Agreement No. 8-2022 Modifying Provisions of Agreement No. 2-2011 Regarding Global Account Management

REPUBLIC OF PANAMA
BOARD OF DIRECTORS
SECURITIES MARKET SUPERINTENDENCE
Agreement No. 8-2022
(From November 23, 2022)
“By which certain provisions of Agreement No. 2-2011 of April 1, 2011, are modified, specifically in relation to the management and handling of global accounts”

THE BOARD OF DIRECTORS

In exercise of its legal powers and

CONSIDERING

That through Law 67 of September 1, 2011, the Securities Market Superintendence (hereinafter the “Superintendence”) is created as an autonomous state entity, with legal personality, own assets, and administrative, budgetary, and financial independence, with exclusive competence to regulate and supervise issuers, investment societies, intermediaries, and other participants in the securities market in the Republic of Panama.

That pursuant to what is established in Article 121 of Law 67 of September 1, 2011, the National Assembly issued the Single Text comprising Decree-Law 1 of July 8, 1999, and Title II of Law 67 of September 1, 2011 (hereinafter the “Single Text”).

That Article 3 of the Single Text establishes that the general objective of the Superintendence is the regulation, supervision, and oversight of securities market activities developed in the Republic of Panama or from it, promoting legal certainty for all market participants and guaranteeing transparency, with special protection of investors' rights.

That Article 10 of the Single Text establishes that it is within the powers of the Board of Directors to “Adopt, reform, and revoke agreements that develop the provisions of the Securities Market Law.”

That Article 14 of the Single Text establishes among the powers of the Superintendent of the Securities Market to examine, supervise, and oversee the activities of entities with licenses issued by the Superintendence, as well as their main executives, securities brokers, and analysts, within the functions inherent to their licenses, as appropriate.

That the Superintendence, through Agreement 2-2011 of April 1, 2011, adopted the rules applicable to the activities and functioning of securities firms.

That through Agreement No. 1-2022 of January 26, 2022, provisions were modified and added to Agreement No. 2-2011 of April 1, 2011, incorporating rules for the management and handling of global accounts.

That, in this order of ideas, Article 323 of the Single Text establishes that when the Superintendence contemplates reforming an agreement, it must consider to determine if the action is necessary and appropriate: (a) the public interest, (b) the protection of investors, and (c) whether the action promotes market efficiency, competition, and capital formation.

That, in Superintendence working sessions, the need to modify certain provisions regarding the regulation for the proper management and handling of global or omnibus accounts under Agreement 2-2011 of April 1, 2011, has been made evident.

That this agreement has been submitted to the Public Consultation Procedure established in Title XV of the Single Text of the Securities Market Law, specifically in Articles 323 et seq., whose term was from August 24 to September 15, 2022, as recorded in the public access file held by the Superintendence.

Therefore, the Board of Directors of the Securities Market Superintendence, in exercise of its legal powers,

AGREES:

ARTICLE ONE: ADD a final paragraph to PARAGRAPH (Clarification) of Article 14-B of Agreement No. 2-2011 of April 1, 2011, which shall read as follows:

Article 14-B. (Custody structures through global account):
PARAGRAPH (Clarification):
The provisions of this article do not apply to securities firms that manage or administer exclusively individual investment accounts of their clients through a financial intermediary and which do not involve the custody of clients' financial assets, which shall be governed by what is established in Article 3 (Activities and Services) and Article 14-A (Business Plan) of this Agreement. Securities firms that maintain a global account with a securities center licensed by this Superintendence shall be subject to compliance with the requirements stipulated in Article 42 of this Agreement and other internal rules adopted by the securities center.

ARTICLE TWO: MODIFY Article 15 of Agreement No. 2-2011 of April 1, 2011, which shall read as follows:

Article 15. (Modification of the Business Plan):
Any modification to the Business Plan must be submitted previously to the authorization of the Securities Market Superintendence in accordance with the internal procedure.
The Superintendence may deny the modification of the Business Plan if the proposed document does not conform to the description contained in Articles 14-A and 14-B of this Agreement. Securities firms that manage or administer exclusively individual investment accounts of their clients through a financial intermediary and which do not involve the custody of clients' financial assets are excepted, to whom Article 14-B of this Agreement does not apply. The modification of a Business Plan towards custody structures through global accounts A, B, or C must contain the model chosen by the securities firm in accordance with what is established in Article 14-B of this Agreement, for its authorization by the Superintendence. Securities firms must modify their Business Plan to incorporate the new requirements established in Articles 14-A and 14-B of this Agreement. Securities firms that manage or administer exclusively individual investment accounts of their clients through a financial intermediary and which do not involve the custody of clients' financial assets are excepted, to whom Article 14-B of this Agreement does not apply.

