Technical Conduct Standards for Entities of the Stock Markets

NDMC-15
TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS Approval: 12/01/2017 Validity: 01/02/2018

THE STANDARDS COMMITTEE OF THE CENTRAL RESERVE BANK OF EL SALVADOR,

CONSIDERING:

I. That Article 2 of the Law on Supervision and Regulation of the Financial System establishes that the Financial Supervision and Regulation System aims to preserve the stability, efficiency, and transparency of the financial system, as well as the safety and solidity of its members, in accordance with the provisions of said Law and other applicable laws, regulations, and technical standards issued for such purposes, all in concordance with international best practices in the matter.

II. That Article 3 of the Law on Supervision and Regulation of the Financial System stipulates as a competence of the Superintendence of the Financial System: to monitor that the members of the financial system conduct their business, acts, and operations in accordance with best financial practices, with the objective of avoiding the improper use of insider information and market manipulation.

III. That according to Article 35 of the Law on Supervision and Regulation of the Financial System, it corresponds to the members of the financial system: the adoption and updating of policies on ethical conduct standards, management of conflicts of interest, use of insider information, prevention of behaviors that may imply manipulation or abuse of the market, as well as compliance with principles, rules, or standards in the management of business that establish to achieve their corporate objectives.

IV. That in conformity with international standards, it is necessary to have an adequate framework for the management of conflicts of interest, use of insider information, and market manipulation, with the objective of enhancing the protection of financial services clients and generating transparency and efficiency within the financial system.

V. That Article 99 of the Law on Supervision and Regulation of the Financial System establishes that the Committee may establish technical criteria to determine acts and operations that are considered contrary to stock market usages or sound market practices.

THEREFORE,

by virtue of the regulatory powers conferred by Article 99 of the Law on Supervision and Regulation of the Financial System,

NDMC-15
TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS Approval: 12/01/2017 Validity: 01/02/2018

AGREES to issue the following:

TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Standards aim to regulate the adoption and updating of policies in entities subject to these Standards, as well as their officials and employees, regarding ethical conduct standards, management of conflicts of interest, use of insider information, and prevention of behaviors that may imply manipulation or abuse of the market.

Subjects
Art. 2.- The subjects obliged to comply with the provisions established in these Standards are: (1) a) Stock exchanges; b) Exchanges of products and services; c) Brokerage firms; d) Companies specialized in the deposit and custody of securities; e) Agents specialized in the valuation of securities; f) General warehouses of deposit; g) Securitization companies; and h) Managers of Investment Funds. Risk Classifiers shall be regulated in accordance with what is established in (NRP-07). In the case of general warehouses of deposit, only what is established in Chapters II and III of these Standards shall be applicable to them.

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning: (1) a) Senior Management: The Chief Executive Officer, General Manager, or whoever acts in their place, and the executives who report to them; b) Conflict of Interest: Any situation in which it can be perceived that a personal benefit or interest of a third party may influence the judgment or professional decision of a member of the entity regarding the fulfillment of their obligations;

NDMC-15
TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS Approval: 12/01/2017 Validity: 01/02/2018 c) Board of Directors: A collegiate body in charge of the administration of the entity, with supervisory and control functions. In the case of limited liability companies that have a single administrator or administrators, the obligations established in these Standards for the Board of Directors shall be applicable to them; d) Client: A natural or legal person who maintains a contractual relationship with the entity for the provision of financial services or products that it offers; e) Code of Ethics or Conduct: A document that must contain the system or set of behavioral values, policies, and mechanisms for compliance that an entity establishes through the adoption of ethical and moral guidelines applicable to the administration of the Board of Directors, Senior Management, and in general to all members of the organization; f) Stakeholders: Persons or groups of persons who pursue objectives different from the purposes of the owners and administrators, but are affected or may be affected by the decisions and activities of the entity. Stakeholders include the employees of the entity, holders of negotiable securities, regulatory, control, and surveillance bodies, competitors, suppliers, creditors, and other groups that have various relationships with the entity; g) Financial Conglomerate: In accordance with Article 113 of the Banks Law, it is a set of companies characterized by the fact that more than fifty percent of their respective share capital is owned by a controlling company, which is also a member of the conglomerate. The controlling company of the conglomerate may be a company with a specific purpose or a bank constituted in the country; h) Business Group: In accordance with Article 5 of the Securities Market Law, it is one in which a company or set of companies have a common controller, who acting directly or indirectly participates with at least fifty percent in the share capital of each of them, or that have common shareholders who, directly or indirectly, are holders of at least fifty percent of the capital of another company, which allows presuming that the economic and financial performance is determined by common interests or subordinate to the group; and i) Superintendence: Superintendence of the Financial System.

CHAPTER II
CODE OF ETHICS OR CONDUCT

Code of Ethics or Conduct
Art. 4.- Entities must draft and keep updated a Code of Ethics or Conduct approved by the Board of Directors, which must contain as a minimum the policies on ethical conduct standards, management and control of conflicts of interest, transactions with related parties, confidentiality, reserve, and use of insider information, disclosure of information, as well as the prevention of

NDMC-15
TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS Approval: 12/01/2017 Validity: 01/02/2018 behaviors that may imply manipulation or abuse of the market in accordance with what is established in these Standards.
Entities that are part of the financial conglomerate or business group may share the Codes of Ethics or Conduct provided that they comply with the requirements established in these Standards.

