Towards international standards in financial regulation in Colombia

Author: | Published: 25 Sep 2012
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Market regulation in Colombia is a complex system that includes the participation of several of the state's branches and authorities. The Constitution states that the Congress must establish the principles, objectives and criteria governing the matter, and the executive, through the Ministry of Finance, regulates such decrees through lower-level rules which by their nature, can be more easily modifiable to adapt to market needs.

Under this scheme, in 2005 Colombia issued the main law for the stock market, which recognised a broad authority in order to allow the government to regulate this matter. From that moment, several decrees have been issued. They mainly regulate the market's activities and how they should be developed.

In recent years, one of the main concerns of the regulator has been the adjustment of regulations to the international standards, and to create an appropriate legal framework for the participation of Colombia's intermediaries and issuers in global markets, enabling issuers to find more funding sources, and the investors to find significant investment alternatives.

That interest was heightened during the implementation of large integration projects with other markets in the region, and the arrival to the country of foreign players, which has generated discussion scenarios designed to adjust the country's standards to the demands of the global industry.

This has determined the adoption of an ambitious regulatory agenda by the government that actually led to the establishment within the government structure, of a specialised entity for the issuance of rules for the financial sector and for the stock market (the Special Administrative Unit of Projection Rules and Financial Regulation Studies (URF), through Decree 4172 of 2011).

There are many standards that have been recently issued, and important projects are still in progress and are being discussed by the government and industry. Significant advances have been reached or are being discussed in several areas but we will limit our discussion to two of them.

Since 2010, Colombia has been a member of the Integrated Latin American Market (Mercado Integrado Latinoamericano, or MILA), through which it seeks integration at an early stage through intermediate routing agreements (there is still no direct access from the local intermediate parties to the foreign trading systems), of the stock markets of Colombia, Chile, and Peru. The beginning of this project became necessary in order to incorporate significant changes to the rules on market intermediation and our foreign investment regime.

Another void in Colombian regulation relates to the lack of a definition of a minimum period between the date of the accrual of dividends and the date of their payment. This allowed issuers to update the information on the holders of the correspondent securities, to determine the titular of the right to the payment of said dividends.

For the integration of the stock markets, it was necessary to have integration towards this term. This caused the government to establish, in December 2011, special rules for local securities and special rules for foreign securities.

For shares issued in Colombia, the rule indicates that the issuers must establish a reasonable time period between the accrual and payment of dividends (ex-dividend). This cannot be less than three trading days, during which time it should be understood that the operation of share purchase does not include the right to receive payable dividends.

In the case of shares issued by foreign companies, there are two possible situations. First, where shares issued by foreign entities are registered on a Colombian stock exchange and not registered in their home jurisdiction, the ex-dividend period applicable will be the one established by the Colombian Stock Exchange. Alternatively, where shares issued by foreign entities are registered in Colombia and in a foreign stock exchange recognised in Colombia, the ex-dividend period applicable is the one of the main residence of the issuer.

Finally, the new regulations provided that in the case of shares listed in foreign trading systems, the ex-dividend period will be the one of the main residence of the issuer.

Some other important significant changes have also been made this year,

The first related to proxy voting. MILA investors faced a big drawback for the exercise of their political rights, originating in the fact that the entries in local securities depository are performed on behalf of foreign securities depository investor's jurisdiction without disaggregation of the final beneficiary.

In response to this problem, the regulator imposed a scheme through which issuers and investors, deposits act harmonically. In summary, under the scheme, the issuer must submit to the local repository the information corresponding to the meetings to be held; the local repository informs this fact to the foreign depositor, and he in turn and for the effects of the meeting, issues certificates to the investors, proving their title. These certificates can be individual or collective.

Investors' participation in the meeting could take place directly, being physically present at it, or indirectly through the foreign depositor, who acts on their behalf, through a representative or agent and has the responsibility of receiving and channelling the voting intentions and inform about the decisions taken.

Another significant change related to a prohibition in effect in Colombia for many years preventing the administrators of brokerage firms in Colombia trading registered shares, bar a few exceptions (namely shares received by inheritance or legacy, shares of his or her own stock brokerage company, and the sale of shares acquired before the post in question). The regulatory development in Colombia stated that what was sought was not really to outlaw the trading procedure in certain securities, but rather the speculative behaviour originating when having available privileged information, or a breach of the guiding principles on conflicts of interests that went against market transparency.

After several disciplinary sanctions filed against the brokerage firms' managers by the self-regulator of the Colombian Securities Market, a discussion on this topic was set out. The result of this discussion was the conclusion that there was no necessary causal link between the status of a manager of a stock brokerage company and a conflict in the trading of listed shares, and it was not necessarily true that the brokerage firm managers had access to privileged information on the shares with which they were interested in trading.

