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General introduction to the regulatory framework

The regulatory framework for the asset management industry is based mainly on Law 24,083 (as amended: Mutual Fund Law), which regulates mutual funds. The Mutual Fund Law defines mutual funds and their main characteristics. It also regulates the main requirements and obligations that managing companies and depositary companies must comply with. Law 26,831 (as amended: Capital Markets Law) is also relevant since it regulates the licences for asset managers.

The Capital Markets Law, which regulates public offering of securities and capital markets, creates certain agents that are licensed to carry out regulated activities related to the capital markets. Among these agent licences, there is a licence for collective investment manager agents,10 which includes managing companies of mutual funds, and for collective investment custody agents,11 which includes depositary companies of mutual funds. Therefore, while most obligations, duties and responsibilities of the managing companies and depositary companies arise from the Mutual Fund Law, there are certain obligations that arise from the Capital Markets Law as these companies are licensed agents under such law.

In addition, the Capital Markets Law is also relevant regarding the public offering of quotas and foreign funds in Argentina.

The CNV is the regulatory agency of both the Mutual Fund Law and the Capital Markets Law, and it is also the supervisory agency of mutual funds activity.

i Mutual fund definition and characteristics

The Mutual Fund Law defines mutual funds as separate estates owned by several persons who are co-owners of the estate and whose rights are represented by quotas.12 Mutual funds are not companies and do not have legal personality, but in no scenario will the investors in the fund be liable in excess of the assets of the fund.

The management of mutual funds is carried out by a managing company, which must be a corporation authorised by the CNV or a financial institution authorised by the Argentine Central Bank. Custody of the assets of the mutual fund must be held by a different company, called a depositary company, which must be a financial institution.13 The managing company must be completely independent from any other company, especially the depositary company, with whom it cannot share its offices. Neither can the directors, managers nor attorney-in-fact of the managing company have a position on the board or supervisory board of the depositary company.

The managing company and the depositary company will be, individually and separately, liable for the damage caused to investors due to failure to perform their obligations under the applicable regulations, the terms and conditions of the mutual fund and the prospectus of the offering; but in no scenario shall one of the parties be liable for the breach of the other party.14

Investment purpose of the mutual fund

Mutual funds can have a broad or narrow investment purpose. Mutual funds that have one or more specific purposes must be denominated in a manner in which the specific purpose can be identified and must invest in those assets the minimum amount set forth by the CNV. Accordingly, the CNV rules provide that mutual funds that have a specialised purpose or whose name includes a reference to a certain class of assets must invest at least 75 per cent of the assets of the fund in the class.15 Additionally, the CNV has issued specific regulations for mutual funds whose purpose is to finance small and medium-sized enterprises16 and those whose purpose is to finance productive and infrastructure projects in regional economies.17

Restrictions on investment by mutual funds

Mutual funds cannot invest in:

  1. securities issued by the managing company or the depositary company or in other mutual funds;18
  2. securities issued by the controlling company of the managing company, or any of its affiliates, in excess of 2 per cent of the capital or liabilities of such controlling party;
  3. a single bond issued by the government; or
  4. a class of assets in excess of the limits established by the CNV.

The CNV can create exemptions to these limitations, and the limitations on securities issued by the depositary company do not apply to financial trusts in which the trustee is the depositary company.

Classes of quotas

Mutual funds may have different classes of quotas with different rights and they may also have fixed-income quotas, in which a fixed return is paid on the notional value, subject to the return of the assets of the fund. Fixed-income quotas may be denominated in units adjusted by inflation19 or in units adjusted by the construction index,20 provided that the amortisation is longer than two years.21 The possibility of issuing quotas indexed by inflation or the construction index is an exemption to the general public policy rule that forbids the indexation of obligations and debts.

ii Classes of mutual funds: regulation of open-end and closed-end mutual funds

There are two types of mutual funds: open-end mutual funds and closed-end mutual funds.

Open-end mutual funds

Open-end funds are those in which the number of quotas can be increased continuously by new subscriptions or be reduced by redemptions.

Open-end mutual funds can be formed by the following assets:

  1. publicly offered securities and sovereign and sub-sovereign public bonds traded in markets authorised by the CNV;
  2. precious metals;
  3. domestic or foreign currency;
  4. derivatives;
  5. instruments issued by financial institutions authorised by the Argentine Central Bank, including bank deposits;
  6. asset portfolios that replicate stock or financial indexes; and
  7. any other type of asset authorised by the regulations of the CNV.

