Banking Board of Ecuador Resolution JB-2015-3447

THE BANKING BOARD

CONSIDERING:

THAT the First Transitory Provision of the Organic Monetary and Financial Code, published in the Official Register Second Supplement No. 332, of September 12, 2014, establishes that resolutions contained in the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board, and norms issued by control bodies, will remain in effect insofar as they do not conflict with the Organic Monetary and Financial Code, until the Monetary and Financial Policy and Regulation Board resolves accordingly, as applicable; and, with the second paragraph of the Third Transitory Provision, which states that the Banking Board will continue to act until it resolves all claims, appeals, and other administrative proceedings it was hearing as of the effective date of said code, within a period of one hundred eighty days, extendable at the discretion of the Monetary and Financial Policy and Regulation Board; extension granted for an additional 180 days, through Resolution of the Monetary and Financial Policy and Regulation Board No. 054-2015-F, of March 5, 2015;

THAT by letter No. SC.IRQ-DRMV.SC.2014.089.4278 of February 13, 2014, Dr. Camilo Valdivieso Cueva, Superintendent of Companies (S), informed the control body that during the control process of the transactions under its jurisdiction, regarding State Bonds used to pay pensions to former teaching employees in 2013, carried out by Santa Fe Casa de Valores S.A., in which the Ecuadorian Teaching Pension Fund participates, it was observed that the selling principals instructed said entity to deposit part of their payment into the account of the Ecuadorian Teaching Pension Fund, so that it in turn would transfer it to the Preferred Single Account of each, since the Fund guarantees them a return payment;

THAT on February 20, 2014, by credential No. IRG-DASS-2014-003 of February 20, 2014, a special examination was ordered for the National Teaching Supplementary Fund, regarding the "Preferred Single Account" product from its inception until January 31, 2014; and, that it also analyzed the fund's participation as promoter and sponsor in the Sabanilla Hydroelectric Plant project, through the Magisterio Clean Energy trust; as well, the purchase of bonds from retirees through Santa Fe, Casa de Valores S.A.;

THAT once the special examination was concluded, the Fund's Board of Directors members were summoned to read the draft report, which took place on April 28, 2014; and, that by letter No. DNC-OFI-14-00294 of May 13, 2014, Engineer Juan José Castelló, Executive President of the Ecuadorian Teaching Pension Fund, presented the corresponding defenses, which were analyzed prior to the issuance of the final report; and the audit results were communicated to said official by letter No. IRG-DASS-2014-004-OBS of June 20, 2014, signed by Dr. Faddul Mosquera, Regional Superintendent of Guayaquil (S), from whose analysis violations were evidenced regarding the provisions of articles 1, 2, and 3 of Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board; and, of articles 2, 9, and 13 of the Fund's Bylaws, concerning the creation of the Preferred Single Account created for retirees of the National Educational System, which establishes conditions different from those granted to fund participants, such as deposits with the possibility of periodic withdrawals, at rates higher than those granted to participants,

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THAT, in addition to not having a pension purpose, they violate the provisions of article 220 of the Social Security Law in conjunction with article 18, Chapter I, Title I, Book III of the aforementioned Codification, which do not contemplate the possibility for persons who are not affiliated with the General Mandatory Insurance and who have concluded their employment relationship, to continue belonging to a supplementary fund, without liquidating their individual accounts despite having met the contingency for which the fund was created; and also other violations stated in the audit report, which relate to the maximum levels that can be contributed to the fund; cancellations and pre-cancellations of deposit certificates that depositors maintained at Consulcrédito S.A., which were transferred to the fund's account with the contributors' authorization; deposits and investments made as a result of the purchase of bonds from retirees; observations related to investments made with income from the collections of the Preferred Single Account; and, improper integration of the fund's board of directors;

THAT by Resolution No. IRG-DASS-2014-055 of June 19, 2014, signed by Dr. Faddul Mosquera, Regional Superintendent of Guayaquil (S), a personal fine of US$ 1,500.00 (One thousand five hundred 00/100 dollars) was imposed on Engineer Juan José Castelló León, Executive President of the Ecuadorian Teaching Pension Fund, due to having violated the provisions of the first paragraph of article 220 of the Social Security Law; those of articles 1, 2, and 3 of Section I, Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board; that of article 18 of Section IV, Ibid; and those of articles 2, 9, and 13 of the Fund's Bylaws. The aforementioned sanction is imposed without prejudice to any other type of action that may apply. The referenced resolution is analyzed, principally:

