Following the enactment of the most recent Investment Companies Law (Ley de Sociedades de Inversión) last year, the National Securities Commission (Comisión Nacional de Valores) is now considering regulations that would allow authorized asset managers to:
- act as trustees (fiduciario) on behalf of their clients with respect to assets under management (such a role is now only allowed in principle to commercial banking institutions);
- modify the prospectus of actual mutual funds to allow different classes of shares within the same fund;
- charge different commissions to clients based on the classes of shares held within the same fund based on different minimum entry levels; and
- hedge interest rates and foreign exchange risks.
It is not clear when these regulations will take effect, although they are expected to be issued before year-end. There are different operating issues that the regulators must take into account before then.
The most significant amendment will be the one granting trustee functions to asset managers. During the past few years, there has been a trend in the financial services industry whereby some non-bank financial institutions have been allowed to operate as trustees to better serve their customers. This will certainly enhance the confidentiality that large clients always look for in handling their portfolio investments. This new authority, together with the new provisions of the Investment Companies Law allowing asset managers to provide financial advice and valuation services to clients, will increase the number of value-added services that these firms may provide, and will also increase the revenue sources of asset management companies in addition to customary management fees.
The role of trustees will entitle them to perform and implement a customized portfolio investment strategy for their clients without having to go to a commercial banking institution. Dealing with banks in the past increased the cost and diluted the returns on their investments. Commercial banking institutions were also unfairly competing with independent asset managers for the same clients by providing these services.
The possibility of holding different classes of shares in a mutual fund allows asset managers to increase the assets under management. There will no longer be the need to have different funds based on minimum entry levels. Large and small accounts will be able to be consolidated in the same funds, but within a different class of shares. Each class of shares may entitle the managers to charge a different commission for handling accounts. This will further consolidate the industry.
The ability to hedge interest rate fluctuations and foreign exchange risk will allow portfolio managers to reduce the volatility in the mark-to market valuation of their funds when an abrupt change in the interest rates or foreign exchange is expected on a short-term basis.
Alberto J Morales