By: José Adolfo Torres
Founding Partner – LatinAlliance El Salvador
With the approval of the Investment Funds Law (LFI) in El Salvador, a door of opportunities has been opened so that both individuals and companies have additional means of participation in the stock market and can enjoy financing alternatives. other than banking. The LFI regulates, among other things, the regulatory framework through which the Funds will act, the Companies that manage them, the investors and the supervisory powers that the State entities will exercise.
The Funds are collective investment instruments in which funds, goods or rights of the general public are collected, managed and invested. Said Funds are formed by the set of contributions from investors (natural or legal persons), who are called "participants". The contributions that the participants make in the Funds will be expressed in "participation quotas", in order to determine the part that corresponds to each one of the investors within the Fund's assets.
On the other hand, the Superintendence of the Financial System (SSF), within its sphere of competence, is the Administrative Authority that corresponds to monitor compliance and execution of the provisions of the Investment Funds Law; It also supervises the Managers, their operations and other subjects regulated by it. Likewise, it will correspond to the Central Reserve Bank, within its competence, to issue the necessary technical standards that allow the application of the Law.
Investment Funds are entities without their own legal personality, since they are a mere set of contributions that make up a mass of assets. This is where the Investment Fund Management Companies (SGFI) come into play, which perform the function of managing the assets that make up the Fund. These Companies manage the Fund, for the account and risk of the investors; and therefore, the gains 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, whose classification responds to the ease of redeeming the contributions made by the participants:
i) Closed Funds that are established for a defined period of existence and on which there is a restriction on the withdrawal of contributions from participants. Due to this restriction of the right to redemption of contributions, the LIF establishes that Closed Fund participation shares may be traded in secondary markets, thus allowing participants to obtain the value of their shares without withdrawing the contributions from the equity of the Background.
ii) Open Funds are those that do not have a defined term and in which the participants can redeem their shares at any time, totally or partially. This type of Fund offers greater flexibility, liquidity and ease of making withdrawals, but only allow contributions.
Investment Funds offer a series of advantages to investors, such as:
i) Risk diversification: indirect participation in an investment portfolio in multiple sectors. When making the contribution to the Fund, the Fund can allocate it to different operations as a result of the accumulation of assets contributed by the participants.
ii) It is accessible: it can be easily carried out and will be within the reach of natural persons and companies.
iii) It is Transparent: it is a regulated instrument, subject to supervision and to strict measures of transparency and conduct.
iv) Professional management: the Funds are managed by professionals with technical knowledge of accounting, the stock market, fixed income, etc.; In other words, a group of experts is allowed to choose the investments to be made (however, it is convenient for the investor to have basic knowledge of how financial markets work).
v) Application of a more favorable tax regime (for example: Exemption from Income Tax, Tax on Financial Operations, etc.).
Likewise, it is essential to reiterate that the amounts of money that are contributed to an Investment Fund are for the account and risk of the investors, they are not bank deposits and they do not have the guarantee of the Deposit Guarantee Institute; They are operations that can report high profitability but also carry a risk of loss.
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 so wish, putting investors in contact with those who require financing.
For more information on this and other legal issues, contact LatinAlliance El Salvador, Lawyers and Notaries, to the following email address: jatorres@latinalliance.co