THAT the integration of the Preferred Single Account violates the benefit and affiliation objective with the IESS, established in the first paragraph of article 220 of the Social Security Law, which provides: "IESS affiliates, regardless of their income level, may make voluntary savings to improve the amount or conditions of benefits corresponding to the General Mandatory Insurance or to protect security contingencies not covered by it"; and, in articles 1 and the first paragraph of article 2 of Section I, Chapter I, Title II of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board, which prescribe: Article 1.- "Closed pension supplementary funds - FCPCs are integrated with autonomous assets constituted in favor of participants starting from their employment relationship with public, private, or mixed institutions, or with a professional or occupational guild, to improve the amount or conditions of benefits corresponding to the general mandatory insurance, through the voluntary savings of their affiliates and the voluntary contribution of their employers, if applicable, under the terms established in the prevailing legal framework." Article 2 "Persons who have an employment relationship with a public, private, or mixed institution, and those who belong to the professional or occupational guild under which the fund was constituted, may be participants of a closed pension supplementary fund legally registered with the Superintendence of Banks and Insurance..."

THAT according to the provided information, as of March 28, 2014, the administration of the Ecuadorian Teaching Pension Fund authorized disbursements for expenses related to the Sabanilla hydroelectric project, amounting to US$ 568,726.45, in the capacity of promoter and sponsor of

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said project, which violates the provisions of article 3, of Section I, Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and the Banking Board; and, of article 9 of the Fund's Bylaws, which provide: Art. 3, of Section I, Chapter (...) "Closed pension supplementary funds registered in accordance with the provisions of this chapter are of social benefit and non-profit, have a private character, and are administered through autonomous assets independent of the assets of the public, private, or mixed institutions from which the employment or guild relationship derives. Supplementary funds will have exclusively pension purposes and will be legally capable of acquiring rights and incurring obligations; they may make specific and non-specific investments, which must be framed within the fund's internal regulations and according to the nature of the benefit. (...)

THAT Mr. Engineer Juan José Castelló, (among others indicated therein), members of the National Board of Directors of the Ecuadorian Teaching Pension Fund, created the "Preferred Single Account" through a resolution of the National Board, in a session on February 8, 2012, so that retired teachers who do not wish to liquidate their individual account, remain affiliated with the FCME and can make additional deposits with free availability, as stated in the National Board session minutes of that date, code No. DN-ACT-012; for which they updated the Operations Policy Manual of the Ecuadorian Teaching Pension Fund on April 3, 2012, establishing as policies, among others, the following: - Continue as a fund participant, once having ceased employment in the national educational system, with conditions different from those of its participants, such as: term deposits ranging from 6 months to 3 years. - Possibility of periodic withdrawals of their deposits (monthly, quarterly, or annual). - Interest rates, higher than those granted to participants (6 to 8%). Such policies violate articles 2, 9, and 13 of the Pension Fund Bylaws; article 18 of Section IV, Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board; and, 220 of the Social Security Law.

THAT Mr. Professor Juan José Castelló León, (among others indicated therein), members of the National Board, by minutes code No. DN-ACT-13 of March 22, 2012, approved the Preferred Single Account (CUP) policy, updated on April 3, 2012, creating the possibility, among others, to continue as a fund participant, once having ceased employment in the national educational system, with conditions different from those of the fund's participants, such as: term deposits ranging from 6 months to 3 years; possibility of periodic withdrawals of their deposits (monthly, quarterly, or annual); interest rates higher than those granted to participants (6 to 8%), violating articles 2, 9, and 13 of the Pension Fund Bylaws, article 18 of Section IV, Chapter I, Title I, Book III of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board; and, Art. 220 of the Social Security Law, a norm that regulates the formation of supplementary funds, establishing the possibility to make voluntary savings, exclusively for IESS affiliates, that is, for all persons who receive income from the execution of a project or the provision of a physical or intellectual service, with or without an employment relationship, who have met the affiliation requirements, indicated in its article 2.

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THAT the so-called Preferred Single Account does not have the pension purpose of improving the amount or conditions of benefits corresponding to the general mandatory insurance, consequently the administration of the Ecuadorian Teaching Pension Fund violated article 1 of Resolution SBS-2004-740, the norm in effect on the date of creation of the account in question; and violates article 1 of Resolution SBS-2013-504, currently in effect.