The securities in which the mutual fund invests must be authorised for public offering either in Argentina or abroad. The CNV also has detailed regulations on the appraisal of the assets of the fund and the eligible assets for the liquidity reserve.22

Open-end mutual funds must invest at least 75 per cent of the funds in assets issued and negotiated in Argentina. For the purposes of this minimum investment requirement:

  1. due to outstanding international agreements, securities that have been authorised to be issued in states that are members of Mercosur and in Chile are given the same treatment as securities issued in Argentina;23 and
  2. Argentine certificates of deposit – certificates representing foreign securities, similar to the American depositary receipt (ADR) – are not considered securities issued and negotiated in Argentina, unless the underlying asset has been issued in Argentina or in a member state of Mercosur or Chile.
Closed-end mutual funds

Closed-end mutual funds are those whose quotas cannot be redeemed, other than in those exceptional cases set forth by the regulations, and must be publicly offered.

The closed-end mutual fund must have, at all times, at least five investors, and none of them can have, directly or indirectly, a participation exceeding 51 per cent of the votes of the quota holders.24

Closed-end mutual funds can be formed by the following assets:

  1. those assets that can be part of an open-end mutual fund;
  2. real estate and movable assets;
  3. securities without public offering;
  4. credit rights of any nature; and
  5. any other type of asset authorised by the regulations of the CNV.

Regarding those assets in which only those mutual funds that are closed-end can invest, such assets must be located, originated or issued in Argentina.25 However, in those closed-end funds that invest at least 75 per cent of the funds in assets in which an open-end fund can invest, this restriction will not be applicable to the investment in those assets.26 This restriction on investment abroad will not apply to closed-end mutual funds that are aimed at financing projects of technological innovation developed by companies organised in Argentina that have the potential to expand themselves regionally or internationally based on their activity.27

The name of the closed-end funds must specify that they are closed-end and identify their investment purpose.28 The rules of the mutual fund must establish a schedule and a strategy for the investment of the funds, which must provide for the investment of at least 75 per cent of the funds in specific assets.29 The CNV rules also set out specific regulations for closed-end funds that invest in credits30 or in real estate.31

The subscription agreement may provide that the payment of the quotas will be made in periodic payments, unless the quotas are paid in kind, in which case they have to be paid in at issuance.32 If a closed-ended fund issues additional quotas, investors must have a pre-emptive right and the managing company must set the price of the new quotas based on the appraisal opinion of two independent appraisers.33 The closed-end mutual fund can take debt, but such indebtedness cannot exceed the net worth of the mutual fund.34

The CNV, considering the structure and characteristics of the closed-end mutual funds, can determine that their quotas may only be publicly offered to qualified investors.35

Mutual funds for qualified investors

The Mutual Fund Law provides that the CNV can create a class of mutual funds in which only qualified investors can invest.36 The definition of qualified investors must follow international standards on this matter and shall consider the investor's net worth and annual income.

Mutual funds for qualified investors will not be subject to the requirements on minimum investment in Argentine assets and other investment restrictions provided by the Mutual Fund Law.

The CNV, through its General Resolution No. 765, in October 2018 called for comments from the general public regarding a proposed regulation on mutual funds for qualified investors. However, the regulations have not been issued yet, and it is unlikely that they will be issued in the near future.

iii Regulations for managing companies, depositary companies and distribution and placement agents

The Mutual Fund Law, the Capital Markets Law and the regulations of the CNV regulate the activities of managing companies, depositary companies and distribution and placement agents.

Managing companies

A managing company must: manage the fund in a professional manner as a good business person and prioritise the interests of the co-owners of the fund; represent the collective interests of the co-owners of the fund; and have the minimum net worth requirements set forth by the regulations.

Managing companies are authorised not only to manage mutual funds, but also other types of portfolios and to distribute and place quotas of mutual funds, whether managed by them or by other managing companies. In addition, they can render advisory services on capital market investments and place transaction orders.37

Managing companies of mutual funds must be registered with the CNV as a collective investment manager agent.38 The managing company must have a net worth of at least 150,000 units of acquisitive value (UVA),39 which must be increased by 20,000 UVA with each additional mutual fund that it manages. At least 50 per cent of such minimum net worth must be held in certain eligible assets listed by the CNV.40

Depositary companies

The depositary company must, inter alia:

  1. collect and make payments to the investor resulting from the subscription and redemption of the quotas of the mutual fund;
  2. supervise the compliance by the managing company of the procedures related to the acquisition and negotiation of the assets of the mutual fund;
  3. carry out the custody and deposit of the securities and the instruments related to the investments, the collection of accrued benefits and the payment and collection of the purchase prices related to the transactions of the mutual fund; and
  4. keep a register of the investors in the mutual fund.41