Ethical Conduct Standards
Art. 5.- Entities, in the development of their activities, must observe at least the following:
a) Prioritize the interests of clients, investors, or participants, as well as the performance of administered assets, over the interest of the entity, stakeholder group, or any third party, when there are conflicting interests between the client and the entity or a third party. In case that special Law provides for the treatment of conflict of interest, the entity must act in accordance with the established legal framework; b) Equal treatment to clients, providing the same conditions and opportunities, avoiding any act, conduct, practice, or omission that may be detrimental to them; c) Transparency and timeliness in the dissemination of information regarding the application of commissions, expenses, surcharges, and any other charge associated with the services provided by the entity. This information must be accessible to the public and in a format that allows for easy comprehension; d) Refrain from acting under the influence of any situation generating a conflict of interest or other circumstances that could alter the integrity of the service; e) Perform their activities with honesty and diligence, avoiding acts that could deteriorate the integrity of the markets; and f) Refrain from using confidential or privileged information for their own benefit or that of third parties to the detriment of clients or the market.

CHAPTER III
POLICY ON THE MANAGEMENT OF CONFLICTS OF INTEREST

Art. 6.- Entities must develop in the Code of Ethics or Conduct the procedures, practices, and controls for the management of potential conflicts of interest, with the purpose of avoiding the provision of their services under the influence of any situation generating a conflict of interest or other circumstances that alter the integrity of their services.

Policies for the management of conflicts of interest Art. 7.- The policy for the management of conflicts of interest must stipulate the mechanisms that allow preventing, identifying, managing, mitigating, reporting, and registering conflicts of interest that may arise between the members of the Board of Directors, Senior Management, representatives, directors, and other employees of the entity and stakeholder groups. Such policies must establish:
a) Scope of application; b) Identification of possible conflicts of interest in which persons included in the scope of application may incur, derived from their functions; and c) Control and management mechanisms for conflicts of interest.
Entities must generate a record of all occurrences of conflicts of interest, in accordance with what is established in Article 13 of these Standards.

Identification of conflicts of interest
Art. 8.- The entity must identify the conflicts of interest that may exist in each operation, product, and line of business, taking into consideration the relationships of incentives, segregation of functions, and independence, identifying at least the following situations:
a) Existence of an interest in the result of the service provided to the client or of a transaction carried out in the name of the client, which differs from the interest of the client in that result; b) Possibility of obtaining a financial, economic benefit, or avoiding a loss to the entity, to the detriment of the interests of the clients; c) Possibility of having financial, economic, or any other type of incentives, to favor the interests of the entity or third parties, against the interests of the clients; d) Possibility of receiving from a third party some incentive related to the service provided, different from the usual commission for said service; and e) Other situations that the entity qualifies.

Management of conflicts of interest
Art. 9.- Entities must have a continuous documented process for the control and management of conflicts of interest. To comply with the foregoing, it must establish at least the following mechanisms:
a) The obligation to report conflicts of interest that arise in a real or potential manner, so that an authority designated by the entity defines the management of the conflict; b) The conditions and procedures for officials and employees of entities to carry out personal operations with natural or legal persons who are related or linked to the entity for which they provide their services, when they are outside the scope of activities that usually correspond to these; and

NDMC-15
TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS Approval: 12/01/2017 Validity: 01/02/2018 c) Mechanisms for the resolution of conflicts of interest, stipulating the way in which the entity will act when a conflict of interest has been generated, identifying the elements for its mitigation.

Criteria for the resolution of conflicts of interest Art. 10.- In cases where the conflict of interest could not be prevented in accordance with the measures established in this Chapter, the entity must resolve, taking into account the following:
a) In case of conflict between the entity and a client, participant, or a third-party administered fund, the interest of the latter must be safeguarded; and b) In case of conflicts between clients: Favoring, disadvantaging, or excluding any of them must be avoided.

Administration of third-party funds
Art. 11.- In the case of entities that administer third-party funds, it must be considered within their conflict of interest management policies, at least the following aspects:
a) Establish the conditions for the performance of operations on their own account or on behalf of members of the Board of Directors, Senior Management, Investment Committee, Surveillance Committee, representatives, risk committees, related persons, and employees of the entity regarding the financial assets in which the administered fund may invest, according to its investment policy, as well as in the subscription and redemption of participation quotas of the funds administered by the entity. Regarding measures related to the negotiation of securities on their own account, these must include mechanisms for prior authorization of any operation, as well as the establishment of limits to carry out the operation; and b) Establish the conditions for the performance of transactions or operations carried out with the resources of the administered third-party funds with companies that are members of their financial conglomerate, business group, or persons related to the entity, and the mechanisms for the allocation of resources when different funds administered by the entity are managed.

