Title III: Brokerage Houses

Chapter I: Incorporation, Legal Nature And Minimum Capital

Sect. 56.- Brokerage Houses will be formed as corporations, in conformity with the effective trade norms, they will add in their denomination the expression Brokerage Houses, and they will have as main purpose to intermediate in the trading of securities.

Each stockbroker must be founded and must operate all the time with a minimum capital of one million Colones entirely subscribed and paid, cash when it is initial capital, which will vary in conformity with what is specified in Section 98 of this Law.

No entity will be able to act as stockbroker without previously registering in a stock exchange and being entered in the Database kept by the Superintendence for this purpose, according to what is specified in Sections 12 and 36 of this Law, what will be disclosed to the public, by means of a publications in the two newspapers of larger national circulation, at the expense of the entity.

Prohibitions

Sect. 57.- The following won't be able to be shareholders, directors or administrators of Brokerage Houses:

1. The debtors of the financial system holding credits with reserves for bad debts of fifty percent or more of the balance, as well as their spouses or relatives within the first degree of consanguinity. This inability will be applicable also to those directors that own twenty-five percent or more of the stock of corporations in this situation. This prohibition will persist while the irregularity of the credit subsists;
2. Directors, officials or administrators of an institution of the financial system that has incurred in net-worth deficiencies of twenty percent or more than the minimum required by the law; that has required contributions from the State for bailout or that has been intervened by the Superintendence, in which the responsibility of these persons in creating such situation is demonstrated;
3. Shareholders, directors or administrators of a stockbroker that has been canceled by the Superintendence except that they prove that they had no responsibility in creating that situation;
4. People that are Directors, administrators, officials or employees of other Brokerage Houses, and shareholders that own more than 10% of the stock capital of other Brokerage Houses. ^{(1) (2)}

Requirements to be Director of Brokerage Houses.

Sect. 58.- directors of Brokerage Houses will satisfy the following requirements.

1. To be Salvadoran, Central American and in case of the foreigners to have at least three years of residence in the country;
2. To be of recognized financial honorability and competence.

Inabilities to be Director or Administrator of Brokerage Houses.

Sect. 59.- It won't be possible to be directors or administrators of a stockbroker to those that lack manifest morality and those that are affected by the inabilities contemplated in points c), d) and e) of Section 31 of this Law.

Operations

Sect. 60.- Brokerage Houses will be able to carry out operations of intermediation of securities on behalf of third parties, receiving from these the securities and the necessary funds, in conformity with what is specified in this Law. They will also be able to grant credits with the purpose of acquiring securities; likewise they will be able to receive credits, carry out operations of repurchase agreements, make complementary activities, such as registration operations and primary placement of securities; give consulting in stock operations and all other licit activity related with stock exchange business that the Superintendence authorizes, within the forty five days following the application received from a stock exchange and in conformity with the considerations expressed by this in the application. ⁽²⁾

Also, they will be able to invest in shares of other corporations that lend them necessary or complementary services with the previous authorization from the stock exchange to which they belong.

They will also be able to buy and sell by own account tradable obligations, and should inform about this circumstance to the persons that take part in the trading.

They won't be able to buy neither to sell by own account, nor to give in guarantee the securities that were entrusted to them for their sale or that were requested from them for their purchase, without having previously executed the orders of their clients and having obtained from them in writing this authorization.

The registration and primary placement operations of shares will be carried out during a term of one hundred and eighty days, counted from the date of the registration of the issue in the Superintendence. Once this term elapses, they will settle the acquired shares. In exceptional cases when the conditions of the market justify it, stock exchanges will be able to prolong per periods of up to one hundred eighty days, the term to settle the shares.

The operations of underwriting and primary placement of securities may be carried out under the following modalities:

1. In firm or guaranteed placement: In which the firm supplies the funds for the entirety or part of the issue, underwriting it and exercising all holder's rights;
2. Pre-financing of the remainder: In which the firm commits to underwrite, for its portfolio, the portion of the issue of securities not placed after a certain period of time;
3. Of intermediation: In which the firm advances the funds corresponding to an issue, without subscribing it and as a loan; and the issuer must pay the credit granted by the house, as the issue is placed in the market; and
4. Non guaranteed placement or of best effort: In which the firm is limited to be the agent of placement, without any responsibility before the issuer.

Each stock exchange will issue the necessary regulations for the development of these operations.

Brokerage Houses that are branches of banks and financial corporations won't be able to carry out operations of underwriting and primary placement of shares.

The Superintendence by means of a guidebook will dictate the regulations that the Brokerage Houses will fulfill in the realization of their operations, including provisions of general character on the trading of securities issued by corporations that are in the same corporate group as the stockbroker, in order to avoid conflicts of interests.

Operations of portfolio administration will be regulated in a special Law. ⁽¹⁾

Broker Agents

Sect. 61.- Brokerage Houses will operate in stock exchanges by means of broker agents that they especially appoint.

