Ecuadorian capital markets remain underdeveloped, with only two small stock exchanges: in Quito and in Guayaquil. The enactment of the 1993 Securities Market Law (which was reformed in 1998) set up a modern regulatory structure, opened stock market trading to banks and other firms, and encouraged the development of mutual funds. It also led the way in the recovery of the financial system from the worst of the economic crisis of 1999-2000. However, judging from the information available, the capital markets are still weak, with significant hurdles in the way of stability and efficiency. The National Securities Council (CNV) is the regulatory body of the capital markets while the Superintendency of Companies is the supervisory authority that authorizes securities firms and supervises their activities while executing the rules and policies issued by the CNV. Overall, there is insufficient information publicly available to make an assessment of Ecuador's compliance with the Objectives and Principles of Securities Regulation of the International Organization of Securities Commissions.

General Overview

Ecuadorian capital markets remain underdeveloped, finds the 2006 publication by the U.S. Department of Commerce (DoC), "Doing Business In Ecuador: A Country Commercial Guide for U.S. Companies." Large industrial groups are privately held and are financed mainly through debt. There are only two small stock exchanges in the country: the Guayaquil Stock Exchange (BVG) and the Quito Stock Exchange (BVQ). These trade predominantly in short term commercial paper, bank obligations, government debt, and a handful of private company stocks. The DoC report points out that one positive development has been the passage of the 1993 Securities Market Law, since it "set up a modern regulatory structure, opened stock market trading to banks and other firms, and encouraged the development of mutual funds" (p. 60). Also, bank credit has become available on market terms, with the private sector largely having access to short term bank credit. In addition, large, blue-chip companies fund themselves through external credit lines or foreign financing.

Per the 2006 DoC report, the 1999-2000 banking crisis in Ecuador, triggered in large part by massive insider trading, jeopardized financial institutions' stability and soundness, and resulted in the state taking over 15 insolvent banks. The financial system has shown signs of recovering from the worst of the crisis, with bank deposits expanding, private banks' return on assets returning to profitability and continually improving, interest rates going down, and bank credit improving. Looking forward, the report opines that privatization, major firms going public, and the development of private pension funds could "help to deepen the market" (p. 60). The International Monetary Fund's (IMF) 2005 Article IV Consultation report also noted an improvement in investor confidence, evidenced by strong bank credits and deposits and stable interest rates, although bank intermediation remains below pre-crisis levels and deposits are predominantly short-term. The upside was that Ecuadorian system gained access to international capital markets with the issuance of a 10-year bullet bond. However, the DoC reported in 2006 that the state was still "saddled with several large, moribund institutions" (p. 60) that it took over after the 1999-2000 crisis; regional rivalries impeded the development of efficient capital markets in the country; and the private sector still lacked adequate sources of funding.

The key law regulating the securities sector in Ecuador is the 1993 Securities Market Law, as reformed in 1998. The Securities Market Law, per a 2004 report jointly prepared by the Center for Latin American Monetary Studies (CEMLA) and the World Bank (WB), enabled the creation of brokerage houses, and allowed banks to create subsidiaries functioning as brokerage houses. The law governs both organized exchange and over-the-counter markets, as well as industry associations, brokerage houses, mutual funds management firms, central securities depositories and risk rating firms. The Securities Market Law also regulates the "trading of debt instruments and equities, the investments of the public sector in the securities markets, securitization, securities issuances, related companies, responsibilities, violations, sanctions and a sector-specific tax regime" (p. 7). The Securities Market Law stipulates that the National Securities Council (CNV) is the regulatory body of the capital markets and is in charge of making rules and general policies in accordance with which the securities sector entities function. The Superintendency of Companies (SCE) is the supervisory authority that authorizes securities firms and supervises their activities while executing the rules and policies issued by the CNV. Per the CEMLA/WB report, the Securities Market Law was reformed in 1998 to provide a legal framework for increasing market transparency and investor protection and fostering the development of the capital markets through the creation and operation of new instruments and investment vehicles. The CNV was created in 1993 with the enactment of the Securities Market Law. As noted by the CEMLA/WB report, the Superintendent of the SCE is its chairperson, whereas other members of the CNV include the superintendent of the SBS, the chairperson of the Board of Directors of the Central Bank of Ecuador (BCE), a representative of Ecuador's president, and three members of the private sector designated by the president. The supervisor, the SCE, was created by the Companies Law of 1964 and, in 1993, the Securities Market Law assigned to it the responsibility for "the application and administration of [the Securities Market Law] through its controlled body: Deputy Superintendence for Securities Markets (Intendencia del Mercado de Valores)" (p. 25). The SCE is an ordinary member of the International Organization of Securities Commissions (IOSCO). Membership in IOSCO does not require a formal declaration of adoption of the IOSCO principles.

