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Trusts in Nicaragua’s financial industry

Rodrigo Taboada

In January, 2011, the National Assembly of Nicaragua approved Law No 741 that regulates trust agreements in Nicaragua. This is the first time that trusts have been regulated by law. The law declares that the regulation of trusts will have the purpose of allowing management of assets, execution of public and private investments, and creation of securities, among other things.

The law defines several relevant topics, including assets that can be transferred to a trust, formalities for the transfer, minimum content of the trust Agreement, and rights and obligations of each party to the contract. There are different types of trusts depending on their purpose, such as: management of assets, creation of securities, life insurance, investments, pensions, and other types created by the parties within the limitations detailed in the law.

The law also makes a clear distinction depending on the nature of the trustee, and mandates that particular rules to complement the law shall be approved by the executive branch, in the case of non–financial institutions, and by the Superintendence of Banks, in case of financial institutions.

This legislation is very important for financial institutions and particularly for banks because the General Banking Law of year 2005 included as a permitted activity for banks the execution of a trust according to the special laws that regulates the matter, but no special laws had been approved before 2011. Banks, as heavily regulated institutions, usually are the first choice for parties that need to work with a trust structure. Several banks have created a particular trust division to handle these operations.

In compliance with the mandate of the Trust Law, on May 2011 the Superintendence issued a prudential regulation that creates the legal framework for the execution of trust operations by financial institutions.

The board of directors of the financial institution will be responsible for approving the objectives and written policies that may allow such body to perform an adequate supervision of the risks associated to trust operations in which the institutions takes part.

The regulation sets forth various general guidelines. Firstly, it sets out that a financial institution must establish a clear separation between its strategic activities and risk taking, with respect to those activities of processing and registration of transactions.

It also states that financial institutions that perform activities as trustees must have human, financial, technological and logistical resources that are according to the nature, responsibilities, size and complexity of the trusts that they manage.

A financial institution must create an organic and functional structure that is segregated from its other structures.

If some acts or functions regarding trust operations may be subject to outsourcing, the financial institution will have to comply with the particular regulations that deal with outsourcing activities of financial institutions.

Financial institutions must also establish internal controls necessary to identify, mitigate and follow up potential conflicts of interest between the different participants in the operations of the trust.

Finally, financial institutions must establish mechanisms for the monitoring of internal controls implemented to mitigate the risks associated with trust operations.

Rodrigo Taboada

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