PARAGRAPH (Adaptation Period):
The adaptation of a Business Plan towards custody structures through global accounts A, B, or C, shall be done in the following manner and within the following timeframes:

1. Securities firms, through their Main Executive, shall have until February 28, 2023, to present to the Securities Market Superintendence, for its authorization, the modified Business Plan, which must contain the chosen custody structure through global account.
2. Within the following six (6) months, counted from the expiration of the term established in the previous numeral, the Securities Market Superintendence will review the submitted Business Plans, and securities firms must address observations (if any) and comply with the requirements to obtain their authorization.
   Observations made within these six (6) months must be addressed by securities firms within the term fixed by the Superintendence, which shall not exceed thirty (30) calendar days and shall count from the receipt of the communication from the Superintendence. This term shall restart if the Superintendence makes new observations. During the adaptation period established above (numerals 1 and 2), securities firms may continue operating through the custody structure through global account they currently have in their Business Plan. Upon completion of the adaptation period established above (numerals 1 and 2), the Securities Market Superintendence, by resolution, will restrict the operations of securities firms that do not have authorization to operate under one of the custody structures through global accounts established in Article 14-B of this Agreement. Such operational restriction will be adopted seeking the preservation of clients' assets.

ARTICLE THREE: MODIFY Article 42 of Agreement No. 2-2011 of April 1, 2011, which shall read as follows:

Article 42. (Requirements):
The securities firm that maintains global accounts under any of the custody structures described in Article 14-B of this Agreement must comply with the following requirements:

1. The securities firm is obligated to keep clients' financial assets off-balance sheet, and it must also maintain updated individual records per client showing balances in cash, securities, and loans, so that they reconcile with the general accounting ledger and with client statements and custodians.
2. Maintain an accounting separation in the books of the securities firm's own assets and clients' assets. This separation must be reflected in the accounting chart of accounts. The foregoing must be available to the Securities Market Superintendence upon its request.
3. Perform daily reconciliations of financial assets per client on all its global custody accounts.
   The securities firm that maintains global accounts under the custody structure C described in Article 14-B of this Agreement must additionally comply with the following requirements:
4. The financial intermediary offering the global account services, as well as the entity maintaining the final custody of the financial assets, must operate from a jurisdiction recognized by the Securities Market Superintendence or be regulated by a Supervisor who is a signatory to Appendix A of the Multilateral Memorandum of Understanding (MMOU) of the International Organization of Securities Commissions (IOSCO). The financial intermediary must be authorized to provide this service and to handle third-party financial assets.
5. The securities firm must identify this account as global or a third-party financial asset management account with the financial intermediary at the time of account opening.
6. Financial assets held in global accounts with financial institutions that are related parties, according to the definition established in the Securities Market Law, may not exceed twenty percent (20%) of the total financial assets under the administration of the securities firm, and these financial institutions, as well as the entity maintaining the final custody of the financial assets, must comply with what is provided in numeral 1 of this article.
   Securities firms that, due to some market situation, exceed the percentage established above, have the obligation to notify the Superintendence through their Main Executive, within three (3) business days, counted from the date on which the percentage established above was breached. From the date of the breach, the securities firm will have a maximum term of three (3) months to adjust to the percentage established in the previous paragraph. Based on the analysis of the established business model, the Securities Market Superintendence may exempt securities firms from compliance with this numeral. The Superintendence, in order to evaluate the total or partial exemption from the application of this numeral, will take into consideration the following aspects: i) whether the financial assets in the custodian are duly identified and/or segregated per client of the securities firm; and/or ii) whether there is any contractual provision between the securities firm and the custodian that allows the securities firm (or the liquidator designated by the Superintendence in case of forced liquidation of the securities firm) on behalf of indirect holders to have access to their financial assets; and/or iii) any other element deemed convenient to mitigate associated risks. Whenever the Superintendence authorizes an exemption from total or partial compliance with the provisions of this numeral, the securities firm must request the financial institution offering the global account service that maintains custody of its clients' financial assets, that in the same communication required in Article 41 of this Agreement, it confirms that within the global account, the accounts of the securities firm's clients are duly segregated individually. Adaptation Period. To comply with what is provided in this numeral, securities firms will have an adaptation period of six (6) months, counted from the date on which the Securities Market Superintendence authorizes the Business Plan.
7. Include in the Business Plan what is established in Article 14-A of this Agreement, regarding the business structure that allows the use of global accounts.
8. The securities firm must maintain and use a financial asset custody management manual, which must be approved by its board of directors. This manual must be updated and available to the Securities Market Superintendence upon its request.
9. Follow-up must be given to risks that may arise in the handling of the global account, and there must be an internal control process to verify them monthly and perform an internal audit of the global account registration and reconciliation process at least quarterly. This audit must include samples of reconciliations performed on dates other than the closing of each month.
10. In the event that, as a result of the executed reconciliation, any unexplained shortage of financial assets is observed, the person responsible for the internal audit function must remit the findings to the Audit Committee, who must determine if the shortage is material to report it to the Superintendence. If it is determined that the shortage is material, the Main Executive of the securities firm has the obligation to notify the Securities Market Superintendence of the differences found in the reconciliations, within a term of three (3) business days, counted from the moment the Audit Committee became aware of this situation.
    A shortage must be considered material whenever it represents or exceeds 3% of the financial assets under administration. Securities firms will have a maximum term of ten (10) calendar days to restore such shortage, counted from the date of notification to the Superintendence.
    In the case of shortages below 3% of the financial assets under administration, that persist for a continuous period of up to twenty (20) calendar days, the securities firm has the obligation to notify the Superintendence through its Main Executive, within a term of three (3) business days, counted from the moment the period established above is completed. Securities firms will have a maximum term of ten (10) calendar days to restore such shortage, counted from the date of notification to the Superintendence.

