This content is from: Local Insights

El Salvador: Congress passes investment law

Oscar Samour
Last year, the Salvadoran Congress passed the Investment Funds Law (IFL), which established the possibility of channelling and developing collective investment within the local financial system. As defined in the IFL, an investment fund is a special-purpose vehicle that gathers contributions – generally in cash – from multiple investors to be invested in different types of assets, such as securities, real estate, and financial instruments.

Under the IFL, investment funds are administered by a special-purpose stock company (sociedad anónima) called a management company. The management company is created with the sole purpose of investing the contributions from its stockholders – investors – in accordance with its bylaws. The patrimony of the fund is independent from the patrimony of the management company by law, and the contributions from the investors are therefore protected in case of bankruptcy of the management company. Additionally, management companies must design and establish mechanisms for asset and share valuations, and have the proper accounting and operation records as well as a merchandising platform for promoting investment.

The IFL contemplates a wide array of options which include: short-term investment funds (three months or less); growth funds, which are long-term investment funds such as real estate funds; and risk funds, which are funds that invest in assets that present higher risk than others, such as shares or securities. These options create opportunities for different types of investors, from individuals to institutions, issuers, real estate developers and entrepreneurial projects.

The IFL presents new challenges for supervisors and regulators, as well as investors in the market that intend to venture into this segment. First, it is important to ensure that potential investors have sufficient information to clearly understand the structure, operation, profitability, commissions and risks of an investment fund. Further, the creation of solid regulations that emulate principles and best practices of other legal systems but which are properly balanced with the Salvadoran reality, will create a sense of security and promote the creation of investment funds.

Oscar Samour

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