Open-ended mutual funds for "PyME"

1.    New alternative of investment

The Argentine Securities Commission (Comisión Nacional de Valores, or "CNV") passed General Resolution No 534/2008 (the "Resolution") which provides a special regime for the creation of open-ended mutual funds (Fondos Comunes de Inversión or "FCI") that shall invest in securities issued by Small and Medium-sized Enterprises (Pequeñas y Medianas Empresas or "PyME").

The open-ended FCI regime for PyME approved by the Resolution complements CNV's prior regulations aimed at promoting the investment in PyME.

Prior General Resolution CNV No 519/2007 had incorporated the alternative of making investments in PyME through financial trusts and close-ended FCI for micro, small and medium-sized enterprises ("MIPyME"). These "close-ended" investment instruments have, among others, the following characteristics:

(i)          the capital of the mutual fund or trust is limited or "closed", as the name indicates;

(ii)         the mutual fund shares or trust securities are not redeemable; consequently to divest the holder must sell the mutual fund share or the trust security in the market;

(iii)         the value of the mutual fund share or trust security is determined by the market (supply and demand); and

(iv)         in the particular case of these "closed" investment alternatives provided by General Resolution CNV No 519/2007, they may only be acquired by "qualified investors".

The Resolution allows the creation of "open-ended" mutual funds to invest in PyME which, in contrast with the close-ended investment vehicles:

(i)          have variable capital (“open-ended”);

(ii)          their fund shares are redeemable; to divest, the holder must request the manager the redemption of the mutual fund share, and the manager must therefore simultaneously sell a proportional part of the assets of the FCI;

(iii)         the value of the fund share is directly related to the value of the underlying net assets of the mutual fund.

2.    Regulations applicable to the open-ended FCI for PyME under the new regime

The Regulation provides the following guidelines for the open-ended FCI PyME:

2.1 Investment limits

The FCI PyME must be invested in assets with the following limitations:

(i)          A minimum of 75% of the FCI’s assets must be invested to finance PyME; and

(ii)         40% of the percentage stated in point (i) above must be invested in instruments issued by PyME (including post dated checks), and the remaining 35% may be completed with (a) securities issued by companies incorporated in the country with low stock market capitalization (less than 0.3% of the total market capitalization of the Buenos Aires Stock Exchange) and/or (b) securities issued by entities for the purpose of financing PyME.

2.2 Maximum term to set the FCI’s portfolio

The portfolio investments must be made in the maximum term of 180 calendar days as from the launching of the FCI, or the lower term that may be provided in the mutual fund agreement.

2.3 Prior notice to request the redemption

The Resolution provided a period of 10 business days as maximum term to serve prior notice to request the redemption of the mutual fund shares when the amount exceeds 10% of the net assets of the FCI. Even when this term is broader than the term of 3 business days provided by the general regime of mutual funds, it may be insufficient given that the securities issued by PyME generally have a low negotiation volume, and therefore may not be easy to sell at a fair price.

3.    Conclusion

Both the close-ended FCI and financial trusts, as well as the open-ended FCI are useful tools to finance and develop PyME, and to promote the development of the Argentine capital market. Likewise, these instruments are a vehicle that allows the public to make investments that are typically made by “private equity funds”.