With the approval of the Investment Funds Law (IFL) in El Salvador, a door of opportunities has been opened for both individuals and Companies to have additional means of participation in the Securities Market and to be able to enjoy financing alternatives other than banking. The IFL regulates, among other things, the regulatory framework through which the Funds will act, the Companies that administer them, the investors, and the supervisory faculties that public entities will exercise.
Funds are instruments of collective investment by which funds, goods and rights from the public are raised, managed, and invested. These Funds are formed by all the contributions of the investors (natural persons or legal entities), who are called “participants”. The contributions made by the participants in the Funds will be expressed in “participation quotas”, in order to determine the part that corresponds to each of the investors within the Fund's assets.
On the other hand, the Superintendence of the Financial System (SSF – by its acronym in Spanish), within its scope of competence, is the Administrative Authority to which corresponds the supervision of the compliance and execution of the provisions of the Investment Funds Law; Also, it supervises the Funds Managers, their operations, and other regulated subjects. Likewise, within its competence, it corresponds to the Central Reserve Bank to issue the necessary technical standards that allow the application of the Law.
The Investment Funds are entities without legal personality, since they are a mere set of contributions that make up a patrimonial mass. This is the reason for the existence of the Investment Fund Management Companies (SGFI, by its acronym in Spanish), since they exercise the function of managing the equity that makes up the Fund. These Companies manage the Fund, at the risk and expense of the investors, and therefore, the profits and losses that may arise from the management of the Fund correspond to the participants.
The Law establishes the existence of two types of Funds, which classification responds to the facility of rescuing the contributions made by the participants:
i) Closed Funds which are established for a defined existence term and over which a restriction to the withdrawal of the contributions of the participants operates. Due to this restriction of the right to redeem the financial securities, the IFL establishes that the participation quotas of Closed Funds may be negotiated in secondary markets, thus allowing the participants to obtain the value of their contributions without withdrawing the contributions of the assets of the Fund.
ii) Open Funds are those that do not have a defined term and in which the participants can redeem their quotas at any time, totally or partially. This type of Funds offers a greater flexibility, liquidity, and facility to make withdrawals, but they only admit contributions.
The Investment Funds offer a series of advantages to investors, such as:
i) Diversification of risk: indirect participation in an investment portfolio in multiple sectors. When contributing to the Fund, it may be allocated to different operations as a result of the accumulation of the equity contributed by the participants.
ii) It is accessible: it can be done easily and will be available for individuals and Companies.
iii) It is transparent: it is a regulated instrument, subject to supervision and strict measures of transparency and conduct.
iv) Professional management: Funds are managed by professionals with accounting technical knowledge of the Stock Market, fixed income, etc. This means that a group of experts is allowed to choose the investments to be made (however, it is convenient that investors have basic knowledge of how financial markets work).
v) Application of a more favorable tax regime (for instance: exemptions of the Income Tax, Tax on Financial Operations, etc.)
It is also essential to reiterate that the amounts of money contributed to an Investment Fund are at the risk of the investors, since they are not bank deposits and they do not have the guarantee of the Deposit Guarantee Institute; they are operations that can report a high profitability but that also carry risk of losses.
With the approval of the Investment Funds Law, a step forward is taken in the modernization and expansion of the Financial System of El Salvador. The existence of the Funds will increase the financing possibilities that Companies need, and it will provide investment alternatives to those who wish to do so, putting investors in contact with those who require financing.
For more information on any legal matters, please contact LatinAlliance El Salvador, Attorneys at Law, at the following email address: jatorres@latinalliance.co