The Asset Management Review: Argentina
Overview of recent activity
Since September 2019, the mutual fund industry has been impacted, as has the entire Argentine economy, by the establishment of an exchange control regime, which has been becoming stricter as time goes by and has severely limited the access of local residents to savings in foreign currency and investment in foreign assets.
Argentine residents, owing to the foreign exchange restrictions, cannot purchase foreign currency for savings in significant amounts2 in the foreign exchange market (i.e., from financial institutions). Since Argentine residents cannot purchase foreign currency from financial institutions, they obtain foreign currency by resorting to a security transaction commonly known as 'blue chip swap'. A blue chip swap is a transaction by which a person buys a security (generally, an Argentine sovereign bond) paying pesos in Argentina for the security, and then, selling the security (either in Argentina or abroad) for a price in US dollars. There are many variations of the blue chip swap transaction, but the most common involves two securities transactions, carried out in securities exchanges, in which a bond that trades in both pesos and US dollars is first purchased in one currency and, then, sold in the other.
The foreign exchange rate that is implicit in the 'blue chip swap' transaction trades at a spread over the foreign exchange rate in the foreign exchange market. This spread varies depending on market conditions, but spreads of 50–60 per cent are not unusual. A large spread between the 'blue chip swap' foreign exchange rate and the 'official' foreign exchange rate has distorting effects on the economy (e.g., exporters are reluctant to liquidate their exports, importers demand higher amounts of foreign currency), and the government is trying to reduce the size of this spread.
The manner in which the government is trying to reduce this spread is by issuing regulations aimed at: (1) forcing the party to hold the security for a certain period of time (usually called parking) before being able to sell it, so that the blue chip swap becomes riskier;3 (2) preventing those who obtain foreign currency from blue chip swap transactions from being able to purchase foreign currency in the foreign exchange market so companies who have to purchase currency in the foreign exchange market (e.g., to pay imports or financial debt) cannot obtain currency with the blue chip swap transaction;4 and (3) limiting the ability of certain regulated parties to purchase with pesos those securities that are commonly used for blue chip swap transactions, to reduce the demand on these securities and control their peso prices.
The Comisión Nacional de Valores (CNV), the Argentine Securities and Exchange Commission, has issued certain regulations that limit the ability of mutual funds to hold foreign currency and sovereign bonds denominated in foreign currency. The CNV provided that mutual funds cannot invest more than 25 per cent of their net assets in foreign currency, unless the currency of the fund is a foreign currency.5 When the currency of the fund is a foreign currency, the subscription of quotas has to be paid in using this foreign currency.6 In addition, the CNV issued a regulation providing that mutual funds (which have to invest at least 75 per cent of the fund in local assets) have to invest at least 75 per cent of the funds in securities and bonds denominated in pesos.7 The CNV treats as bonds denominated in pesos those bonds that are denominated in foreign currency but are subscribed by the investor and repaid by the issuer in pesos (dollar-linked bonds).8 The CNV also allowed the mutual funds to maintain sovereign and sub-sovereign bonds denominated in foreign currency until maturity.9 All these regulations are aimed at limiting the ability of mutual funds to invest in foreign currency and to lower the demand of securities that are commonly used for the blue chip swap transactions.
As from August 2019, when the foreign exchange controls were imposed and the restructuring of the Argentine sovereign debt became certain, the process of global integration of the Argentine capital markets and the entry of foreign assets manager were halted, and, to a certain extent, reversed. The decision of the MSCI to consider Argentina as a stand-alone market may increase the isolation of the Argentina market.
A key concern for the local mutual fund industry is the regulations on valuations of assets. In the past, certain regulations forced the mutual fund managers to assess certain assets at a price lower than its market price generating disruption.
General introduction to the regulatory framework
The regulatory framework for the asset management industry is based mainly on Law 24,083 (as amended, the Mutual Fund Law), which regulates mutual funds. The Mutual Fund Law defines mutual funds and its main characteristics. It also regulates the main requirements and obligations that the managing companies and depositary companies must comply with. Law 26,831 (as amended, the 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 agent,10 which includes managing companies of mutual funds, and for collective investment custody agent,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 the mutual funds is carried out by the managing company, which must be a corporation authorised by 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 Argentine government; and (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: (1) open-end mutual funds; and (2) 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. Also, the CNV 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 member of the Mercosur and in Chile have the same treatment as securities issued in Argentina;23 and (2) the Argentine certificates of deposit – certificates representing foreign securities, similar to the American depositary receipt – 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 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.