The Banks' General Law of 1927 was replaced by the General Law on the Institutions of the Financial System in 1994. The General Law on the Institutions of the Financial System, per the CEMLA/WB report, "aims at promoting a competitive and efficient financial system that is capable of creating and developing those financial instruments and services that are necessary to enhance internal savings and to efficiently channel those resources towards productive activities and investment;...[and] transforming the overall structure of the sector by promoting the creation of multiple banks and financial groups, and by benefiting from the economies of scale and economies of scope to better face globalization both at the domestic and international levels" (p. 6).

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

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The 2004 CEMLA/WB report notes that the securities market in Ecuador is regulated by the 1993 Securities Market Law, as reformed in 1998. The law governs both organized exchange and over-the-counter markets, as well as industry associations, brokerage houses, mutual funds management firms, central securities depositories and risk rating firms. The Securities Market Law also regulates the "trading of debt instruments and equities, the investments of the public sector in the securities markets, securitization, securities issuances, related companies, responsibilities, violations, sanctions and a sector-specific tax regime" (p. 7). The Securities Market Law stipulates that the CNV is the regulatory body of the capital markets and is in charge of making rules and general policies in accordance with which the securities sector entities function. The SCE is the supervisory authority that authorizes securities firms and supervises their activities while executing the rules and policies issued by the CNV. However, there is insufficient information publicly available that directly addresses Ecuador's compliance with this principle.

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

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Per the 2004 CEMLA/WB report, the SCE is in charge of authorizing as well as inspecting the stock exchanges and central securities depositories. It is granted broad powers and immunity under the Securities Market Law to "verify the transactions, accounting books and working papers, information and any other documents or instruments" (p. 67). Banking and securities secrecy laws do not limit its activities. The SCE also has the power to take corrective actions against supervised entities as it deems necessary, and require those entities to comply with those measures. However, there is insufficient information publicly available that directly addresses Ecuador's compliance with this principle.

4. The regulator should adopt clear and consistent regulatory processes.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

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The Securities Market Law, per the 2004 CEMLA/WB report, describes self regulation as "the power that is given to stock exchanges and securities market industry associations, once recognized by the CNV, to issue their own regulations and internal rules, as well as to exercise control activities over their members and to establish sanctions within their corresponding competences" (p. 69). Under the law, stock exchanges and industry associations are allowed to issue their own rules and regulations as approved by their governing bodies, and these operational rules come into effect five days after they have been notified to the SCE and the members of the self-regulatory organizations (SROs). Self-regulatory rules must comprise rules on ethics, discipline, self-control, surveillance, sanctions, and market best practices. If an SRO member infringes any of these rules, the SRO is entitled to sanction the member, irrespective of additional sanctions by the SCE. However, there is insufficient information publicly available that directly addresses Ecuador's compliance with this principle.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

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The 2004 CEMLA/WB report notes that the SCE has the power to require stock exchanges and industry associations to suspend or modify the self-regulatory rules issued by them if they are deemed harmful to the development of the market or contradictory to the prevalent laws and regulations. However, there is insufficient information publicly available that directly addresses Ecuador's compliance with this principle.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

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The Securities Market Law empowers the SCE to "require and provide information on the activities of the individuals or firms under its direct control" (p. 67), and for the latter purpose, the Securities Market Law stipulates that the SCE must have a publicly accessible information center. However, there is insufficient information publicly available that directly addresses Ecuador's compliance with this principle.

