JPRF-F-2023-085 — Incorporates the Standard for Extraordinary Merger Processes of Entities in the Public and Private Financial Sector

Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas Governmental Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador Resolution No. JPRF-F-2023-085

THE FINANCIAL POLICY AND REGULATION BOARD

CONSIDERING:

That Article 66, numbers 15 and 25 of the Constitution of the Republic of Ecuador, in order, recognize the right to develop economic activities, individually or collectively, in accordance with the principles of solidarity, social and environmental responsibility; and the right to access quality public and private goods and services, with efficiency, effectiveness, and good treatment, as well as to receive adequate and truthful information regarding their content and characteristics;

That Article 82 of the Magna Carta contemplates that the right to legal certainty is based on respect for the Constitution and the existence of prior, clear, public legal norms applied by competent authorities;

That Article 226 of the Fundamental Norm orders that state institutions, their agencies, dependencies, public servants, and persons acting by virtue of state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law, having the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of rights recognized in the Constitution;

That Article 227 of the Constitution of the Republic provides that public administration constitutes a service to the community governed by the principles of effectiveness, efficiency, quality, hierarchy, deconcentration, decentralization, coordination, participation, planning, transparency, and evaluation;

That Article 308 of the Magna Carta determines that financial activities are a matter of public order and may be exercised in accordance with the law, with prior authorization from the State; these activities shall have the fundamental purpose of preserving deposits and meeting financing requirements to achieve the country's development objectives, and shall efficiently intermediated captured resources to strengthen national productive investment and socially and environmentally responsible consumption, for which the State will promote access to financial services and the democratization of credit. The regulation and control of the private financial sector will not transfer the responsibility for banking solvency nor imply any guarantee from the State; and, administrators of financial institutions and those controlling their capital will be responsible for their solvency;

That Article 309 ibidem establishes that the national financial system is composed of the public, private, and popular and solidary sectors, which intermediated public resources, which will have specific and differentiated control norms and entities, which will be responsible for preserving their security, stability, transparency, and solidity;

That Article 13 of the Organic Code of Monetary and Financial Law, Book I, reformed by the Organic Reformatory Law to the Organic Code of Monetary and Financial Law for the Defense of Dollarization, published in the Official Register Supplement No. 443 of May 3, 2021, created the Financial Policy and Regulation Board, part of the Executive Function, as a public law legal entity, with administrative, financial, and operational autonomy, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care service policy and regulation;

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas Governmental Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

That numbers 2 and 3 of Article 14 of the same legal body provide that it corresponds to the Financial Policy and Regulation Board to issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system; and to issue micro-prudential regulations for the national financial sector, based on proposals presented by the respective superintendencies, within their respective scopes of competence and without prejudice to their independence;

That Article 14 ibidem further provides that, for the fulfillment of its functions, the Financial Policy and Regulation Board will issue norms in matters within its competence, without being able to alter legal provisions, and may issue regulations by segments, economic activities, and other criteria;

That Article 14.1 of the Organic Code of Monetary and Financial Law, Book I, mandates that, for the performance of its functions, the Financial Policy and Regulation Board has the duty and exercises the faculty to regulate the creation, constitution, organization, activities, operation, and liquidation of financial entities;

That Article 62 of the aforementioned Organic Code determines as a function of the Banking Superintendence to propose policies and regulations to the Financial Policy and Regulation Board, within the scope of its competencies, in concordance with what is prescribed in the penultimate paragraph of Article 14.1 previously cited;

That Article 150 ibidem provides that entities of the national financial system will be subject to the regulation issued by the Financial Policy and Regulation Board;

That Article 151 of the aforementioned Code provides that regulation must recognize the nature and particular characteristics of each of the sectors of the national financial system, and may be differentiated by sector, segment, activity, among others;

That Article 170 of the referenced Organic Code provides that merger is the union of two or more entities of the national financial system of the same sector, by which they commit to joining their assets and forming a new society, which acquires by universal title the rights and obligations of the intervening societies. Merger also occurs when one or more entities are absorbed by another that continues to subsist;

That Article 171 of the Organic Code of Monetary and Financial Law provides that mergers may be ordinary and extraordinary. The extraordinary merger occurs between an entity that is in a situation of technical equity deficiency and another entity that is not in such a situation; in this case, the express acceptance of the legal representative of the entity not in a situation of deficiency is always necessary, who for this effect is empowered to make this decision. For this case, the general meeting of shareholders or the body acting in its place of the entity not in technical equity deficiency shall be deemed convened to resolve the extraordinary merger. If the general meeting of shareholders or the body acting in its place does not attend this summons, the control body will order the mandatory meeting of these collegiate bodies to resolve what corresponds, with the members present;

