Circular 1/2005 — Trusts

Thursday, June 23, 2005 OFFICIAL GAZETTE (Second Section)

SECOND SECTION
BANK OF MEXICO

CIRCULAR 1/2005, relating to the Rules to which multiple banking institutions; brokerage houses; insurance institutions; surety institutions and limited-purpose financial companies must adhere, in trust operations.

At the margin a logo, which says: Bank of Mexico.

CIRCULAR 1/2005

The Bank of Mexico, based on articles 24, 26, 27 and 36 of its Law; 81, 103 section IV and penultimate paragraph, and 106 section XIX subsection a) of the Credit Institutions Law; 22 section IV subsection d) and 103 section IX subsection b) of the Securities Market Law; 35 section XVI Bis subsection a) and 62 section VI subsection a) of the General Law of Insurance and Mutual Societies; 16 section XV subsection a) and 60 section VI Bis subsection a) of the Federal Law of Surety Institutions, considering:

a) That on June 13, 2003, modifications to various financial laws regarding Trusts were published in the Official Gazette of the Federation;

b) That these reforms had, among other purposes, the objective of establishing a more solid legal framework to: i) prohibit that through the Trust, operations reserved by law to financial intermediaries are carried out; ii) avoid that through this figure, intermediaries carry out operations that evade compliance with the provisions established in their respective laws or norms, and iii) provide greater transparency and legal protection to users of Trusts;

c) That it is convenient to eliminate the figures of Open and Closed Trust, since through them it was intended to inhibit the carrying out of certain operations that currently, due to the aforementioned legal reforms, are prohibited in the different financial laws, and

d) That it is considered important to facilitate the consultation of the provisions issued by the Bank of Mexico applicable to Trust operations carried out by financial entities that, according to the laws, correspond to it to regulate, through the issuance of a single normative body that includes all the aforementioned provisions, except those directed at development banking institutions due to the particular nature of such intermediaries.

For the above, it has resolved to issue the following:

RULES TO WHICH MULTIPLE BANKING INSTITUTIONS; BROKERAGE HOUSES; INSURANCE INSTITUTIONS; SURETY INSTITUTIONS AND LIMITED-PURPOSE FINANCIAL COMPANIES MUST ADHERE, IN TRUST OPERATIONS

1. DEFINITIONS

For the sake of brevity in these Rules, the following will be understood, in singular or plural, as:

Brokerage Houses: Legal entities authorized to operate as such in terms of the Securities Market Law.

Exchange Houses: Legal entities authorized to operate as such in terms of the General Law of Auxiliary Credit Organizations and Activities.

Foreign Financial Entity: That which is authorized to act as a financial entity by the competent authorities of the country in which it is constituted.

Trust: An operation by virtue of which the settlor transmits to a Trustee Institution the ownership or title of goods or rights to be destined to lawful and determined purposes, entrusting the realization of said purposes to the Trustee Institution itself.

Multiple Banking Institutions: Legal entities authorized to act with such character, in terms of what is provided in the Credit Institutions Law.

Surety Institutions: Legal entities authorized to act as such in terms of the Federal Law of Surety Institutions.

Insurance Institutions: Legal entities authorized to act with that character in terms of the General Law of Insurance and Mutual Societies.

Thursday, June 23, 2005 OFFICIAL GAZETTE (Second Section)

Trustee Institutions: Multiple Banking Institutions, Brokerage Houses, Insurance Institutions, Surety Institutions and Sofoles to which the trust operation has been entrusted.

Recognized Markets: MexDer, Mexican Derivatives Market, S.A. de C.V., located in Mexico City, Federal District; the Chicago Mercantile Exchange, Chicago Board Options Exchange and Mid America Commodity Exchange which is part of the Chicago Board of Trade, located in the city of Chicago, Illinois, United States of America, and Commodity Exchange Incorporated, located in New York City, New York, United States of America.

Sofoles: Legal entities authorized to act as Limited-Purpose Financial Companies in terms of the Credit Institutions Law.

2. GENERAL PROVISIONS

2.1 The provisions contained in these Rules regulate those types of Trusts that Trustee Institutions are authorized to enter into in accordance with their own laws and the provisions emanating from them.

2.2 Trustee Institutions must strictly observe the formal requirements of each operation to avoid legal defects.

2.3 In the event that a technical committee exists, the Trust contract must provide at least for the following: i) how it will be integrated; ii) how it will take its resolutions, and iii) the mechanism through which it will inform the Trustee Institution and, if applicable, other persons of the content of said resolutions.