9. The regulator should have comprehensive enforcement powers.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

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There is scant information publicly available as to Ecuador's compliance with this principle. However, the Council of Securities Regulators of the Americas (COSRA) website mentions the establishment of a Framework for Co-operation in the Americas by the COSRA members following a June 1994 meeting. The framework spells out the intention of the COSRA members, including the SCE, to mutually assist member country supervisors in the conduct of their enforcement and regulatory inquiries; coordinate the assistance from all relevant government agencies to provide such assistance; and continually review the assistance arrangement to enhance cooperation in information exchange. COSRA has also drawn up a set of Principles for Cross-border Surveillance which include mutual assistance by members in sharing information at their respective disposals and conducting joint supervisory activities regarding investment management firms subject to their mutual jurisdictions.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

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See Principle 12.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

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The 2004 World Bank Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing in Ecuador notes that the SCE is responsible for enforcing financial reporting standards with respect to companies listed on the stock exchanges or those that exceed a certain size. All incorporated companies are required to submit to the SCE their annual balance sheet and profit and loss statements no later than April 30 of the following year. Auditors auditing financial statements must submit a copy of their report no later than eight days after their report is issued. Further, Ecuador's legal framework "appears to provide an adequate basis for strengthening financial reporting practices in the near and medium terms, although reforms may be needed in the longer term" (p. i) the ROSC adds. The cause for concern, per the ROSC, is that the country's accounting standards that are based on the International Accounting Standards (IASs) have not been updated since 2000, do not cover all IAS principles, and therefore adversely affect the quality of financial statements brought out by the companies. The Securities Market Law also does not require the companies to publish financial statements, and this leads to non-transparency and an unfavorable investment climate. Further, the SCE does not effectively enforce consolidated financial reporting requirements resulting in widespread non-compliance.

In the context of financial and other disclosures, the COSRA website informs the reader that the Framework for Full and Fair Disclosure in the Americas adopted in 1994 by COSRA members, including the SCE, "accepts the principles of the Fundamental Elements of a Sound Disclosure System as produced by COSRA, which cover the character, timing, form and efficacy of disclosure of information."

15. Holders of securities in a company should be treated in a fair and equitable manner.

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According to the 2004 World Bank ROSC, Ecuadorian law requires that shareholders appoint a "comisario", a traditional figure (with no professional title) in Latin American corporate law. Under the 1999 Companies Law, a comisario must be appointed at the annual general meeting of shareholders for a one-year period to supervise the management of the company. The comisaro's responsibilities include reviewing the balance sheet and profit and loss statement and present it to the shareholders' general meeting. The comisario must also report to the SCE any irregularities witnessed. The comisario has broad power to carry out its duties. However, this person can be dismissed anytime by the shareholders' meeting. The role of the comisario, as noted by the World Bank, is mostly redundant and is an inadequate substitute for a governance body in line with international corporate practices. Furthermore, the Companies Law does not provide for any governance arrangement within the company to monitor the independent audit process on behalf of shareholders.

The 2004 CEMLA/WB report notes that shares are issued by open stock companies that are controlled by the SCE. There are two types of shares: common or preferred. Common shares represented by securities grant to their holders the same basic rights as to any other shareholder, as stated in the laws. Additionally, common shares provide preferential rights in the subscription of new paid-in capital and can be incorporated in fully negotiable preferential certificates. Preferred shares, on the other hand, give their holders special rights associated with dividend payments and in the event of the liquidation of the company although they do not give them voting rights. Overall, however, the information does not directly address Ecuador's compliance with this principle.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

NC

Corporate financial reporting, accounting, and auditing requirements are laid out in the 1999 Companies Law, finds the 2004 World Bank ROSC. Further, the SCE adopted in two waves, in the years 1999 and 2000, the Ecuadorian Accounting Standards (Normas Ecuatorianas de Contabilidad, or NEC) that were issued by the Ecuadorian National Federation of Accountants (FNCE), and are based on the International Accounting Standards (IASs). However, the ROSC notes that though the NECs are based on the IASs, they are considerably less complete, have major differences with the International Financial Reporting Standards (IFRSs), and have not been updated since 2000. These factors adversely affect the quality of financial reporting in the corporate sector. Further, the SCE "does not allow the use of IFRS for statutory purposes, which would allow corporations, on a voluntary basis, to better satisfy the needs of shareholders and other financial statements users" (p. 3). There is no obligation to publish statutory audited financial statements, and they are not available on an official website. Also, the SCE does not enforce the obligation of firms to publish consolidated financial statements and this "represents a potentially serious weakness as non-consolidated information provide an incomplete if not distorted presentation of companies' financial position and economic performance" (p. 3).

