Agreement 01-2022 of January 26, 2022 Modifying and Adding Provisions to Agreement 2-2011, Incorporating Rules for the Management and Handling of Global Accounts

REPUBLIC OF PANAMA
SUPERINTENDENCE OF THE SECURITIES MARKET
Agreement No. 1-2022
(January 26, 2022)

"Modifying and Adding Provisions to Agreement 2-2011 of April 1, 2011, Incorporating Rules for 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 Superintendence of the Securities Market (hereinafter the "Superintendence") was created as an autonomous entity of the State, 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 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 licensed entities, as well as their main executives, securities brokers, and analysts, within the functions inherent to their licenses, as applicable.

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

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 working sessions of the Superintendence, the need to develop regulation for the proper management and handling of global or Omnibus accounts has been highlighted, with the purpose of maintaining the best standards in the handling of client investments entrusted to our jurisdiction through these accounts. As a result of the analyses performed, it corresponds to modify some articles and add a Chapter to Agreement 2-2011 of April 1, 2011, to develop the aforementioned figure, expanding the regulatory framework of the Agreement for the benefit of the securities market.

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 ran from June 3, 2021, to June 23, 2021, as evidenced by the file of public access held by the Superintendence.

That, pursuant to the foregoing, the Board of Directors of the Superintendence of the Securities Market, in exercise of its legal powers,

AGREES:

ARTICLE ONE: MODIFY paragraph 13 of Article 8 of Agreement 2-2011 of April 1, 2011, which shall read as follows:

Article 8. (License Application):
13. Business Plan in accordance with what is established in Article 14-A of this Agreement.

ARTICLE TWO: ADD Article 14-A to Agreement 2-2011 of April 1, 2011, which shall read as follows:

Article 14-A. (Business Plan):
The Business Plan must include, at least, the description of the following:

1. Client segment;
2. Products and services;
3. Distribution or marketing channels;
4. Jurisdictions where services will predominantly be provided and where financial assets are expected to be received and sent;
5. Jurisdictions where correspondents and custodians will be located;
6. Administrative and accounting organization;
7. Its facilities regarding the distribution of physical space of the securities house, opening and location of branches, and whether it will share facilities with another entity of its economic group, if applicable;
8. Human and technical resources, and whether these resources will be shared with another entity of its economic group, if applicable;
9. Custody service offered to other securities houses or other financial institutions, if applicable;
10. Internal control, access, and safeguarding procedures for information systems;
11. Contingency and business continuity plans.
12. Projections of the Income Statement, Balance Sheet, and Cash Flow for the next three (3) years.
13. Custody structure through global account in accordance with what is established in Article 14-B of this Agreement, if applicable.

In particular, the Business Plan must contain a description of the computer support with which it will maintain information on clients, the modality for handling and sending information and account statements to clients, confirmations, and frequency of transactions in financial assets.

The Superintendence of the Securities Market may, by resolution, restrict the operations of the securities house, if it is determined that it is not complying with what is established in this article. Such operational restriction will be adopted seeking the preservation of client assets.

ARTICLE THREE: ADD Article 14-B to Agreement 2-2011 of April 1, 2011, which shall read as follows:

Article 14-B. (Custody Structures through Global Account):
Regarding the custody of clients' financial assets, securities houses wishing to offer custody services through global accounts may opt for one of the three (3) structures established below:

1. Structure A:
   Allows a securities house to maintain its clients' financial assets through a global account with a securities center licensed by this Superintendence.

2. Structure B:
   Allows what is provided in Structure A.
   Also allows a securities house to maintain its clients' financial assets through another securities house licensed by this Superintendence, which in turn maintains said financial assets in a global account with a securities center licensed by this Superintendence.

3. Structure C:
   Allows what is provided in Structure A and/or Structure B.
   Also allows a securities house to maintain its clients' financial assets through a foreign custodian and/or through another securities house licensed by this Superintendence, which in turn maintains said financial assets with a foreign custodian. To do this, it must comply with the requirements stipulated in Article 42 of this Agreement and include in the Business Plan the following:
   a. The projection of the growth of financial assets under administration in a global account. b. Identify systems for records, reconciliations, and capacity to generate segregated account statements by client.
   c. Identify reconciliation and daily segregation processes of financial assets by client.
   d. Indicate the possible financial institutions that will provide the global account service.

The processes established in letters b and c of paragraph 3 of this article may be executed by related parties of the securities house, according to the definition established in the Securities Market Law, provided that they are regulated financial entities. The foregoing must be established in its Business Plan.

