Technical Standards on Corporate Governance

NRP-17
Validity: 05/02/2019

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

CONSIDERING:

I. That Article 2, second paragraph of the Law on Supervision and Regulation of the Financial System establishes that the proper functioning of the Financial Supervision and Regulation System requires, from the members of the financial system and other supervised entities, compliance with current regulations and the adoption of the highest standards of conduct in the development of their businesses, acts, and operations, in accordance with what is established in the aforementioned Law, in other applicable laws, regulations, and technical standards issued for such purpose.

II. That according to Article 3, first paragraph and letter i) of the Law on Supervision and Regulation of the Financial System, the Superintendence of the Financial System is responsible for supervising the individual and consolidated activity of the members of the financial system and other persons, operations, or entities mandated by laws, and for such purposes, it is within its competence to require that supervised entities and institutions be managed and controlled in accordance with international best practices referred to corporate governance management as well as the technical standards issued.

III. That Article 7 of the Law on Supervision and Regulation of the Financial System establishes the entities subject to the supervision of the Superintendence of the Financial System.

IV. That Article 35, letter k) of the Law on Supervision and Regulation of the Financial System stipulates that directors, managers, and other officials holding positions of direction or administration of the members of the financial system must adopt and implement corporate governance standards in the management, direction, and control of their operations.

V. That Article 99, letter a) of the Law on Supervision and Regulation of the Financial System establishes that it corresponds to the Central Reserve Bank of El Salvador in its capacity as regulator to approve the technical standards that the laws regulating the supervised entities establish must be issued to facilitate their application, especially regarding good corporate governance practices.

VI. That international experience has evidenced that the application of good corporate governance practices strengthens proper administration, contributes crucially to achieving the entities' objectives, decreases the existence of conflicts among stakeholders, mitigates risks related to the administration of the entity, improves the capacity for decision-making and risk classification of entities, promoting security and confidence in financial markets.

NRP-17
Validity: 05/02/2019

THEREFORE,

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

AGREES to issue the following:

TECHNICAL STANDARDS ON CORPORATE GOVERNANCE

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Standards have as their object to establish regulations regarding the corporate governance bodies of the entities subject to their application; as well as the policies and procedures that must be issued, in order to ensure the adoption of sound corporate governance practices and the adoption of an adequate framework of transparency and protection of the interests of the entity's shareholders and clients, in accordance with applicable laws and international best practices in the matter, consistent with the nature and scale of their activities. Each entity will design, implement, and evaluate its corporate governance framework, considering the laws applicable to it, the size, ownership structure, and legal nature of the entity, as well as the scope and complexity of its operations, corporate strategy, the risk profile the entity is willing to assume, and the potential impact of its operations on third parties.

Subjects
Art. 2.- The subjects obligated to comply with the provisions established in these Standards are:
a) Specialized Agents in Securities Valuation; b) General Warehouses for Deposit; c) Development Bank of the Republic of El Salvador, insofar as it does not contradict its Creation Law; (1) d) Agricultural Development Bank, insofar as it does not contradict its Creation Law; e) Mortgage Bank of El Salvador, S.A.; f) Banks constituted in El Salvador and their foreign subsidiaries; g) Cooperative Banks, Savings and Credit Societies, and Federations regulated by the Law on Cooperative Banks and Savings and Credit Societies, insofar as pertinent; h) Investment Banks and their foreign subsidiaries; (3) i) Product and Services Exchanges; (3) j) Securities Exchanges; (3) k) Brokerage Houses; (3)

NRP-17
Validity: 05/02/2019

l) Social Housing Fund and National Popular Housing Fund, insofar as it does not contradict their creation laws; (3) m) Investment Fund Managers; (3) n) Pension Fund Administrating Institutions; (3) o) Social Insurance Institute of the Armed Forces, insofar as it does not contradict its Creation Law; (3) p) Risk Rating Societies; (3) q) Insurance Companies constituted in the country and Cooperative Insurance Associations constituted in the country, insofar as it does not contradict their respective Law; (3) r) Specialized Societies in the Deposit and Custody of Securities; (3) s) Electronic Money Provider Societies; (3) t) Branches of Foreign Banks established in the country, insofar as pertinent; (3) u) Branches of Foreign Insurance Companies established in the country, insofar as pertinent; (3) v) Securitization Companies; (3) w) Legal persons that carry out money sending or receiving operations systematically or substantially, by any means, at the national and international level. It will be understood that money sending or receiving operations are carried out systematically or substantially when such activity is carried out habitually or constitutes an important activity within the business operations of the entity; (1) (3) x) Reciprocal Guarantee Societies and their local guarantors; (1) (3) y) Administrating or Operating Societies of Payment Systems and Securities Settlement Systems; (1) (3) z) Foreign Currency Exchange Houses; and (1) (3) aa) Societies that offer complementary services to the financial services of the members of the financial system, particularly those in which they participate as investors. (1) (3)

Those entities that administer third-party funds must establish adequate segregation of functions and responsibilities that allow them to properly manage conflicts of interest in the administration of said funds.
The entities listed in letters n) and r) of this article are responsible for demonstrating to the Superintendence of the Financial System the effectiveness of their corporate governance framework and indicating the aspects that, due to their own characteristics and nature, are not applicable to them, with due justifications.

