After many months of intense debate among Mexican securities market and pension fund regulators, and local and international private equity and infrastructure funds, on July 22 2009 the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV) amended its general rules for issuers of securities in order to regulate the issuance of structured securities by Mexican investment funds, which can be purchased by Mexican retirement funds (Sociedades de Inversion de Fondos para el Retiro or Siefores) managed by Mexican managers of retirement funds (Administradoras de Fondos Para el Retiro or Afores) and other investors.
Such investment funds can invest the proceeds of these securities over time in various portfolio projects (such as infrastructure projects and private equity investments), as determined by the fund manager in accordance with the agreed investment guidelines. On August 4 2009, the Mexican National Commission of the Pension System (Comisión Nacional del Ahorro para el Retiro or Consar) amended its Circular 15-19 (the regulation establishing the investment regime of Siefores) to essentially allow Siefores to invest part of their assets in such structured securities as long as the securities are registered with the National Registry of Securities maintained by the CNBV.
These amendments have created great excitement both on the part of fund managers and Afores, since they are expected to increase the investment by private pension funds and institutional investors in infrastructure and other productive projects, which had not been feasible to date and which investments are fundamental for Mexico's development.
One of the principal areas of debate in the amendments resulted from the tension between the governance rights of investors as to the investment of fund assets and the flexibility that fund managers need to act under a set of investment guidelines in a competitive environment. The balanced protection of the basic interests of investors and the flexibility of fund managers was achieved by various means such as detailed disclosure requirements, corporate governance mechanisms and investor rights. For instance, the CNBV regulations contemplate a format that has to be executed by investors whereby they acknowledge the risks of their investment.
In respect of governance, the CNBV regulations establish that the issuers of the structured securities (which are Mexican trusts) are required to have as a minimum a governing body (Technical Committee) in which both investors and the fund manager are represented. The Committee is required to be formed by up to 21 members. At least 25% of the members of the Committee are required to be independent (in accordance with the definition of independence contemplated by the regulations). Any investor or group of investors that owns 10% of more of the outstanding securities has the right to designate one member of the Committee and the other members are designated by the fund manager. The decisions of the Committee are valid if adopted by the vote of the majority of its members present at a duly called meeting. The new regulations establish that the Committee is required to approve the following matters:
- The investment policy of fund assets.
- Any investment of the fund assets or any divestiture that has a value equal or exceeding 5% of the aggregate assets of the fund (based upon most recent available financial statements).
- Transactions with any person that is a related party of the fund, the fund manager and the persons related to the entities in which the trust invests, as specified in the new regulations.
- The policies for the exercise by the fund manager of its powers-of-attorney for ownership and management of the fund assets.
The new regulations allow for members of the Committee to waive their right to designate a member and also for them to enter into voting agreements with other members of the Committee, for instance to establish that their interests shall be voted in the same manner as the members designated by the fund manager. Such waiver and voting agreements are required to be disclosed to the investing public, as well as if the opinion of the majority of the independent members of the technical committee is not the same as the resolutions of the technical committee.
Various Mexican and international fund managers are expected to arrange for the issuance of such structured securities in order to tap resources of Mexican pension fund managers for investment in Mexican productive projects and this is an area of Mexican capital markets and financial law that is expected to develop quickly in the near future.
James E Ritch with the assistance of Alberto Gutiérrez