2.4 Trustee Institutions must register and preserve evidence of the operations they carry out, in accordance with the laws governing them and the general provisions issued by the authorities for this purpose.

2.5 Trustee Institutions may only charge the commissions and fees agreed upon in the Trust contract. It may be agreed that the payment of said commissions and fees be charged to the trust estate.

2.6 In Guarantee Trusts, the contract must provide at least for the following: i) the obligations whose compliance is guaranteed with the trust estate; ii) the goods or rights that constitute said estate, and iii) the proportion that must be maintained between the value of the goods or rights that make up the trust estate and the outstanding balance of the guaranteed obligation.

2.7 What is provided in these Rules will be applicable to mandate and commission operations carried out by Multiple Banking Institutions.

2.8 The Bank of Mexico may authorize the carrying out of Trust operations under terms different from those provided in these Rules. For this, Trustee Institutions must request the respective authorization from the Management of Authorizations, Consultations and Legal Control.

3. INVESTMENT AND ADMINISTRATION OF RESOURCES

3.1 For the investment and administration of the trust estate, Trustee Institutions must adhere to what is agreed in the Trust contract, in which the possibility of receiving instructions from the settlor, the beneficiary, or the technical committee may be stipulated.

3.2 The Trust contract must agree: i) the procedure to be followed to invest the liquid resources that make up the trust estate; ii) how to proceed in the event that such investment cannot be carried out in accordance with the procedure provided; iii) the type of goods, rights, or instruments in which the liquid resources that make up the estate of said Trust may be invested; iv) the maximum terms of the investments; v) the characteristics of the counterparties with whom such investments may be carried out, and vi) in the case of investments in securities, credit instruments, or other financial instruments, the characteristics of their issuers and, if applicable, the rating of such securities, instruments, or instruments.

4. OPERATIONS OF TRUSTEE INSTITUTIONS WITH OTHER ENTITIES

4.1 Trustee Institutions must present themselves as such before their counterparties in the legal acts they carry out in the fulfillment of the Trusts entrusted to them.

4.2. Operations with securities, foreign exchange sales, financial operations known as derivatives, as well as in general any type of financial investment carried out by Trustee Institutions must be carried out with a Multiple Banking Institution, Brokerage House, or Foreign Financial Entity, all these societies acting in their own name. The foregoing, with the exception of financial operations known as derivatives that are carried out in Recognized Markets.

Likewise, Trustee Institutions may carry out foreign exchange sales directly with Exchange Houses.

5. TRANSPARENCY MEASURES

5.1 Trustee Institutions must deliver to the settlor and, if applicable, the beneficiary at the time of signing the Trust contract a copy of it, as well as an inventory of the goods or rights that make up the Trust's estate.

5.2 Trustee Institutions must establish in the Trust contract that they will be civilly liable for damages and losses caused by the non-compliance with the obligations assumed by them in said contract.

5.3 Trustee Institutions must provide in Trust contracts the manner, terms, and persons to whom they will deliver the documentation related to the Trust. Such documentation may consist of financial statements, account statements, or any other that the parties agree to in the Trust contract.

5.4 In accordance with what is provided in articles 106 section XIX subsection a) of the Credit Institutions Law, 103 section IX subsection b) of the Securities Market Law, 62 section VI subsection a) of the General Law of Insurance and Mutual Societies, and 60 section VI Bis, subsection a) of the Federal Law of Surety Institutions, Multiple Banking Institutions, Brokerage Houses, Insurance Institutions, and Surety Institutions are authorized to carry out operations with the same institution acting in its own account, in compliance with Trusts, provided that they are operations that their law or provisions emanating from them allow them to carry out and preventive measures are established to avoid conflicts of interest.

Trustee Institutions must comply with at least the following preventive measures:

a) Provide that the operations referred to in this section may be carried out in the Trust contract;

b) Agree in the Trust contract: i) that the operations referred to in this section be carried out with prior express approval, in each case, granted by the settlor, the beneficiary, or the technical committee through some means that leaves documentary evidence, even in electronic media, or ii) the type of operations that may be carried out with the institution acting in its own account, and if applicable, their characteristics;

c) Provide in Trust contracts clauses that prevent the rights and obligations of the Trustee Institution acting with such character and in its own account from being extinguished by confusion, and

d) The department or area of the Trustee Institution that acts in its own account and the fiduciary department or area of said Institution must not be directly dependent on each other.