ARTICLE FOUR: MODIFY Article 43 of Agreement No. 2-2011 of April 1, 2011, which shall read as follows:

Article 43. (Infrastructure, systems, processes, and records):
The securities firm that manages global accounts must maintain a technological system contracted or owned by it, which must be stable, robust, and allow it to keep an accurate record of the financial assets in custody. Without prejudice to the obligation to comply with what is provided in Agreement 5-2018 of August 21, 2018, which establishes general guidelines for the management of information technology risk, the technological system must, at a minimum:

1. Identify the financial assets maintained in the global account that correspond to the stock rights recognized by the securities firm to clients in their investment accounts, as well as the quantity and value corresponding to each client.
2. Efficiently identify the client holding stock rights over the financial assets under custody, using a unique and irreplaceable account name and code for each client's investment account.
3. Perform the corresponding distribution of coupon payments, dividends, or others, applied to clients.
4. Identify the corporate events corresponding to each client.
5. Identify the maturities of each financial asset that is custodied in the global account.
6. Identify the financial assets that constitute the guarantees for each client's operations.
7. Generate current and historical statements for clients for defined periods.
8. Generate detailed and individual information of the third-party accounts that the securities firm maintains with custodians.
9. Maintain backup of the records of the financial assets in custody at an alternative site.
10. Have corresponding controls for the security, safeguarding, and recovery of records that are stored or recorded therein.
    The information described above, which the system must generate, must be kept available to the Securities Market Superintendence whenever it requests it.

ARTICLE FIVE: MODIFY Article 44 of Agreement No. 2-2011 of April 1, 2011, which shall read as follows:

Article 44. (Securities Lending Agreements or Contracts):
Securities firms that wish to offer the service of granting loans for the purchase of securities must comply with the following:

1. Indicate the modalities of these in their business plan (Products and services).
2. Identify the pledged securities in the corresponding global account with the custodian.
3. Establish independent contractual documentation from the main contract, corresponding to the lending modality offered, and it must be signed by the clients.
4. Implement controls, limits, policies, procedures, and follow-up methodologies for the mitigation of risks associated with such services.
5. In the case of margin loans, they must contemplate policies for the margining of securities in the corresponding accounts.
   The securities firm must contractually maintain two global accounts where it maintains custody (custodian) of its financial assets, one where pledged securities will remain and another where securities free of encumbrances will be. These accounts must be reconciled separately.
   The securities firm's global account where clients' financial assets free of encumbrances are maintained may under no concept be pledged or otherwise encumbered or committed.
   The securities firm, including its employees, executives, shareholders, representatives, or any other person acting on its behalf, may not use a global account that has stock rights over clients' financial assets for its own benefit or that of third parties.

ARTICLE SIX: MODIFY Article 45 of Agreement No. 2-2011 of April 1, 2011, which shall read as follows:

Article 45. (Prohibition of short selling):
The securities firm may not offer the service of selling short in global accounts.

ARTICLE SEVEN: EFFECTIVE DATE. The provisions of this agreement shall enter into force from their publication in the Official Gazette.

PUBLISH AND COMPLY,

Luis Chahoub
President of the Board of Directors

Adriana Carles
Secretary of the Board of Directors