/ Bill creates measures to protect the financial market19 June, 2020
Bill that amends DL 3,500 (Chilean Pension Fund Statute), DFL 251 (Insurance Law), Law 18,045 on the Securities Market and Law 18,046 on Corporations to protect the solvency of Insurance Companies, expand investment alternatives for Pension Funds and facilitate access to financing for companies supervised by the securities and insurance regulator (CMF).
Partner Senior Associate
On June 4, 2020, the Executive submitted to Congress a miscellaneous Bill through which it seeks, in this context of pandemic, to provide tools to capital markets issuers, so that they can better face the looming economic crisis. The draft bill has aspects that can mean an improvement in the regulation of pension funds, insurance companies and companies that seek an acceleration in the financing processes. However, some of its provisions will not solve the underlying problem. It will require discussion, study and careful adjustment of ancillary regulations in order to make what on paper appear to be ideal solutions a reality.
In order to expand the investment alternatives for pension funds (AFPs) and thus allow the financing of companies that are issuers of publicly traded securities, the bill considers the amendment of DL 3,500 in two main aspects:
increase of the maximum limit for investment in alternative assets, such as private equity funds, private debt, infrastructure and real estate, from 15% to 20% of the value of the relevant fund; and
- allowing investment in debt securities not registered in the Securities Registry maintained by the Financial Market Commission (CMF) to the extent that the issuer of such securities is already registered in such registry and complies with the requirements established by the CMF through a General Applicability Rule (NCG).
The extension of the maximum limits for investment in alternative assets is an amendment eagerly awaited by the market, especially with the recent amendment that the Superintendence of Pensions made to the Investment Regime for Pension Funds which incorporated national private debt securities within the category of alternative assets. However, with respect to investment in unregistered debt instruments, the bill should specify that actually these are instruments that, in accordance with the amendments contemplated in Law 18,045, obtain automatic registration and are not simply unregistered instruments. Indeed, a clear distinction should be maintained between publicly offered securities and those which, due to their lack of registration, can only be offered privately under private placement rules.
The amendments to Law 18,045 point in the right direction in terms of facilitating and simplifying the issuance of debt securities, whether corporate bonds or commercial paper, for companies or issuers that are already registered in the securities registry and are not novices in the issuance of that class of securities. The automatic registration of the issue, to the extent that it complies with the requirements established by the CMF, can mean a great progress in the speeding up of the processes, allowing issuers to have their securities registered and placed swiftly and thus obtain resources to finance the activities of their line of business or to comply with other financial commitments that are affecting them, in a timely manner and without the need to resort to commercial banks or the government.
Notwithstanding the above, the final regulation of this expedited process to register debt securities will be the responsibility of the CMF, and it is not possible to foresee what level of requirements it will impose and whether the internal processes of this regulator will actually be accelerated.
Another interesting measure aimed at simplifying the issuance of debt securities, or rather at facilitating their registration, is the elimination of the obligation to undergo a credit rating for such instruments, to the extent that the issuance complies with the requirements established by the CMF. This does not prevent the issuer from voluntarily contracting one or more credit ratings for such debt securities.
In this effort to streamline processes, the bill also includes some amendments to Law 18,046.
Basically, these changes focus on reducing the minimum period required to call a shareholders’ meeting, from 15 to 10 days, and on the possibility of waiving the right of first refusal that shareholders have, when agreeing to a capital increase, at the same meeting where such increase has been agreed. This provision was already contained in the Corporations Regulations for closely-held corporations, apparently shortening the periods to carry out the capital increases. The reason why this is only apparent is that given that this is a right that each shareholder has and can exercise at the same meeting, it would be necessary for all shareholders to be present at the meeting. This is why such a regulation was more appropriate only for closely-held corporations, since they are generally companies with few shareholders whose meetings tend to be self-summoned. However, in publicly-held corporations, due to their own characteristics, attendance at meetings is not normally full, which will necessarily entail that the 30-day period within which shareholders can exercise or waive their right of first refusal continues to apply. The most appropriate course of action would have been to modify the 30-day period, reducing it considerably.
Finally, and as measures aimed at maintaining and safeguarding the solvency of insurance companies, the bill includes several interesting and highly valuable measures. One of these is to make the distribution of dividends by these companies subject to compliance with a certain solvency ratio and asset requirements. The same applies to agreements to reduce capital, as these cannot be implemented if the capital strength ratio is less than 1.2 times the company’s assets.
Similarly, to help companies to face the current crisis and to avoid them being involved in default processes, the bill, on the one hand, allows CMF to increase the indebtedness limits in relation to equity, for life insurance companies, and on the other hand, it makes the limits more flexible to deal with the excesses of investments representing technical reserves and regulatory capital.
Thus, for example, if the excess over any of the diversification limits or the loss of representativeness occurs due to causes not attributable to the company, such as fluctuations in the market value of its investments, and not only falls in the credit rating, the excess or the affected investments may continue to support the technical reserves and regulatory capital for a period not exceeding six months.
In short, the bill has aspects that can effectively mean an improvement in the regulation of pension funds, insurance companies and companies that seek an acceleration in the financing processes. However, it is necessary to bear in mind that some of its provisions will not solve the underlying problem, such as the automatic registration of debt issues and their review by the CMF or the waiver of the right of first refusal in a publicly-held corporation. It will require discussion, study and careful adjustment of ancillary regulations in order to make what on paper appear to be ideal solutions a reality.
If you need further information, please feel free to contact our capital markets team.