In all cases, the preventive measures must be stated prominently in the Trust contract.

5.5 Trustee Institutions must insert prominently in the Trust contracts they enter into, the prohibitions to which they are subject in accordance with their respective Laws, or those applicable to them supplementarily, as well as those provided in these Rules.

6. PROHIBITIONS

6.1 In the celebration of Trusts, Trustee Institutions are prohibited from the following:

a) Charging the trust estate prices different from those agreed upon when concluding the operation in question;

b) Guaranteeing the perception of returns or prices for the funds whose investment is entrusted to them, and

c) Carrying out operations under conditions and terms contrary to their internal policies and sound financial practices.

6.2 Trustee Institutions may not carry out operations with securities, credit instruments, or any other financial instrument that do not meet the specifications agreed upon in the corresponding Trust contract.

6.3 Trustee Institutions may not carry out types of Trusts that they are not authorized to enter into in accordance with the laws and provisions regulating them.

(Segunda Sección) OFFICIAL GAZETTE Thursday, June 23, 2005

6.4 In no case may Trustee Institutions cover with charge to the trust estate the payment of any sanction imposed on said Institutions by any authority.

6.5 In Guarantee Trusts, Surety Institutions and Sofoles may not receive goods or rights other than those intended to guarantee the obligations in question.

6.6 Trustee Institutions must observe what is provided in articles 106 section XIX of the Credit Institutions Law, 103 section IX of the Securities Market Law, 62 section VI of the General Law of Insurance and Mutual Societies, and 60 section VI Bis of the Federal Law of Surety Institutions, as applicable to each Institution.

7. INFORMATION

Trustee Institutions must provide the Information Directorate of the Financial System of the Bank of Mexico with information on the Trusts they enter into or administer in the manner and terms that it may require them, if applicable.

8. SANCTIONS

8.1 Multiple Banking Institutions and Brokerage Houses that fail to comply with the provisions contained in these Rules will be sanctioned by the Bank of Mexico in accordance with the law regulating it and other applicable provisions. The foregoing, without prejudice to the powers that the laws grant to other authorities.

8.2 Sofoles that fail to comply with the provisions contained in these Rules will be sanctioned by the National Banking and Securities Commission in accordance with the Credit Institutions Law.

8.3 Insurance Institutions and Surety Institutions that fail to comply with the provisions contained in these Rules will be sanctioned by the National Insurance and Surety Commission in accordance with the General Law of Insurance and Mutual Societies and the Federal Law of Surety Institutions.

TRANSITORY PROVISIONS

FIRST. These Rules will enter into force on July 11, 2005.

SECOND. From the entry into force of these Rules, sections M.31. to M.31.4, M.41.2, and M.42.3 of Circular 2019/95 directed at multiple banking institutions are repealed, except for what is provided in section M.31.16 of said Circular regarding Trusts in which sums of money contributed periodically by groups of consumers integrated through marketing systems are administered, intended for the acquisition of new movable goods and/or the provision of non-real estate services, in terms of Article 63 of the Federal Consumer Protection Law and other related provisions.

The above stated, understanding that the Trusts referred to in section M.31.16., which do not adhere to what is provided in said section, as well as those Trusts in which sums of money contributed periodically by groups of consumers integrated through marketing systems, intended for the acquisition of other types of goods and/or the provision of real estate services, must make an interest-free cash deposit at the Bank of Mexico, for fifty percent of the funds received in the aforementioned Trusts. Said deposit must be constituted in a special account that the Bank of Mexico maintains for Multiple Banking Institutions, on the date the resources are received and maintained during the validity of the respective act or contract.

THIRD. From the entry into force of these Rules, section CB.4 of Circular 115/2002 dated October 31, 2002 directed at brokerage houses is repealed, and the Rules to which Insurance Institutions must adhere when acting as trustees, as well as the Rules to which Surety Institutions must adhere when acting as trustees, both published in the Official Gazette of the Federation on April 4, 2000, are abrogated.

Respectfully,

Mexico, D.F., June 17, 2005.- BANK OF MEXICO: The Director General of Financial System Analysis, José Quijano León.- Initials.- The Director of Central Banking Provisions, Fernando Corvera Caraza.- Initials.

THESE RULES ARE ISSUED BASED ON ARTICLES 8o., 10, 14 AND 17 OF THE INTERNAL REGULATIONS OF THE BANK OF MEXICO.

Thursday, June 23, 2005 OFFICIAL GAZETTE (Second Section)

(R.- 213880)