Added to this situation was the fact that market regulation should focus on the fact that information about the purchase positions and share sale was disclosed on equal terms to all the market participants, and that the trend in interest conflict management was oriented not to the obligation to refrain from acting against them, but to the duty to disclose and manage them properly.

As a consequence, the prohibition was derogated and, as an alternative, the obligation to have prevention, revelation, and administration policies for conflicts of interest related to the trading of shares registers by their managers was introduced.

Regulation of collective investment schemes and trustees

In Colombia, collective investment schemes, other than those belonging to the retirement benefit and social security systems, are regulated under the figure of the Group Portfolios, defined as the uptake or managing mechanisms or vehicles for monies or other assets, made up with the contribution of a number of individuals whose resources are collectively managed to achieve economic results, also collective.

The development of these products, through which substantial resources have been channelled into the stock market, has performed outstandingly compared to other countries in the region. Nevertheless, the successful development of these schemes has also set the scene for identifying areas where improvements are needed on regulatory reforms or to adjust this particular industry to international standards in terms of management, language and information provision.

Additionally, the detection of some fraud and conduct contrary to the integrity of the market has identified the need to review the structure of the management model today known as collective portfolio.

These factors, among others, have influenced the government's decision to establish a new regulatory framework for these products. The first change to be introduced, in order to get closer to international standards, is related to the desire to speak the same language. This was the motivation to change the term 'collective portfolios' to the internationally accepted 'collective investment fund'.

Another international standard to be introduced with the reform is related to the separation of the responsibilities involved in the management of investment funds. It intends for agents who develop such activities to specialise in any of the tasks set out below.

Fund administration: This administrative activity is understood by the project as a genre that involves administration in a concrete sense (drafting of regulations, collected interests, dividends, management accounting and financial information, ensuring the maintenance of technical and administrative infrastructure, and so on), management of the fund, and its distribution.

The administrative activity in the new regulatory framework will be developed directly by the fund management company, as is the case today. In addition, the project provides for management and distribution activities to be served by third parties and that the activity of custody is necessarily developed by an agent different from the manager.

Fund management: In Colombian legislation, the figure of the professional manager exists, but is applied to the case of equity funds (exchange-traded funds), and private equity funds defined as a closed collective portfolios that allocate at least two-thirds of their resources to the acquisition of assets other than securities registered in the National Registry of Securities and Issuers administered by the Financial Superintendence of Colombia, and, in particular, for investment in productive projects or companies in which the collective investment scheme, through their administrator, becomes a participant and therefore directly assumes the business' risks.

The project regulates the activity of portfolio management understood as the power to make investment decisions regarding the portfolio being managed and to adopt measures relating to the identification, measurement, control, and risk management. This activity in the proposed regulatory framework would be developed by the fund manager or by an external manager, domestic or foreign.

The possibility of outsourcing this particular type of activity faced serious regulatory problems, in attention to the discussions had arisen in relation to the possibility that the administrator of the collective investment vehicle delegated the activities that correspond to him as a market professional. It seems such a discussion is exceeded in care and accurate setting high standards that guarantee specific technical and professional capacity of managers and their moral.

Distribution: In terms of distribution, the project does not represent a particular novelty in relation to the vehicles used for this purpose, which would remain the same, namely: (i) the administrator's sales force; (ii) contracts for local correspondent which can be executed with brokerage firms; and (iii) the use of the network of credit institutions.

The novelty is seen in the fact that the standard permits the collective portfolio manager to delegate its duty to counsel in cases when the network contracts are used as a distribution mechanism contracts network.

Another innovation has to do with the establishment of the own and other parties' investment fund distribution, as a specialised line of business of investment management companies.

As the development of this particular type of distribution, the proposed rule is intended to introduce the concept in Colombian regulation of the omnibus account, defined as those administered by the distributor grouping several investors with the purpose of allowing him to act on his behalf, but on their behalf, as the sole investor in the fund.

This figure has not been introduced in Colombia, and in addition to its importance in terms of international standards, it responds to a particular problem that has arisen in Colombia, where schemes proliferated through which unregulated third parties captured resources from the public to manage through accounts opened in the name of a middleman who assumed no responsibility for any investment results he or she decided to perform.

Many of these people have been subjected to an intervention by the Colombian authorities when finding that said schemes constitute the development of irregular capitation and investment of public resources.

Custody of the assets: The draft decree of mutual funds determines that third parties updated for this purpose should compulsorily develop the activity of custody of securities that are part of the funds.