That Article 172 of the Organic Code ibidem provides that the extraordinary merger process is exempt from ordinary merger procedures and will be regulated by the Financial Policy and Regulation Board. This merger will be exempt from the payment of taxes;

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas Governmental Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

That Article 176 of the referenced Organic Code provides that merger and conversion will be previously approved by the respective control bodies, in accordance with current regulation;

That General Provision Twenty-Ninth of the aforementioned Code provides that in current legislation where reference is made to the "Monetary and Financial Policy and Regulation Board," it shall be replaced by "Financial Policy and Regulation Board";

That Transitory Provision Fifty-Fourth ibidem provides 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 maintain their validity until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies;

That by Letter No. SB-DS-2023-0492-O of September 16, 2023, issued by the Acting Superintendent of Banks, a proposal for the creation of a norm on the extraordinary merger process applicable to entities in the public and private financial sector is presented to the Financial Policy and Regulation Board, attaching Technical Report No. SB-INRE-2023-0683-M of September 12, 2023, and Legal Report No. SB-INJ-2023-0996-M of September 14, 2023;

That the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2023-0087-M of October 13, 2023, forwards to the President of the Board the following reports:

i) Legal Report No. JPRF-CJF-2023-051 of October 13, 2023, which concludes: a) The Organic Code of Monetary and Financial Law, Book I, in its Article 14 number 2, provides as a competence of the Financial Policy and Regulation Board to issue norms that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system. On the other hand, the aforementioned Organic Code provides in Article 172 that it is the exclusive competence of the Financial Policy and Regulation Board to regulate the extraordinary merger process of entities in the national financial system. The norm to be issued for this effect must incorporate the principle of differentiation established in the Constitution and the Organic Code of Monetary and Financial Law; b) The norm proposal presented by the Banking Superintendence, as analyzed by the Technical Coordination of Financial Sector Policy and Regulation in Technical Report No. JPRF-CTSF-2023-016 of October 13, 2023, is legally viable and does not contravene the current legal framework by virtue of the arguments contained in this report. Therefore, it is appropriate for the Financial Policy and Regulation Board to issue the extraordinary merger norm for entities in the public and private financial sector, in accordance with the competencies established in current legislation.

ii) Technical Report No. JPRF-CTSF-2023-016 of October 13, 2023, which concludes that, the issuance of the norm proposed by the Banking Superintendence with the indicated adjustments is considered pertinent, in order to strengthen the regulatory framework applicable by the Control Body for the fulfillment of its mandate, equipping it with tools that allow the application of the extraordinary merger process as an alternative resolution mechanism for the orderly exit of unviable entities, reducing losses for creditors of said entities and minimizing the impact on the stability of the financial sector;

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas Governmental Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

That the Financial Policy and Regulation Board, in an ordinary session held via technological means, convened on October 13, 2023, and carried out via video conference on October 16, 2023, reviewed Memorandum No. JPRF-ST-2023-0087-M of October 13, 2023, issued by the Technical Secretariat of the Board; as well as the aforementioned reports from the Technical Coordination of Financial System Policy and Regulation and the Legal Coordination of Financial Policy and Norms, in addition to the corresponding draft resolution;

That the Financial Policy and Regulation Board, in an ordinary session held via technological means, convened on October 13, 2023, and carried out via video conference on October 16, 2023, reviewed and approved the following Resolution; and,

In exercise of its functions,

RESOLVES:

SINGLE ARTICLE.- Incorporate as Section II "Extraordinary Merger Process for Entities in the Public and Private Financial Sector," of Chapter V "On Mergers, Conversions, and Associations," of Title II "National Financial System," of Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, the following:

"SECTION II: EXTRAORDINARY MERGER PROCESS FOR ENTITIES IN THE PUBLIC AND PRIVATE FINANCIAL SECTOR.

Art. 1.- Objective: This norm aims to regulate the extraordinary merger process, in order to maintain the integrity, solidity, sustainability, and stability of entities in the public and private financial sector. Extraordinary mergers will be carried out under the criterion of lowest cost and market solution.

Art. 2.- Conditions: An extraordinary merger process may be implemented when the Banking Superintendence has determined that the financial entity to be absorbed is subject to any of the following circumstances:

1. Substantial non-compliance with the intensive supervision program, understood as such when the entity fails to meet commitments, obligations, and/or deadlines to carry out the activities provided therein; or having presented compliance, has not overcome the weaknesses presented at the start of the Plan that guarantee its financial sustainability, measured through its ability to generate positive results; or when the entity's risk profile, derived from the application of the methodology established by the Control Body, remains or deteriorates.

2. Technical equity deficiency that has not been covered within the maximum term of three months, according to what is established in Article 190 of the Organic Code of Monetary and Financial Law, Book I.