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning:
a) Shareholder: owners of the shares of the subjects obligated to the application of these Standards; the term will also serve to refer to the associates of Cooperative Associations subject to the application of these Standards; b) Senior Management: the Executive President, Executive Director, General Manager, or acting equivalent and the executive positions that report to them. In the case of the Development Bank of the Republic of El Salvador, the President; (1) c) Cooperative Association: those governed administratively by the General Law of Cooperative Associations and its Regulation; d) Central Bank: Central Reserve Bank of El Salvador; e) Investment Bank: In accordance with Article 3, first paragraph of the Investment Banks Law, these are institutions that act habitually in the financial market, being able to carry out operations and provide services exclusively with Sophisticated Investors, according to the active, passive, and investment operations established in this Investment Banks Law or those duly authorized by the Central Bank within its competence; (3) f) Client: natural or legal person who maintains a contractual relationship with the entity for the provision of financial services or products that it offers, which in these Standards may refer to: depositors, investors, contributors, affiliates, pensioners, insured, debtors, co-debtors, contributors, or participants, among others; (3) g) Code of Ethics or Conduct: 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 generally to all members of the organization; (3) h) Corporate Governance Code: document that must contain the entity's philosophy such as its vision, mission, values, practices, and policies adopted in the matter of Good Governance to conduct the entity, especially regarding the functions and responsibilities of shareholders, Board of Directors, Senior Management, and other control bodies or organs, while also developing the handling of relationships with entities or persons interested in the good performance of the entity; (3) i) Support Committees: committees integrated by members of the Board of Directors, Directing Council, or Administrative Councils and executive personnel; (3) j) Board of Directors Committees: committees integrated exclusively by members of the Board of Directors, Directing Council, or Administrative Councils; (3) k) Conflict of Interest: any situation in which a personal benefit or interest of a third party that could influence the professional judgment or decision of an entity member regarding the fulfillment of their obligations can be perceived; (3) l) Financial Conglomerate: in accordance with Article 113 of the Banks Law, it is the set of societies characterized by the fact that more than fifty percent of their respective
share capitals are owned by a controlling society, which is also a member of the conglomerate. The controlling society of the conglomerate may be a society of exclusive purpose or a bank constituted in the country; (3)

NRP-17
Validity: 05/02/2019

m) Executive Director: is the one who exercises the highest administrative authority within the entity, and who may also be part of the Board of Directors; frequently referred to as Executive President, General Manager, or acting equivalent; (1) (3) n) External Director: is the one who is not an employee nor holds an executive position in the entity; (3) o) Employees: Personnel who provide their services with direct subordination or labor dependence in the entity; (2) (3) p) Entity: subject obligated to comply with these Standards; (2) (3) q) Corporate Governance: is the system by which entities are administered and controlled; its structure must establish the attributes and obligations of those participating in its administration, supervision, and control, such as the General Shareholders' Meeting or its equivalent, the Board of Directors, members of Senior Management, Committees, and Control Units; likewise, it must provide an adequate framework of organizational transparency and the protection of the interests of the entity's clients; (2) (3) r) Stakeholder Group: are 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. Stakeholder groups are considered to be the entity's employees, holders of negotiable securities, regulatory, control, and oversight bodies, competitors, suppliers, creditors, and other groups that have diverse relationships with the entity; (2) (3) s) Business Group: in accordance with Article 5 of the Securities Market Law, it is that in which a society or set of societies has 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 society, which allows presuming that the economic and financial performance is determined by common interests or subordinate to the group; (2) (3) t) Departments: Positions within the entity that have an area or functional unit under their direction and responsibility; (2) (3) u) Supervisory Board: body that exercises in Cooperative Associations the supervision of all entity activities and audits the acts of administrative bodies as well as those of employees. In the case of the Social Housing Fund, it refers to the Supervisory Council; (2) (3) v) Board of Directors: collegiate body or equivalent body in charge of the administration of the entity, with functions of supervision, direction, and control; in the case of Cooperative Associations, it will be the Administrative Council or as defined in its Creation Law; (2) (3) w) Social Pact: constitutive and organizational instrument of the entity; in the case of Cooperative Associations, it will refer to the Statutes; (2) (3) x) Cooperative Society: Cooperative Banks governed by the Code of Commerce and the Law
on Cooperative Banks and Savings and Credit Societies; and (2)

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(3) y) Superintendence: Superintendence of the Financial System. (2) (3)

CHAPTER II
ON SHAREHOLDERS

On the General Shareholders' Meeting
Art. 4.- The General Shareholders' Meeting or its equivalent is the highest authority of the entity. In the Social Pact or Statutes, this attribution must be recognized along with its fundamental functions and competencies to adopt any type of agreement regarding its governance and in general, all measures that require the fulfillment of the Social Pact and the common interest of the shareholders. This term will also serve to refer to the General Assemblies of Associates of Cooperative Associations subject to these Standards. In the case of entities created by Law, what is established in said laws will be observed.