In parallel to progressing the mutual funds project, the government also anticipates a draft decree by which it will regulate the activity of custody of securities, understood as the power to exercise the care and monitoring of resources and securities. This power comprises:

(i) safeguarding the custody of money and securities, ensuring that the book-entry form in the name of the latter is performed in a securities depository, or by a sub-custodian;

(ii) operating the bank accounts of the investment fund;

(iii) performing the necessary work for the fulfilment and definitive settlement of transactions with securities ordered by the guarded; and,

(iv) managing economic rights inherent to the securities in custody, making the collection of income, dividends, and capital.

Additionally, but as an option, the custodian can be instructed to excerpt other activities such as, among others, the exercise of voting rights or other economic rights other than those listed in precedence, the fulfilment of tax obligations, or valuation of the corresponding portfolio.

In relation to the legal structure of mutual investment funds, the project has incorporated the concept of a family of funds, understood as "the grouping of several investment funds that share similar characteristics in the type of knowledge and experience required for its administration and in particular risk management."

This scheme provides for the possibility that the management company establishes a single management model for the corresponding fund family, on the condition that the relevant risks maintain sufficient similarity. As a criterion to determine when various backgrounds can congregate in a single family, the type of assets in which the investment is being made is predominantly taken into account.

Another relevant aspect in the proposal is the establishment of agile authorisation mechanisms that serve, among other things, the past history of the managing entity providing simpler approval processes for those entities that have not been found responsible for any violation of the standards related to the management of funds.

In the classification of the investment funds, the Ministry of Finance, as stated in the concept paper Investment Funds – Regulatory Reform in Colombia, has decided to adopt a regulatory model similar to that in force in the United States where there are open-ended investment funds (mutual funds/open-ended funds) and closed-ended funds. It also provides for the existence of special funds into which figures are contemplated as exchange-traded funds (ETFs), known in Colombia under the name of equity funds, which were subject to regulation in the past.

Within the category of open funds, trade money funds or money market funds are regulated and, in connection with closed-end funds, the draft decree emphasises the regulation of private equity funds and real estate funds.

The meaning and text of the project has been the subject of many discussions in the industry and still is just a project in discussions.

These are not the only regulatory projects being conducted by the government; there are more projects underway and other regulations have been issued, therefore the challenge that the regulator will face will be to coordinate its efforts so that the issue of the standards required by the market for its development meet the expectations and needs of the industry in terms of efficiency and agility in compliance of the regulatory work.

Actors in the market will face the challenge of adjusting their structure to meet the new requirements and of properly complying with its work in financial consumer education, to allow growth and development of the products that are being regulated.

Claudia Barrero


Claudia Barrero is a partner in prietocarrizosa's corporate group, co-heads the firm's mergers and acquisitions practice and heads the capital markets and securities practice. She specialises in mergers and acquisitions of listed companies and has extensive experience in infrastructure projects and corporate governance matters.

She has acted as adviser to issuers on IPOs and debt issues, as well as to several Colombian and international clients in such matters as cross-border mergers and acquisitions and all related capital markets aspects. She has also advised the Colombian government in various privatisation processes, especially in the energy sector.

Before joining prietocarrizosa she worked for Araujo & Ibarra. She is member of the board of directors of State Capital Group.

Martin Acero


Martin Acero co-heads the mergers and acquisitions practice and heads the tax practice at the firm. He specialises in corporate financing, mergers and acquisitions, joint ventures, and corporate tax. He has advised important Colombian and international clients in various cross-border merger and acquisitions deals and has also facilitated joint ventures involving Colombian and foreign companies, government agencies, and international organisations operating inside and outside Colombia. Acero has been a teacher of both undergraduate and Masters degree programmes at Universidad del Rosario and Universidad Externado de Colombia in corporate law, international taxation, mergers and acquisitions and international tax planning.

His legal expertise in this area, including knowledge of international corporate and taxation law, has allowed him to develop and implement efficient structures for these partnerships and transactions. His advisories to both national and international clients have earned him nationwide recognition.

Juan Fernando Gaviria


Juan Fernando Gaviria has advised lenders and borrowers, including the Colombian government and state-owned companies, in the areas of corporate finance, asset finance, and project finance deals, among others. He has participated in the financing and restructuring of several power generation and cogeneration projects connected to these transactions. He has also participated in various infrastructure projects and local and international mergers and acquisitions, including the acquisition of local companies through worldwide acquisitions, and has advised both creditors and debtors in several bankruptcy and reorganisation proceedings.

Gaviria has been a professor of law (contracts and corporations) (1999-2003) and an assistant professor of law (contracts and negotiable instruments) (1995-1997) at the Universidad de los Andes School of Law where he was chosen one of the school's top five professors in 2002. Before joining the firm, he was in-house counsel to several Colombian financial institutions including Banco Andino (1997), Fiduciaria Davivienda (1995), Leasing Colmena (1994), and the Colombian Leasing Companies Federation.

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