In addition, the ROSC explains that listed companies in Ecuador follow financial reporting requirements laid out in the Securities Market Law. Empowered by the Securities Market Law, the CNV is the official securities market regulator and is responsible for "issuing the chart of accounts and accounting standards for market registrants" (p. 3). The Securities Market Law regulates auditing activities in Ecuador, including "independence, incompatibilities, confidentiality, communication of findings, etc., and mandates the change of an audit firm's signing partner after five years" (p. 3). However, ensuring compliance with the Securities Market Law or the CNV regulations is delegated to the SCE, which may conduct inspections and impose sanctions for non-compliance with the generally accepted accounting or auditing standards. The tax law also regulates accounting and auditing activities in Ecuador. It requires companies with common stock to keep accounting books prepared according to either the NEC, or the IASs, in areas not covered by the NEC.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

21. Regulation should provide for minimum entry standards for market intermediaries.

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There is insufficient information publicly available as to Ecuador's compliance with this principle. The Securities Market Law defines the secondary market as comprising "the transactions or trades that are made after the securities were placed in the market for the first time" (p. 50), the 2004 CEMLA/WB report notes. Secondary trading of securities is allowed only to brokerage houses, and they engage in numerous cross transactions, where they have both selling and buying parties as clients.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

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There is insufficient information publicly available as to Ecuador's compliance with this principle. Per the 2004 CEMLA/WB report, in order to trade in the organized exchange market or in the over the counter market, securities, their issuers and securities object of a public offering have to be registered in the Securities Market Registry. This registration, prior to which a risk rating of the debt securities has to be obtained by the issuers, binds participants to disclose any information as required by the CNV rules, and to other requirements. However, government and other public sector issued securities are automatically and mandatorily registered, and require only showing the legal validity and a description of the main features of the issuance of the security. Participants commit themselves to disclose any information as required by the CNV rules and to comply with all other requirements.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

27. Regulation should promote transparency of trading.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

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There is insufficient information publicly available as to Ecuador's compliance with this principle. The 2004 CEMLA/WB report, however, finds that the Securities Market Law stipulates that stock exchanges must require members to create guarantee funds to cover unforeseen situations and protect their customers as well as the exchange itself in the event of, inter alia, settlement failures, erroneous transactions, broker misuse of customer funds. The report also finds that the general guarantee fund at the Guayaquil Stock Exchange corresponds to the Securities Market Law requirement, and has a cumulative contribution by each member in the amount of US$13,000. Another fund collects US$3,000 per brokerage house to cover minor faults and failures.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

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As the 2004 CEMLA/WB report notes, Article 69 (Of the Nature, Authorization and Operational Requirements), Title XIII (About Central Securities Depositories for Securities Clearance and Settlement) of the Securities Market Law provides the legal framework for securities clearance and settlement in Ecuador. Under the Securities Market Law, the SCE authorizes private companies to receive in deposit the securities registered in the Securities Market Registry for custody and safeguard, to offer transfer and settlement services, and to act as a securities clearinghouse. The SCE also supervises them on an ongoing basis. The report further elaborates that the only central securities depository approved by the SCE is DECEVALE S.A. It was created by the Guayaquil Stock Exchange, the Quito Stock Exchange, and some other financial institutions. Since it is not a self-regulatory organization, the SCE regulates it. However, DECEVALE S.A. has been found to account for taking custody of less than 1 percent of the total outstanding securities in the market - issued by the National Finance Corporation (CFN). The dominant central custodian of all public and private sector securities in Ecuador is the Central Bank of Ecuador, accounting for roughly three-fourths of the outstanding government bonds, and one-fourths of the Treasury certificates. Private sector institutions or investors safeguard the remaining securities. The Guayaquil Stock Exchange and Quito Stock Exchange clear and settle securities themselves through delivery and transfers to the current accounts held by the exchanges at the BCE. The stock exchanges also have a general purpose fund to cover settlement failures and distinct procedures to cover failed transactions in the securities leg. This descriptive information notwithstanding, there is little information publicly available on which to base the assessment of Ecuador's compliance with this principle.