Limits on the Investment in Foreign Securities by Local Mutual Funds Apply to Argentine Depositary Certificates

The Mutual Fund Law[1] provides that mutual funds can invest in securities that are admitted to the public offering in Argentina or abroad, but at least 75% of the fund has to be invested in securities issued and negotiated in Argentina. The same rule applies to investments in futures and options.

However, the regulatory decree of the Mutual Fund Law[2] provides that certain securities that are traded in foreign markets must be deemed as issued in Argentina for the purposes of complying with the minimum investment requirement. The decree provides that they would be treated like Argentine securities. For the purposes of the minimum investment requirement, those securities negotiated in countries with which Argentina has entered into an economic integration treaty, if such treaty provides for the integration of capital markets or if the Comisión Nacional de Valores, (Argentine Securities and Exchange Commission or “CNV”) entered into a similar capital market integration agreement with its foreign counterparty. The securities issued in such countries must be traded in markets supervised by a regulatory authority similar to the CNV to qualify for the minimum investment requirement.

As a result, the CNV has recognized that securities authorized to be issued in Member States of the Mercosur and in Chile will be considered as securities issued in Argentina for the purposes of complying with the 75% minimum investment requirement.[3]

Furthermore, the CNV Rules provide for the possibility of issuing collective deposit certificates for foreign issued securities—to some extent a local version of ADRs—called Certificados de Depósito Argentino (“CEDAR”). The CNV considers that for the purposes of the minimum investment requirement, CEDARs must be treated as authorized in the country where the underlying security was authorized and issued by the issuer of the underlying assets for the purposes of the diversification rules. As a result, CEDEARs are transparent for the purposes of the minimum investment and diversification requirements.[4]

The CNV has recently enacted Regulation 694/2017(“Regulation 694”), which clarifies and reinforces this principle. Regulation 694 provides that CEDEARs must be deemed issued and negotiated in Argentina for the purposes of the 75% minimum investment requirement, to the extent that they directly and exclusively represent securities of issuers that have been authorized to the public offering in a Member State of Mercosur or Chile or another country with similar treatment under the regulatory decree for the Mutual Fund Law.

The Government has sent a bill to Congress reforming the Mutual Fund Law, which would change the limitations to the investment in foreign securities by local mutual funds. The bill provides for the possibility of forming mutual funds offered exclusively to qualified investors. The CNV would have the authority to exempt such mutual funds from the limits and restrictions set forth in the Mutual Fund Law.

Until Congress passes that bill, local mutual funds have to invest at least 75% of the fund in securities publicly offered and traded in Argentina or in Chile or a Member State of Mercosur.

[1] Section 6, Law N° 24,083.

[2] Section 13, Decree 174/93.

[3] Article 11, Section II, Chapter II, Title V of the Rules of the CNV.

[4] However, they are not transparent for the purposes of valuation regulations.