The agents will act on behalf and in representation of the stockbroker that appointed them and under the responsibility of this stockbroker.

Margins of Indebtedness

Sect. 62.- Brokerage Houses will maintain and fulfill the rates of indebtedness, of placements and other conditions of liquidity and net-worth solvency that, according to the nature of the operations that they carry out, their amount and the class of instruments that are trade, establishes the Superintendence.

Sect. 63.-Brokerage Houses will prepare prior to the beginning of their operations a guarantee, to ensure the fulfillment of all their obligations as intermediaries of securities, in their current or future clients' benefit or of those that they get to have because of their operations of intermediation of securities.

The guarantee will be of an initial amount of one million Colones and will respond only and exclusively for responsibilities in the intermediation of securities. Each stock exchange will be able to demand bigger guarantees according to the volume and nature of the operations of the stockbroker and of its financial situation.

The guarantee may be in the form of cash, guaranty by bank, financial or insurance company, as well as pledge over securities accepted by the respective stock exchange.

All in all, that part of the guarantee that consists of pledge over shares, won't be able to exceed the twenty-five percent of their total value.

The guarantee will be kept effective by the stockbroker, while the judicial actions that have been filed against it by the beneficiaries to whom this disposition refers, are not resolved by means of final and binding judgment. In any event the guarantee will be kept for up to one year after the quality term  of the stockbroker or until the liquidation of the corporation.

Sect. 64.- Brokerage Houses will designate a stock exchange, a bank or financial firm as representatives of the potential beneficiaries of the guarantee to which the previous Section refers. These representatives will only carry out the functions that are pointed out in the following paragraphs.

If the guarantee consists of cash deposits or pledge over securities, the delivery of the deposits or of the mortgaged goods will be made to the representative of the creditors.

In the registration of pledges it won't be necessary to individualize the creditors, being enough to indicate the name of their representatives, annotating at the margin the substitutions that take place. Also, the summons and notifications that according to the law must be done to the pledgee, will be considered fulfilled upon being made to their representatives. If the guarantee consists as an instrument from a bank, financial firm or insurance corporation, the representatives of the beneficiaries will also be the holders of their supporting documents. The bank, financial firm or insurance corporation that gives the guarantee will pay the value demanded up to the amount guaranteed to the above mentioned representatives by means of request done in agreement with the Law of Mercantile Procedures.

In spite of what was specified in the precedent paragraph and without the need to certify it to the grantors, the representatives of the beneficiaries of the guarantee, to make it effective, must have been judicially notified of the fact of having filed lawsuit against the guaranteed intermediary of securities.

The funds coming from the realization of the guarantee in the stock exchange will be in its custody or in the custody of the respective financial entity, in substitution of that guarantee, staying in deposits with adjustable rates until the guarantee obligation finishes.

Obligations and Responsabilities

Sect. 65.- The Brokerage Houses will be obliged to:

1. Keep records of purchase and sale orders that it receives by any means, as well as the other books and records that the Law prescribes and those required by the Superintendence;
2. To provide to the respective stock exchange, with the frequency that it specifies, information on the executed operations;
3. To elaborate financial statements according to the generally accepted accounting principles, which will be audited by external auditors registered in the Superintendence;
4. To publish in two newspapers of national circulation their financial statements up to June 30 and December 31 of every year, together with the opinion of the external auditors, during the sixty following days to the indicated dates;
5. To inform to the Superintendence, at least with a month of anticipation, the opening or closing of new offices and branches;
6. To provide to the Superintendence the documentation that is necessary to maintain updated the information of the Registration; and
7. To keep a record of agents.

Sect. 66.- Transactions of securities in which Brokerage Houses participate will comply with the norms of this Law; and in its case, to what is specified in the internal regulation of the respective stock exchange. Every order to make a stock exchange operation will be understood with respect to the principal, made on the basis that this principal is subject to the regulations of the respective stock exchange.

Brokerage Houses that act in trade of securities are forced to pay the price of the purchase or to deliver the sold securities and it won't be admitted as an exception a lack of provision of funds. These intermediaries cannot make for the money they received to buy securities, neither for the price paid to them for the securities that they sold, with the quantities that their client, buyer or salesperson owe them.

The vouchers that they give to their clients and those reciprocally given, in cases in which two or more intermediaries converge to the closing of a deal, are full proof against the stockbroker that underwrites them.

Sect. 67.- Brokerage Houses are responsible for the identity and legal capacity of the people that they hire; of the authenticity and physical integrity of the securities that they trade; of the registrations of the last holder in the records of the issuer when this is necessary, of the continuity of endorsements and of the authenticity of the last one of these, when it proceeds.

REFORMS:
(1) D.L. No. 254, Published in the Official Newspaper No. 35, Vol. 326, of February 20, 1995
(2) D.L. No. 925, Published in the Official Newspaper No. 25, Volume 334 of February 7, 1997.