Without prejudice to related parties of the securities house carrying out the processes established in letters b and c of paragraph 3 of this article, the securities house is responsible for ensuring compliance with these requirements.

Securities houses may outsource the processes identified in letter c of paragraph 3 of this article, subject to the requirements established in Article 14-C.

PARAGRAPH (Clarificatory):
What is provided in this article does not apply to securities houses that exclusively manage or administer individual investment accounts of their clients through a financial intermediary and which does not imply 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.

PARAGRAPH 2:
For the purposes of this Agreement, the term "financial assets" must be understood in accordance with the definition contained in the Securities Market Law.

ARTICLE FOUR: ADD Article 14-C to Agreement 2-2011 of April 1, 2011, which shall read as follows:

Article 14-C. (Outsourcing):
While licenses for Market Administrative Service Providers have not been granted, securities houses may outsource the processes established in letter c of paragraph 3 of Article 14-B.

Securities houses may outsource the processes established in letter c of paragraph 3 of Article 14-B, through other companies, prior authorization from the Superintendence of the Securities Market and provided they meet the following requirements:

1. Fully identify the service provider and carry out the due diligence process, verifying that it has the necessary financial solidity, reputation, policies, and controls for handling risks inherent to the securities house and the ability to fulfill its obligations;
2. Develop, implement, and supervise effective programs for the continuous and adequate administration of all risks inherent to the outsourcing of the activity or process;
3. Not diminish or impair its capacity to fully fulfill obligations with its clients and with the Superintendence. In this sense, outsourcing must not interfere with the securities house's ability to meet regulatory requirements;
4. The relationships between the securities house and the service provider must be governed by a written contract that clearly describes all relevant aspects of the service provision agreement, including the rights, guarantees, responsibilities, and expectations of both parties;
5. Establish and maintain, together with the service provider, contingency plans related to the activity or process, including disaster recovery plans and relevant periodic tests of the provider's support systems;
6. The contract must require the service provider to protect and maintain due confidentiality regarding all confidential information provided to it, both of the securities house and its clients. The securities house must take adequate measures to ensure that the service provider protects the confidential information, both of the securities house and its clients, so that it is not revealed intentionally or inadvertently to unauthorized persons in accordance with Panamanian legislation;
7. A viable alternative plan in the event of cessation of the provider's services.

The Superintendence of the Securities Market is empowered to request any information or documentation required for the proper verification of compliance with the aforementioned requirements.

The securities house must at all times maintain access, control, and ownership of the information, which must be stated in the contract signed with the service provider, in such a way that it is available to the Superintendence of the Securities Market upon request. The foregoing implies that the securities house must reveal in its Business Plan how it will maintain access, control, and ownership of outsourced information.

Without prejudice to the outsourcing of the processes established in letter c of paragraph 3 of Article 14-B, the securities house is responsible for ensuring compliance with the requirement to perform daily reconciliation and segregation of financial assets by client, in due form, and to carry out and execute an Immediate Action Plan in the event of a shortage or situation.

ARTICLE FIVE: MODIFY Article 15 of Agreement 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 Superintendence of the Securities Market. The Superintendence may deny the modification of the Business Plan if the proposed document does not adjust to the description contained in Articles 14-A and 14-B (when applicable) of this Agreement, in accordance with the internal procedure of the Superintendence.

The modification of a Business Plan towards custody structures through global account A, B, or C must contain the model chosen by the securities house in accordance with what is established in Article 14-B of this Agreement, for its authorization by the Superintendence.

Securities houses must modify their Business Plan to incorporate the new requirements established in Articles 14-A and 14-B (when applicable).

PARAGRAPH (Adaptation Period):
The adaptation of a Business Plan towards custody structures through global account A, B, or C, will be done as follows and within the following timeframes:

1. Within the first nine (9) months, counted from the promulgation of this Agreement, securities houses, through their Main Executive, must present to the Superintendence of the Securities Market, for its authorization, the modified Business Plan, which must contain the chosen global account custody structure.
2. Within the following six (6) months, counted from the expiration of the period established in the previous paragraph, the Superintendence of the Securities Market will review the submitted Business Plans, and securities houses must address observations (if any) and meet the requirements to obtain authorization.

Observations made within these six (6) months must be addressed by securities houses within the period set by the Superintendence, which will not exceed thirty (30) calendar days and will count from the receipt of the communication from the Superintendence. This period will run again, in case the Superintendence makes new observations.

During the adaptation period established above (15 months), securities houses may continue operating through the custody structure through global account that remains valid in their Business Plan.