THAT the provisions established in the Social Security Law and the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board, being hierarchically superior norms, prevail over articles 12, 16, and 19 of the Fund's Bylaws, which contemplate incompatible provisions, contrary to those established by higher-ranking norms.

THAT the Social Security Law in its article 305 provides the following: "Art. 305.- APPLICABLE REGIME.- Entities that make up the National Social Security System and natural and legal persons that make up the Private Insurance System, for their constitution, organization, activities, operation, and termination, shall be subject to the provisions of this Law, the General Law of Institutions of the Financial System and its Regulations, the Organic Law of Financial Administration and Control, the Securities Market Law, the Commercial Code, the Companies Law, subsidiarily, and to regulatory norms and resolutions issued for this purpose by the control bodies created by the Political Constitution of the Republic."

THAT article 2 of Section I, Chapter I, Title V, Book III, of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board, defines INSTRUCTIONS OF THE SUPERINTENDENCE OF BANKS AND INSURANCE as follows: "It is the set of norms, mandates, provisions, requirements, and guidelines issued by the control body to the National Social Security System. These instructions may be contained in resolutions, letters, or circulars and may be general; or specific."

THAT article 8, Section III.- OF SANCTIONS FOR VIOLATIONS OF INSTRUCTIONS ISSUED BY THE SUPERINTENDENCE OF BANKS AND INSURANCE, Chapter I, Title V, Book III, of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board states: The Superintendent of Banks and Insurance or his delegate will financially sanction the person responsible for the infringement in question, from an institution that is part of the National Social Security System, for non-compliance with instructions issued by the Superintendence of Banks and Insurance to the National Social Security System, a fine of US$ 131.40 to US$ 7,886.82 will be imposed;

THAT by document presented on July 3, 2014, Engineer Juan José Castelló, filed a reconsideration appeal before the Regional Superintendent of Guayaquil, regarding the financial sanction imposed with resolution No. IRG-DASS-2014-055 of June 19, 2014, which was denied through letter No. IRG-DjYTL-2014-0595 of July 24, 2014, thereby confirming the sanction imposed on the appellant, in view of said appeal not being based on the existence of facts or legal elements unknown to the Superintendence of Banks, as required by article 3, Chapter II, Title XVI, Book I of the Codification of Resolutions of the Superintendence of Banks and Insurance and the Banking Board;

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THAT by document received at the Superintendence of Banks on August 7, 2014, Engineer Juan José Castelló, Executive President of the Ecuadorian Teaching Pension Fund, filed a review appeal before the Banking Board against the administrative act contained in letter No. IRG-DjYTL-2014-0595 of July 24, 2014, which was admitted for processing through letter No. JB-2014-2193 of August 14, 2014;

THAT Engineer Juan José Castelló bases his review appeal on the fact that the defenses contained in letter No. DNC-OFI-14-00294 of May 13, 2014, were not taken into account by the Superintendence of Banks; that there is a lack of motivation in letter No. IRG-DjYTL-2014-0595 because it does not examine any of the arguments presented in the reconsideration appeal, which was filed because legal arguments were not taken into account, nor were the defenses analyzed, and because it was the obligation of the control body and the corresponding authority to analyze and motivate each argument, therefore, it is considered null; regarding the Preferred Single Account, he states that it was created under the protection of article 16 of the social bylaws; that its objective is to improve the benefits of the Mandatory Social Insurance since it addresses the pension needs of the departing participant, such as, the death contingency, credit services, housing, among others, which are purely pension-related as stated in the Operations Policy Manual of April 2, 2013, approved by the National Board and delivered to the Audit Commission, but it was not taken into account; that the CUP is a reserve maintained by the departing affiliate of the National Educational System or the retiree of the Ecuadorian Teaching Supplementary Fund, which allows him to address risks and needs inherent to his new condition, since he does not have fixed teacher income; that the bylaws were duly approved by the Superintendence of Banks and are in effect; that the new bylaws are in the approval process and that any change that occurs will govern for the future and in no case retroactively; that it is inaccurate to claim that the board created the possibility to continue as a fund participant once having ceased functions in the National Educational System, since this is determined by the current bylaws through its articles 12, 16, and 19; that with the CUP several benefits are obtained; among others, life insurance for the family group and coverage for funeral services, the latter improve the amount and conditions of death and funeral benefits offered by the General Mandatory Insurance, therefore article 1 of Resolution No. SBS-2004-740 nor article 1 of Resolution No. SBS-2013-504 currently in effect have been violated; that it is not explained which norms of the law or the Codification contradict the bylaws, nor why; that by virtue of the principle of non-retroactivity established in article 7 of the Civil Code, it should have been considered that if resolution No. SBS-2013-504 introduced changes, and if said resolution contained an adaptation period, said changes, to enter into effect, should have been approved by the Superintendence of Banks; and, that it should have carried out control based on the norm applicable at the time, for legal certainty; that article 66, numerals 13 and 15 of the Constitution recognizes and guarantees the right to associate, assemble, and manifest freely and
voluntarily. Thus, based on this principle of voluntariness, people have the right to manifest their decision to join the fund, as well as to separate and the right to request the liquidation of their individual account; that articles 18 and 19 of Resolution No. SBS-2013-504, establish that separation is voluntary, therefore the participant may withdraw from the Fund even without ceasing functions; and additionally articles 22 and 24 state that separation is voluntary and when the bylaws requirements are met; that therefore, if the participant can separate even without ceasing functions, once meeting requirements, they can request the liquidation of their individual account;

