Information Duty and Duly Evaluation of Risks

Colombian Banking Superintendence warns Fiduciarys directors about the responsibility of the companies regarding the violation of the information duty and the need of an adequate evaluation of risks. Mr. Segismundo Mndez Mndez, Banking Superintendent (e), issued the 54 Circular Letter, on july 26; document in which he expressed his concern about what is, in his opinion, an inadequate divulgation of precise information given by fiduciaries 1 concerning its roll in real state projects. Some time ago states the document the lack of meaningful and accurate information misled the public, making them rely on the fact that the fiduciaries participated in the mentioned projects as financial supporters of the whole operation, which was true at all. As a direct consequence of this, the fiduciary companies faced lawsuits with appalling consequences, cases that became widely known by everyone. In order to avoid this situation, Mr. Mndez pointed out: bearing in mind the characteristics and complexity related to this kind of projects, it is critical for fiduciary societies to evaluate the risk involved with every project, having adequate contracts for the specific operations, with all that, make a correct divulgation to the public, concerning the extension and effects of its participation.

Fiduciaries or trust companies

On this scenario, the Superintendence set forth the basic outlines to be followed by the fiduciaries, which can be summarized as follows. Concerning the internal obligations of the fiduciaries: (i) Implementation of stronger risk management controls These controls should be able to identify and measure the risks related to a project, and those consequentially assumed by the fiduciaries-; and (ii) Knowledge of the costumer. The responsibility concerning the verification of the clients conditions is an act that cannot be delegated. The fiduciaries must establish clear proceedings in order to obtain, update, and file the information, in a proper manner. Regarding the clientele, the document establishes the following obligations: (i) Diligence obligation. Amongst many others, this general obligation requires to the fiduciaries to divulge the necessary information about the implicit risks of the project, and the degree of responsibility assumed by the fiduciaries; (ii) Duty of information. This responsibility must be complied in every project, and particularly in those of presale, in which the fiduciaries must inform to the public who takes on the risk of expected and unexpected losses. In accordance with this duty, the advertisement should express the range of the fiduciaries obligation, and it should indicate that the mentioned entity is under control of the Superintendence; and (ii) As an extension of the information duty, the fiduciaries are obliged to give account of the operation, pointing out the difficulties faced, and the measures that are going to be taken, in order to maintain the execution of the project. Nevertheless, the concern of the Supervising authority is only the consequence of the multiple complications of the Real State projects developed by fiduciary companies in Colombia, in the background of its contractual obligations. Thus, the exposition risk of risk for the fiduciaries increases if there are not clear

proceedings for information management, and for the compliance of its obligations. The natural position of the fiduciaries in the structure of these contracts makes them vulnerable to legal actions, eventually started for every side of the project. This is why it is compelling, from a legal scope, and bearing in mind the general diligence obligation, the reviewing of the contracts, the internal proceedings, the existence of conflict of interests, the assignments or tasks for those involved in the project, and the management of information to clients and third parties- regarding the existent risks. From the effective realization of these obligations, it will depend no doubt about it- the increase or the reasonable management of the fiduciaries risks, having regard to the current state of the construction in our country. Please bear in mind that it seems that the Circular Letter 54
th

set aside the

latest types of real state projects, developed the last few years, in which the obligations of the fiduciaries are basically located in the administration and management of payments. However, we consider that for these recent developments, are equally applicable the duties and responsibilities mentioned. Should you have a question or require further information, please contact us. Sergio Rodriguez Azuero Julio Csar Quintero Hernndez

abogados@rodriguezazuero.com jquintero@rodriguezazuero.com

Also, you can reach us in our Web Page: www.rodriguezazuero.com Information Duty and Duly Evaluation of Risks

Colombian Banking Superintendence warns Fiduciarys directors about the responsibility of the companies regarding the violation of the information duty and the need of an adequate evaluation of risks. Mr. Segismundo Mndez Mndez, Banking Superintendent (e), issued the 54 Circular Letter, on july 26; document in which he expressed his concern about what is, in his opinion, an inadequate divulgation of precise information given by fiduciaries 1 concerning its roll in real state projects. Some time ago states the document the lack of meaningful and accurate information misled the public, making them rely on the fact that the fiduciaries participated in the mentioned projects as financial supporters of the whole operation, which was true at all. As a direct consequence of this, the fiduciary companies faced lawsuits with appalling consequences, cases that became widely known by everyone. In order to avoid this situation, Mr. Mndez pointed out: bearing in mind the characteristics and complexity related to this kind of projects, it is critical for fiduciary societies to evaluate the risk involved with every project, having adequate contracts for the specific operations, with all that, make a correct divulgation to the public, concerning the extension and effects of its participation.

Fiduciaries or trust companies

On this scenario, the Superintendence set forth the basic outlines to be followed by the fiduciaries, which can be summarized as follows. Concerning the internal obligations of the fiduciaries: (i) Implementation of stronger risk management controls These controls should be able to identify and measure the risks related to a project, and those consequentially assumed by the fiduciaries-; and (ii) Knowledge of the costumer. The responsibility concerning the verification of the clients conditions is an act that cannot be delegated. The fiduciaries must establish clear proceedings in order to obtain, update, and file the information, in a proper manner. Regarding the clientele, the document establishes the following obligations: (i) Diligence obligation. Amongst many others, this general obligation requires to the fiduciaries to divulge the necessary information about the implicit risks of the project, and the degree of responsibility assumed by the fiduciaries; (ii) Duty of information. This responsibility must be complied in every project, and particularly in those of presale, in which the fiduciaries must inform to the public who takes on the risk of expected and unexpected losses. In accordance with this duty, the advertisement should express the range of the fiduciaries obligation, and it should indicate that the mentioned entity is under control of the Superintendence; and (ii) As an extension of the information duty, the fiduciaries are obliged to give account of the operation, pointing out the difficulties faced, and the measures that are going to be taken, in order to maintain the execution of the project. Nevertheless, the concern of the Supervising authority is only the consequence of the multiple complications of the Real State projects developed by fiduciary companies in Colombia, in the background of its contractual obligations. Thus, the exposition risk of risk for the fiduciaries increases if there are not clear

proceedings for information management, and for the compliance of its obligations. The natural position of the fiduciaries in the structure of these contracts makes them vulnerable to legal actions, eventually started for every side of the project. This is why it is compelling, from a legal scope, and bearing in mind the general diligence obligation, the reviewing of the contracts, the internal proceedings, the existence of conflict of interests, the assignments or tasks for those involved in the project, and the management of information to clients and third parties- regarding the existent risks. From the effective realization of these obligations, it will depend no doubt about it- the increase or the reasonable management of the fiduciaries risks, having regard to the current state of the construction in our country. Please bear in mind that it seems that the Circular Letter 54
th

set aside the

latest types of real state projects, developed the last few years, in which the obligations of the fiduciaries are basically located in the administration and management of payments. However, we consider that for these recent developments, are equally applicable the duties and responsibilities mentioned. Should you have a question or require further information, please contact us. Sergio Rodriguez Azuero Julio Csar Quintero Hernndez

abogados@rodriguezazuero.com jquintero@rodriguezazuero.com

Also, you can reach us in our Web Page: www.rodriguezazuero.com