3. Not constituting the guarantee of at least the equivalent to 140% of the required technical equity deficiency or not maintaining it while such deficiency exists, applicable to financial entities in the private sector.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas Governmental Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

Art. 3.- Requirements for absorbing entities: The entity interested in absorbing must meet the following criteria:

1. Compliance: With the solvency and financial prudence norm.

2. Supervision Strategy: Not being in an intensive supervision strategy.

3. Having an external audit report containing an unqualified opinion or that the qualifications have been overcome.

Art. 4.- On acceptance: The express acceptance of the legal representative of the entity not in a situation of deficiency is necessary, who for this effect is empowered to make this decision. For this case, the general meeting of shareholders or the body acting in its place of the entity not in technical equity deficiency shall be deemed convened to resolve the extraordinary merger. If the general meeting of shareholders or the body acting in its place does not attend this summons, the Control Body will order the mandatory meeting to resolve what corresponds, with the members present.

Art. 5.- Criteria: For the selection of the absorbing financial entity, the Banking Superintendence, in the event that there is more than one interested party in the absorption process, will consider the following criteria and order of application:

1. That it presents the highest level of solvency and/or
2. That it presents the lowest level of risk. If only one financial entity has manifested its acceptance to absorb the unviable financial entity, the extraordinary merger process may continue with said entity provided that said entity meets the selection criteria established in this article.

Art. 6.- On unperfected merger: If there is no entity interested in the extraordinary merger process, the Banking Superintendence will order the exclusion and transfer of assets and liabilities or the liquidation of the financial entity sought to be absorbed.

Art. 7.- Merger Resolution: The Banking Superintendence will issue the corresponding extraordinary merger resolution; and, will prepare an extract that the absorbing financial entity will publish once, in a newspaper of major national circulation or in legally authorized technological media. To proceed with the issuance of the Resolution, it must be founded that all means to safeguard the initiation of the merger (supervision measures, capitalization, among others) have been exhausted; said resolution must be motivated and contain, at least:

1. The provision of the extraordinary merger by absorption;
2. Name of the absorbing financial entity and the absorbed entity;

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas Governmental Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

3. The assumption, by universal title, of the assets and the entirety of the assets and liabilities of the absorbed entity;

4. The cessation of the functions of the administrators and legal representatives of the financial entity to be absorbed and the prohibition to carry out operations in the name of their administered or represented entities, especially granting new credits, who violate this prohibition will be personally responsible for the amounts of the operations, without prejudice to civil or criminal liability, if any;

5. The provision that property registrars, in the cantons where the absorbed financial entity has real estate or real rights over them, register or take note in the margin of the transfer of ownership of these to the absorbing financial entity by virtue of the merger; and,

6. The provision of the extinction of the absorbed entity and the corresponding annotation in the cadastre. As a consequence of the issuance of the extraordinary merger resolution, the absorbing entity assumes ownership, by universal title, of all movable and immovable assets of the absorbed entity, and of the credits, privileges, guarantees, intellectual property rights, and other rights belonging to the absorbed entity.

Art. 8.- Control: The Banking Superintendence will monitor the full compliance with the extraordinary merger resolution.

GENERAL PROVISIONS

FIRST.- The legal representatives, board members, and committees of the financial entities that extinguish by virtue of the extraordinary merger will be responsible for all acts and contracts prior to the date of issuance of the extraordinary merger resolution, as well as for assets, liabilities, and contingencies not revealed in the information delivered to the Banking Superintendence.

SECOND.- Proof of all actions taken must be sent to the Control Body by the absorbing entity within a term of up to 3 months counted from the notification of the merger resolution.

THIRD.- The Control Body may establish a schedule for the required provisioning for the credit portfolio acquired in liquidation and extraordinary merger processes. After up to three years from the date the entity acquired the portfolio of entities in the merger process, said portfolio must be provisioned in accordance with the general character norms issued by the Financial Policy and Regulation Board that are in force, according to the schedule established by the Superintendence.

FOURTH.- The Banking Superintendence may establish a term for financial entities that assume liabilities within the framework of extraordinary merger processes to adapt the composition and structure of their liquid assets, according to the requirements established in the Organic Code of Monetary and Financial Law, the general character norms issued by the Financial Policy and Regulation Board; and those issued by the Control Body.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas Governmental Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

FIFTH.- Cases of doubt that arise in the application of this section will be resolved by the Banking Superintendence."

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 (2) days from its issuance.

COMMUNICATE.- Given in the Metropolitan District of Quito, on October 16, 2023.

THE PRESIDENT, Mgs. María Paulina Vela Zambrano

The aforementioned 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 October 16, 2023.- I CERTIFY.

TECHNICAL SECRETARY Mgs. Nelly Arias Zavala