In addition to the functions recognized in applicable laws, the Social Pact or Statutes, the following operations must be submitted for approval to the aforementioned Meeting:
a) Any corporate operation that implies the forced modification of shareholders' participation in the entity's capital; b) The acquisition or alienation of assets or liabilities that limit or prevent the normal development of the entity's main activity; c) When it implies a modification of the social object, Social Pact, Statutes, or generates effects equivalent to a structural modification of the entity; and d) Operations whose effects lead to the liquidation of the entity.

Shareholders may make recommendations on the corporate governance of the entity.
For the application of this article, in the case of entities created by Law, they must observe what is established in said laws.

Responsibility of Shareholders
Art. 5.- It is the responsibility of shareholders to diligently elect the Directors who will integrate the Board of Directors, ensuring that they meet the requirements of suitability and availability to direct the entity with honesty and efficiency, in accordance with what is established in the regulatory framework and in Article 11 of these Standards. In addition, shareholders must know their rights, requirements, and disqualifications contained in the Social Pact, Statutes, laws, and norms, in order to comply with them when required.

Convening to the General Shareholders' Meeting Art. 6.- The General Shareholders' Meetings held by entities will be subject to the provisions and procedures contemplated in the Social Pact or Statutes of the Society, the legal or regulatory provisions that regulate them, and in their absence, what the Code of Commerce and Common Law regulate. (1)

Without prejudice to the holding of General Meetings in which all shareholders or representatives of all shares in which the social capital is divided are present, the convening to the General Shareholders' Meeting must include, in addition to the minimum content contemplated in applicable laws, the place and the manner in which shareholders can access the documentation and information related to the points considered in the agenda. In accordance with what is provided in Article 236 of the Code of Commerce, the books and documents related to the purposes of the General Shareholders' Meeting will be available to shareholders at the entity's office or in other means that facilitate their consultation, from the publication of the convening so that they can be informed of them.

Entities that do not gather more than half plus one of the shares in the first convening to the General Shareholders' Meeting must make efforts to increase attendance, using means additional to those provided in applicable laws, to hold it in a second convening and, when announcing and holding it in a third convening, if applicable.

The foregoing will not be applicable in the case provided for in Article 233 of the Code of Commerce and for Cooperative Associations, what is established in the General Law of Cooperative Associations will apply.

Agenda of the General Shareholders' Meeting
Art. 7.- The points to be treated in the agenda of the General Shareholders' Meeting must be clear, precise, and appear expressly, in such a way that each topic is discussed separately, facilitating its analysis and thereby avoiding the joint voting of topics that must be resolved individually. Any other point may be included in the agenda when all shares are represented and so agreed upon unanimously.

In the case of Cooperative Associations, any point agreed upon by the attending associates at the time of approving the agenda may be treated in the General Assembly.

Shareholder's Right to Information
Art. 8.- In accordance with Article 245 of the Code of Commerce, shareholders have the right to request information or clarification from Senior Management on the points included in the agenda before or during the holding of the session.

The Board of Directors must ensure that the information is made available to the shareholder in writing before or at the latest on the day of the holding of the General Shareholders' Meeting or access to it by any technological means that allows confidentiality of the same.

CHAPTER III
ON THE BOARD OF DIRECTORS

Mission of the Board of Directors
Art. 9.- The Board of Directors or its equivalent must ensure the strategic direction of the entity, good corporate governance, and the surveillance and control of the management delegated to Senior Management. The Board of Directors will establish the organizational structure, adequate segregation of functions, and policies that allow the entity to balance profitability and risk management, which promote its stability and ensure adequate attention to the clients of the products and services offered. (2)

In their relations with stakeholder groups, members of the Board of Directors must ensure that the entity acts in accordance with applicable laws and regulations, must fulfill their obligations in good faith, and make decisions with independent judgment, observing those additional principles of social and environmental responsibility that they had previously accepted. They must especially ensure:
a) Protecting the rights and interests of clients in general; b) Protecting the rights and interests of shareholders and establishing mechanisms for their equitable treatment; c) Developing a communication and information policy with shareholders and clients in general; and d) Performing their functions prioritizing the interest of the entity and with independence of criteria.

For the application of this article, in the case of entities created by Law, they must observe what is established in said laws.

Composition
Art. 10.- The Board of Directors will be composed of the number of members established in the Social Pact or its Statutes within the margins fixed therein, always respecting the minimum limit of members established in applicable laws.

With the object of strengthening the general supervision function, the Board of Directors of entities may only have one Executive Director.

The mechanism for replacement due to resignations and temporary or definitive absences, as well as the mechanism to cover vacancies of Directors, must be established in the Social Pact or Statutes.

For the application of this article, in the case of entities created by Law, they must observe what is established in said laws.

Suitability

NRP-17
Validity: 05/02/2019