A managing company must: (1) manage the fund in a professional manner as a good business person and prioritise the interest of the co-owners of the fund; (2) represent the collective interest of the co-owners of the fund; and (3) 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 UVA39 (i.e., units of acquisitive value), 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
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; and (4) keep the 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.
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).
Foreign entities must inform the CNV of any publicity made by them within three business days of the date of publication. Also, 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, electronic means, 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.
Common asset management structures
Open-end mutual funds continue to dominate the mutual fund structures, with the number of closed-end mutual funds still almost negligible. Regarding the type of investment of open-end mutual funds, those money market funds represent approximately 49 per cent of the assets under management of mutual funds, fixed income around 34 per cent, balanced funds 8 per cent and equity 1 per cent.48 The money market funds still represent the largest type of fund, even when new regulations provide that mutual funds cannot invest more than 5 per cent of their portfolio in money market funds.49
Main sources of investment
The current breakdown, as of May 2021, of the investors in mutual funds is approximately 93.3 per cent by legal entities and 6.7 per cent by individuals. Individual investors have participations for around 157 billion Argentine pesos and legal entities, for around 2,190 billion Argentine pesos. Argentine institutional investors have around 831 billion Argentine pesos invested in open-end mutual funds. The participation of individuals has decreased since May 2018 when it peaked, representing 25 per cent of the invested funds.
The key trend during the past year is that most foreign asset managers have suspended or terminated their plans to increase their presence in Argentina.
There have been no significant changes in the regulatory framework from the previous edition of this review, and the foreign asset managers can still enter into the Argentine market in different ways, even when some of them are almost theoretical.50
i Public offering of foreign mutual funds
Foreign mutual funds can be registered for the public offering in Argentina, but the requirements are so stringent that their registration is unattractive. For instance, these funds will have to invest at least 75 per cent of the funds in assets issued or located in Argentina, Mercosur countries or Chile.
ii Private placement
The asset manager, or any third party, may sell unregistered mutual funds directly to investors under a private placement in Argentina. This has been traditionally the largest distribution channel for foreign mutual funds, but the lack of private placement safe harbours is a constraint.
iii Local mutual funds
An alternative would be that local mutual funds invest in foreign mutual funds. There are several restrictions that make unfeasible for domestic mutual funds to invest in foreign mutual funds.
iv Marketing to investment advisors
Finally, the asset manager may contact local licensed investment advisors to market their products. These licensed investment advisors may, then, recommend those products to their clients.
v Distribution of local mutual funds
Regarding the distribution of local mutual funds, certain managing companies are using electronic payment platforms and apps to offer to their users the possibility to subscribe money market funds with the cash they have available in those systems.
In the domestic market, the mutual fund industry has mostly been driven by: (1) a demand for money market funds, increased by high inflation rates; (2) instruments that would provide hedging against the devaluation of the Argentine peso; and (3) instruments that may adjust by inflation. In many cases, mutual funds have been providing negative returns in real terms.
As a result of the foreign exchange restrictions, companies have been accumulating liabilities denominated in foreign currency, mainly restructured financial indebtedness and pending commercial debts for imports of goods and services. On the other hand, many companies have been accumulating cash in pesos, owing to restrictions on inter-company payments outside Argentina. As a result, these companies have exposure to a foreign exchange devaluation. If the devaluation expectations increase, the demand for mutual funds that provide hedging against this devaluation will increase.
Sectoral regulations are not very relevant in the Argentine market as regulated companies have limited importance in the market, mainly since there are almost no pension funds. Insurance companies, the largest regulated sector that invests in capital markets, can invest part of their mandatory reserves in mutual funds.
Investors who are non-Argentine residents are exempted from income tax on the income resulting from their redemption of quotas of open-end funds that have at least 75 per cent of their assets in shares issued by Argentine companies that are traded in markets authorised by the CNV. Also, capital gains and interest arising from debt quotas of open-end funds placed though a public offering are exempted from income tax. Non-Argentine residents will benefit from the exemption to the extent: (1) they are not a resident of a non-cooperative jurisdiction for tax purposes; and (2) the funds were not delivered from any of those jurisdictions. Section 24 of the Income Tax Law Regulatory Decree established the list of non-cooperative jurisdictions.