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THAT likewise, the appellant points out regarding the observations relative to the Fund's participation in the Sabanilla Hydroelectric Plant Project, that it was not taken into account that said project is of a private nature, since it is owned by HIDELGEN S.A., which signed a contract with CONELEC through which the State for a period of 15 years, purchases all the energy it generates, at a rate of 6.86 KWH; that the Fund has given a practical response by contributing to national objectives and at the same time achieving complementary benefits of an individual and collective nature for its affiliates as stated in its Bylaws; that in 10 years the debt is paid, that is, the shareholders who contribute 18 million as capital, within that period will own 100% of the Plant, since the business pays the debt; that their shares revalue and an annual profit of 14% is projected on an ITR of 14.6% and the corresponding share revaluation year by year; that 6,230 people, of them 5,800 fund affiliates, 150 retirees, 160 family members or friends have perfected their investment and the resources have been transferred to the Magisterio Renewable Energy Trust FMER for USD 12,510,000 and with that they own 70% of the share package of HDG; that to launch the project USD 62,400,000 is required, structured in 18 million in capital and 44,400,000 through securitization; that the management of the FUND as promoter and sponsor has allowed the project to pass from the condition of a project to being a hydroelectric plant under construction; that the securitization trust has submitted the securitization documentation to be approved by the Superintendent of Companies; that once the USD 12,000,000.00 of new investors was met, the refund of the pre-investment resources was requested, when the project had already entered execution; that the fund's condition as project sponsor materializes in investments through the securities market, in titles generated in a securitization process that must be legally approved, and, in shares registered in the securities market, as authorized by the Bylaws: that they have been leading managers of an unprecedented event, national savings coming from small and medium investors, financing productive projects for the country's development; and, that the fund's intervention in the trust and in the Sabanilla project meets the objectives of article 9 of the Bylaws; that the appealed administrative act refers to final report No. IRG-DASS-2014-002 of June 6, 2014, of which he never had knowledge, therefore his right to defense guaranteed in article 76 of the Constitution has been violated; that the appealed act does not state which instructions issued by the Superintendence of Banks have been violated, since instruction is not the same as regulation; that the challenged resolution also does not state in what way article 18 of the bylaws is violated; that the Social Security Law nor the current regulations have been violated either; that both the
Preferred Single Account and the Sabanilla Hydroelectric Plant were implemented due to the massive retirement process, since more than 20,000 employees of the National Educational System have retired and this year 16,000 additional retirements could occur, to all of whom the CUP allows them to maintain life insurance for themselves and their family group; and, that in the second case, it is a contribution to the country's development; and, that he challenges letter No. IRG-DjYTL-2014-595 of July 24, 2014, which ratifies the sanction imposed through resolution No. IRG-DASS-2014-055 of June 19, 2014, which he requests be left without effect;

THAT regarding the grounds of the appeal presented by Engineer Juan José Castelló, it must be considered that according to article 368 of the Constitution of the Republic, it corresponds to the State to regulate, supervise, and control activities related to social security; and, that in accordance with said constitutional norm, article 18 of the Social Security Law provides that the State guarantees the good governance of the General Mandatory Insurance administered by the IESS, through the S