Upon completion of the adaptation period, the Superintendence of the Securities Market, by resolution, will restrict the operations of securities houses that do not have authorization to operate under one of the custody structures through global account established in Article 14-B of this Agreement. Such operational restriction will be adopted seeking the preservation of client assets.

ARTICLE SIX: MODIFY Article 21 of Agreement 2-2011 of April 1, 2011, which shall read as follows:

Article 21. (General rules for contractual relationships with securities house clients, serving as a means for handling individual investment accounts maintained with financial intermediaries abroad):

The contractual relationships that a securities house maintains with its clients, which serve as a means to handle the investment account in individual accounts that the client has with a financial intermediary abroad, must observe the following general rules:

1. Securities houses that provide services to clients who maintain investment accounts with foreign financial intermediaries must comply with the rules adopted by this Superintendence for the prevention of money laundering, terrorism financing, and financing of weapons of mass destruction.
2. The contractual relationships of the client, both with the local securities house and with the foreign financial intermediary, must be documented in such a way that the local client is duly informed, through the contract, of the responsibilities of the local securities house and the foreign financial intermediary, before which jurisdiction claims that may correspond to it for each case must be filed, the legislation and regulations applicable to the product being acquired via such correspondence, with express indication of the applicable procedure for transferring the account to another foreign financial intermediary, the determination of the person who effectively acts as the custodian of the financial assets, and the applicable mechanisms for communication of buy or sell orders.

ARTICLE SEVEN: ADD a Chapter to Agreement 2-2011 of April 1, 2011, to become Chapter Five, titled "Global Account," with articles 41, 42, 43, 44, 45, 46, and 47, and renumber the Chapters, with the subsequent articles to continue from Article 48, within Chapter Six, titled "Final Provisions," as follows:

Chapter Five.
Global Account

Article 41. (Definition):
The global account is that account in the name of the securities house in which the financial assets of several clients are grouped, under the indirect or fiduciary holding regime contemplated by the Securities Market Law, maintained with another local or foreign financial intermediary that is authorized by its Regulator to offer this type of account.

The global account aims to custody, negotiate, clear, and settle financial assets and does not impact the financial structure of the securities house.

Article 42. (Requirements):
The securities house that maintains global accounts under Structure C, described in Article 14-B of this Agreement, must comply with the following requirements:

1. The financial intermediary offering global account services, as well as the entity maintaining final custody of the financial assets, must operate from a jurisdiction recognized by the Superintendence of the Securities Market 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 manage third-party financial assets.
2. The securities house must identify this account to the financial intermediary as global or third-party financial asset management account at the time of account opening.
3. Financial assets maintained 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 administration of the securities house, and said financial institutions, as well as the entity maintaining final custody of the financial assets, must comply with what is provided in paragraph 1 of this article.

Securities houses that, due to some market situation, exceed the aforementioned percentage, will have the obligation to notify the Superintendence through their Main Executive, within a term of three (3) business days, counted from the date on which the aforementioned percentage was breached. From the date of non-compliance, the securities house will have a maximum period of three (3) months to adjust to the percentage established in the previous paragraph.

4. 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.
5. The securities house 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 Superintendence of the Securities Market upon request.
6. The securities house is obliged to individually identify the financial assets of each of its clients in accounting, in such a way that they can be clearly identified.
7. Maintain a client accounting auxiliary that shows balances in cash, securities, and loans, with the objective that this table per client reconciles with the general accounting ledger and with client and custodian account statements.
8. Maintain an accounting separation in books of the securities house's own financial assets and those of its clients. This separation must be reflected in the accounting chart of accounts. The foregoing must be available to the Superintendence of the Securities Market upon request.
9. Perform daily reconciliations of financial assets on all its global custody accounts.
10. Follow-up must be given to risks that may arise in the handling of the global account, and the person responsible for the internal audit function must 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 different from the closing of each month.
11. In the event that, as a result of the executed reconciliation, a shortage of financial assets that is not justified 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 to the Superintendence. If the shortage is determined to be material, the Main Executive of the securities house will have the obligation to notify the Superintendence of the Securities Market 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. It must be considered that a shortage is material whenever it represents or exceeds 3% of the financial assets under administration. Securities houses will have a maximum period of ten (10) calendar days to restore said shortage, counted from the date of notification to the Superintendence.

In the case of shortages below 3% of the financial assets under administration, which remain for a continuous period of up to (20) calendar days, the securities house will have the obligation to notify the Superintendence through its Main Executive, within a term of three (3) business days, counted from the moment the aforementioned period is completed. Securities houses will have a period...