Record of Conflicts of Interest
Art. 12.- The entity will keep an updated record, which may be centralized or decentralized, of the conflicts of interest that arise in the entity. In the record, the following information will be recorded clearly and numbered consecutively:
a) The identity of the persons who have been exposed to the conflict of interest; b) The department or areas involved in the conflict of interest; c) Date on which the conflict originated; d) Reason for the appearance of the conflict and detailed description of the situation; e) Documents that prove the conflict;

NDMC-15
TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS Approval: 12/01/2017 Validity: 01/02/2018 f) Financial instruments or services to which the conflict refers; g) Description of the management, minimization, or, if applicable, correction process of the situation; h) Date of resolution of conflicts of interest; and i) Estimation of damages or harm caused to clients, when this is applicable.

CHAPTER IV
POLICIES FOR THE PREVENTION OF THE USE OF INSIDER INFORMATION

Insider Information
Art. 13.- Insider information is understood as any concrete information referred to the entity, its business, funds it administers, or the securities it issues, that has not been disclosed to the market, and whose knowledge, by its nature, is capable of influencing the business or results of the entity, in the behavior of the administered funds, as well as in the price or quotation of the securities issued or participation quotas of the Investment Funds administered by the entity. Notwithstanding the foregoing, for information to be qualified as concrete, it is not necessary that all details of an operation are defined, but it must be precise information from which a possible impact on the prices or quotations of the securities can be reasonably concluded.

Policies for the prevention of the use of insider information Art. 14.- Entities must develop in the Code of Ethics or Conduct the policies for the prevention of the use of insider information, which must establish the procedures that allow the controlled flow of information qualified as privileged to any other person or area of the entity, stakeholder group, or third parties. The policies for the prevention of the use of insider information must contain, at a minimum, the following:
a) Identification of the insider information generated by the entity or to which employees or officials may have access in relation to the entity; b) Security measures for the custody, generation, archiving, access, reproduction, and distribution of the information; c) Mechanisms for insider information to be communicated only to persons whose knowledge of it is essential, prior warning that it is information of that nature, and of the prohibition of its use or communication to third parties; d) Criteria to be followed during the phases of studies or negotiation of a public acquisition offer; and

NDMC-15
TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS Approval: 12/01/2017 Validity: 01/02/2018 e) Preventive measures and prohibitions adopted by the entity regarding the improper use of insider information.
Likewise, in said policies, examples of possible information or events that may be qualified as insider information must be included.
In the case of entities that are members of a financial conglomerate or business group, the aforementioned procedures must contemplate security measures so that the referred information is not disseminated to other entities that are members of the financial conglomerate or business group.

Obligations
Art. 15.- Any person or entity that possesses insider information has the obligation to safeguard it. Therefore, it must adopt the necessary measures to prevent such information from being subject to improper use, until the information has become public. Any official or employee who has access to insider information must refrain from the following:
a) Carrying out, directly or indirectly, any type of operation on their own account regarding securities, financial products, or financial operations based on insider information, whether this belongs to the entity itself, any entity member of the financial conglomerate or business group, or any other entity in the financial system in which the official or employee may have some type of linkage; b) Communicating it to third parties, except in the normal exercise of their work, profession, or position; c) Recommending to third parties to carry out any type of financial operation, whether acquiring or ceding investments, credits, contracts, guarantees, sureties, or causing others to acquire or cede them, based on said insider information; and d) Making investments with prior knowledge of the investment strategy of third-party funds administered by the entity itself.

Segregation of Functions
Art. 16.- With the aim of avoiding carrying out activities using insider information, entities may establish separate areas within the entity, in relation to the rest of its operational units, considering the departments where investment management, securities intermediation, financial analysis, among others, are developed. The separation must imply conditions of hermeticism, reserve, and exclusivity during the exercise of functions in relation to other areas that make up the organizational structure of the entity.

CHAPTER V
POLICIES FOR THE PREVENTION OF MARKET MANIPULATION

NDMC-15
TECHNICAL CONDUCT STANDARDS FOR ENTITIES OF THE STOCK MARKETS Approval: 12/01/2017 Validity: 01/02/2018 Art. 17.- For the purposes of these Standards, market manipulation in accordance with the Securities Market Law shall be considered the following activities:
a) Carrying out fictitious transactions, whether these are carried out inside or outside an exchange; b) Carrying out transactions or inducing the transaction of securities governed by the Securities Market Law, through deceptive, fraudulent, or dishonest practices or mechanisms; c) Carrying out transactions to fix or artificially vary the prices of any value in the market, as well as the dissemination of rumors and information that may lead investors to deception; and d) That brokerage firms unnecessarily fragment transactions, without benefit for the client, and that they use for their own benefit the prior knowledge of the transactions in which they intervene.

Policies for the prevention of Market Manipulation Art. 18.- Entities must draft as part of the development of their Codes of Ethics or Conduct, policies for the prevention of market manipulation, which must contain at least the following aspects:
a) Mechanisms for the prevention of manipulation and abuse of the market; and b) Prohibitions related to the performance of activities that may be considered as market manipulation of conf