Depositary companies, which must be financial institutions, must be registered with the CNV as a collective investment custody agent.42 The depository company can be registered with the CNV under other categories of agents that are compatible with its activity as a depositary company.43

Mutual fund placement agents

The managing company and the depositary company can directly place the quotas of the mutual fund. In addition, these parties may, at their own cost, enter into placement agreements with mutual fund distribution and placement agents registered with the CNV. The appointment of a mutual fund placement agent does not discharge any of the responsibilities and duties of the managing company and the depositary company.44

Mutual fund placement and distribution agents can be a financial institution or any other entity that meets the requirements of the CNV.

Any employee of the managing company, the depositary company or the mutual fund distribution and placement agent who is in contact with the public must pass an exam and be registered as a qualified adviser with the CNV.45

iv Public offering of offshore mutual funds in Argentina

A foreign mutual fund can be publicly offered in Argentina if it is registered with the CNV. The registration procedure requires that the mutual fund meets not only the general requirements for the registration of foreign issuers but also the specific requirements applicable to foreign mutual funds. As further described below, the current regulations are so stringent that it is not a practical possibility to register a foreign mutual fund, and there has seldom been any security publicly offered by a foreign issuer in recent years.

Registration of a foreign entity as issuer

The Rules of the CNV provide that all foreign issuers have to fulfil certain requirements to be registered as a foreign issuer. For instance, the foreign issuer must not be affected by legal restrictions or prohibitions that restrain the performance of the corporate purpose and activities set forth in the by-laws or articles of incorporation in its jurisdiction of incorporation, must have a permanent representation or branch in Argentina, and must provide evidence that it has certain eligible assets outside Argentina.

The CNV regulations applicable to local issuers will apply to the foreign issuer.

Restriction on investment in foreign assets

The Rules of the CNV have limitations on the assets in which these foreign issuers may invest that put these entities in the same situation as local mutual funds regarding the ability to invest in non-Argentine assets. The main investment restriction is that the securities in the portfolio shall be publicly traded in Argentina or abroad, and that 75 per cent of the investments must be made in assets issued and traded in Argentina, in Chile or in a Mercosur country.

In addition, the foreign entity may not:

  1. hold more than 5 per cent of the voting rights of an entity;
  2. invest in securities issued by an entity of a similar nature (e.g., other mutual funds);
  3. purchase securities issued by its parent company representing more than 2 per cent of the capital or debt of such parent company, as resulting from its last financial statements (the shares in excess of such limit will have no voting rights);
  4. have in its portfolio securities that represent more than 10 per cent of the total liabilities of an issuing company;
  5. invest in a single Argentine government bond worth more than 30 per cent of its assets; and
  6. invest more than 20 per cent of the assets in securities issued by a single issuer or by issuers belonging to the same group.
Reporting obligations

Foreign issuers have to comply with all the information obligations applicable to Argentine issuers, and with certain specific reporting obligations for foreign mutual funds (e.g., the redemption value of the securities as of the redemption date, and details of the funds collected in Argentina).

Publicity

Foreign entities must inform the CNV of any publicity made by them within three business days of the date of publication. In addition, the foreign issuer must describe its legal nature, in all the information, in a manner such that the public cannot confuse them with an Argentine mutual fund regulated by the Mutual Fund Law.

v Private placement

The public offering of securities is regulated by the Capital Markets Law. The Capital Markets Law defines public offering of securities as an invitation, made by an issuer or by individuals or companies engaged fully or partially in the purchase and sale of securities, to the general public, or certain sectors or groups, made through personal offers, newspaper advertisements, radio or television broadcasts, telephone, films, billboards, signs, programmes, electronic means (including email and social networks), circulars, printed notices or by any other means, to enter into any transaction involving securities.46

The Capital Markets Law does not provide a private placement definition or specific safe harbours from securities registration requirements.47 The lack of an express definition does not mean that private placements do not exist, but that exempted transactions are defined by default as any offer of securities that does not fall within the definition of public offering. Therefore, private placement is any offering that does not qualify as a public offering. There are certain guidelines based on a reasonable interpretation of the regulations and precedents that can be followed by parties willing to carry out a private placement in Argentina.

Therefore, offshore mutual funds can also be offered in Argentina without being registered with the CNV to the extent the offer is carried out by means of a private placement.