The government is trying to create attractive instruments denominated in pesos to end the Argentine investor tradition of investing in foreign currency. Currently, owing to the high and volatile inflation levels, the instruments chosen are inflation indexed bonds denominated in pesos.
However, Argentine capital markets are in a transition as result of the sovereign debt restructuring process and the foreign exchange controls. Therefore, it remains to be seen what direction that the mutual fund industry will take once the market has normalised and whether investors will find peso-denominated investments attractive.
An increased expectation of a sudden devaluation of the peso may also reduce the attractiveness of investment in the peso.
1 Pablo Gayol is a partner at Marval, O'Farrell & Mairal. The author would like to thank Fernando Vaquero, partner at the firm, for his contribution on tax aspects.
2 Under current regulations, Argentine residents who are individuals can purchase up to US$200 per month, provided certain conditions are met, and companies cannot purchase foreign currency for savings without the express authorisation of the Argentine Central Bank.
3 The parking period is generally three business days, but it does not apply to all transactions. For instance, companies may sell the security immediately if they sell it for pesos, since this will tend to reduce the spread.
4 This restriction is generally structured as a prohibition to purchase foreign currency in the foreign exchange market if the party has sold securities for foreign currency or transferred them abroad within a certain period (currently, 90 calendar days). In addition, when purchasing foreign currency in the foreign exchange market the party has to commit not to sell securities for foreign currency or transfer them abroad for a period of time (currently, 90 calendar days).
5 CNV Regulation No. 835, as amended by CNV Regulation No. 887.
6 CNV Regulation No. 835.
7 CNV Regulation No. 836.
8 CNV Regulation No. 838.
10 Section 1 of Chapter I, Title V of the Rules of the CNV.
12 Section 1 of the Mutual Fund Law.
13 Section 3 of the Mutual Fund Law.
14 Section 4 of the Mutual Fund Law.
15 Section 27 of the Chapter I, Title V of the Rules of the CNV.
16 Section 21 of the Chapter II, Title V of the Rules of the CNV.
17 Section 22 of the Chapter II, Title V of the Rules of the CNV.
18 Section 7 of the Mutual Funds Law.
19 i.e., Unidad de Valor Adquisitivo (units of acquisitive value, UVA).
20 i.e., Unidad de Vivienda (UVI).
21 Section 54 and 55 of the Chapter II, Title V of the Rules of the CNV.
22 Chapter II, Title V of the Rules of the CNV.
23 Section 11 of Chapter II, Title V of the Rules of the CNV.
24 Section 36 of the Chapter II, Title V of the Rules of the CNV.
25 Section 6 of the Mutual Fund Law; and Section 31 of the Chapter II, Title V of the Rules of the CNV.
26 Section 31 of the Chapter II, Title V of the Rules of the CNV.
29 Section 44 of the Chapter II, Title V of the Rules of the CNV.
30 Section 51 of the Chapter II, Title V of the Rules of the CNV.
31 Section 12 of the Chapter V, Title V of the Rules of the CNV.
32 Section 42 of the Chapter II, Title V of the Rules of the CNV.
33 Section 38 of the Chapter II, Title V of the Rules of the CNV.
34 Section 45 of the Chapter II, Title V of the Rules of the CNV.
35 Section 31 of the Chapter II, Title V of the Rules of the CNV.
36 Section 7 bis of the Mutual Fund Law.
37 Section 2 of Chapter I, Title V of the Rules of the CNV.
38 Section 1 of Chapter I, Title V of the Rules of the CNV.
39 A UVA is a unit, the value of which is adjusted by inflation and currently represents approximately US$0.90.
40 Section 2 of Chapter I, Title V of the Rules of the CNV.
41 Section 14 of the Mutual Fund Law.
42 Section 1 of Chapter I, Title V of the Rules of the CNV.
43 Section 11 of Chapter I, Title V of the Rules of the CNV.
44 Section 23 of Chapter II, Title V of the Rules of the CNV.
45 Section 3, Chapter II, Title V of the Rules of the CNV.
46 Section 2 of the Capital Markets Law.
47 The Capital Markets Law authorises the CNV to regulate private placement exemptions (Section 82 of the Capital Markets Law). However, the CNV has not regulated private placements yet.
48 The statistics correspond to May 2021, as published in the monthly report by the Argentine Chamber of Mutual Funds.
49 CNV Regulation No. 887.
50 In this chapter we exclude from our analysis foreign ETFs, which may have different regulations.