JPRF-V-2022-033 - Harmonization of External Auditor Chapter Provisions Regarding Services to the Same Audited Entity in the Securities Market Sector

Resolution No. JPRF-V-2022-033 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING: That, Article 226 of the Constitution of the Republic orders that: “The institutions of the State, their agencies, dependencies, public servants, and persons acting by virtue of a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law. They shall have the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of the rights recognized in the Constitution.”; That, through Article 13 of the Organic Code of Monetary and Financial Law, Book I, the Financial Policy and Regulation Board was created as part of the Executive Function, as a public law legal entity, with administrative, financial, and operational autonomy, responsible for formulating credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation; and its composition was determined; That, Article 14 ibidem, in its items 1, 2, and 3, determines that it corresponds to the Financial Policy and Regulation Board to formulate credit, financial, including insurance policy, prepaid comprehensive health care services, and securities policies; issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial, securities, insurance, and prepaid comprehensive health care services systems in accordance with what is provided in Article 309 of the Constitution of the Republic of Ecuador; and to issue micro-prudential regulations for the national financial, securities, insurance, and prepaid comprehensive health care services sectors, based on proposals presented by the respective superintendencies, within their respective scopes of competence and without prejudice to their independence; That, Article 14.1 ibidem, in its item 7, establishes that, for the performance of its functions, the Financial Policy and Regulation Board must comply, among others, with the duty to issue the prudential regulatory framework to which financial, securities, insurance, and prepaid comprehensive health care services entities must adhere, a framework that must be coherent and not give rise to regulatory arbitrage; That, the unnumbered article incorporated following Article 6 of the Organic Code of Monetary and Financial Law, Book I, titled “International Best Practices,” states that bodies with regulatory, normative, or control capacity will seek to adopt as a reference framework the international technical standards related to the scope of their competence for the issuance of regulations and for the exercise of their functions, strictly adhering to the normative hierarchy established in the Constitution of the Republic of Ecuador;

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That, the Fifty-Fourth Transitory Provision of Article 106 of the Organic Law Reforming the Organic Code of Monetary and Financial Law for the Defense of Dollarization, published in the Official Register Supplement No. 433 of May 3, 2021, states that: “Resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board and norms issued by control bodies will remain in effect until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies.”; That, the penultimate paragraph of the aforementioned Article 14.1 states that the Superintendent of Companies, Securities, and Insurance may propose regulation projects for consideration by the Financial Policy and Regulation Board, backed by the respective technical reports; That, through letter No. SCVS-INMV-DNFCDN-2022-00041821-O of July 8, 2022, the Superintendent of Companies, Securities, and Insurance submitted to the Financial Policy and Regulation Board a proposal for reform to the regulations regarding the “alternation and cooling-off period” of external audit companies of entities under the Securities Market Law, contained in Article 17 of Section IV “General Provisions,” Chapter I “External Auditors,” Title XIX “External Audit,” Book II “Securities Market” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions; and for this purpose, sent Report No. SCVS.INMV.DNFCDN.DRMV.065.051.2022 of July 7, 2022, approved by the National Director of Inspection, Queries, and Normative Development (E) and by the delegate of the Regional Directorate of Securities Market of the Superintendent of Companies, Securities, and Insurance, in which it is determined that “the control body requires the Financial Policy and Regulation Board to issue a modifying norm regarding the topic under consultation, in order to harmonize the analyzed provisions with the applicable norms on the alternation of persons performing external audit (…).”; That, the Technical Secretariat of the Financial Policy and Regulation Board, through memorandum No. JPRF-SETEC-2022-0059-M of July 26, 2022, submits to the President of the Board the following reports: (i) Technical Report No. JPRF-CT-2022-00029 of July 26, 2022, in which it is concluded that, from the review of international best practices in the matter, it is evident that they are oriented towards establishing measures that allow maintaining the independence of the external auditor, constituting these a fundamental mechanism of support for the supervision and control performed by the Superintendencies and other control instances, in their respective scopes, with the purpose of ensuring that the statement on the reasonableness of financial statements lacks biases that could result from conflicts of interest arising from the constitution of prolonged commercial relationships or expectations of future business. In this line,

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and with the purpose of applying what is provided in the third paragraph of Article 233 of Book I of the Organic Code of Monetary and Financial Law, which establishes that entities that make up financial groups and popular and solidarity groups will necessarily have the same external auditor or correspondent or associated firms with it, it is considered pertinent to harmonize the applicable regulations for the securities and insurance sectors, to what is provided for the financial sector, also covering the criteria relative to the termination of the contract with the external auditor; and, (ii) Legal Report No. JPRF-CJ-2022-0034 of July 26, 2022, in which it was determined that the Financial Policy and Regulation Board is competent to reform the provisions of Article 17 of Section IV “General Provisions,” Chapter I “External Auditors,” Title XIX “External Audit,” Book II “Securities Market” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions; That, the Financial Policy and Regulation Board, in ordinary session convened by technological means on July 26, 2022 and carried out through video conference on July 29, 2022, learned about memorandum No. JPRF-SETEC-2022-0059-M of July 26, 2022, issued by the Technical Secretariat; Technical Report No. JPRF-CT-2022-00029 of July 26, 2022, issued by the Technical Coordination; and Legal Report No. JPRF-CJ-2022-0034 of July 26, 2022, issued by the Legal Coordination; as well as their annexes, and approved the following Resolution; and, In exercise of its functions, RESOLVES: SOLE ARTICLE.- Substitute Article 17 of Section IV “General Provisions,” of Chapter I “External Auditors,” of Title XIX “External Audit,” of Book II “Securities Market” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following: “Art. 17.- Provision of services to the same audited entity.- External audit companies registered in the Public Registry of the Securities Market may provide their services to the same audited entity for consecutive periods of up to three years, observing the alternation criteria and reference prices that the control body establishes for this purpose. The Superintendency may, at its sole discretion and in a motivated manner, dispose of the termination of the contract with the external auditor; in this case, the entity will proceed to replace it within a period not exceeding two months. The entity may not terminate the contract with the external auditor without the authorization of the control body.

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The external auditor may only provide audit services for which they were contracted and may not provide any other service or collaboration to the audited entity through natural or legal persons directly and indirectly related. Likewise, the external auditor may not, within the year following the termination of their contract, provide any other service to the audited entity. No one who has provided services, other than external audit services, to the entity in the immediately preceding year may be an external auditor.” FINAL PROVISION.- This Resolution will enter into force from the present date, without prejudice to its publication in the Official Register. Publish this Resolution on the website of the Financial Policy and Regulation Board, within a maximum term of two days from its issuance. COMMUNICATE.- Given in the Metropolitan District of Quito, on July 29, 2022. THE PRESIDENT, Mgs. María Paulina Vela Zambrano The preceding resolution was processed and signed by Master María Paulina Vela Zambrano, President of the Financial Policy and Regulation Board, in the Metropolitan District of Quito, on July 29, 2022.- I CERTIFY. TECHNICAL SECRETARY Dr. Nelly Arias Zavala