The Mexican Senate has approved an initiative to reform the Securities Market Law and the Investment Funds Law
The initiative, which envisages some important changes aimed at making the Mexican stock market more flexible, must continue its legislative passage and may undergo amendments before being definitively approved.
On 29 April, in what proved to be a controversial session, the Mexican Senate approved, among other initiatives, a bill aimed at amending, repealing and adding various provisions to the Securities Market Law and to the Investment Funds Law. The intention is to provide the Mexican stock market with additional tools and flexibility required to trigger the right incentives to facilitate access to capital markets for a greater number of participants (focusing on small and medium-sized enterprises or SMEs) and boost their growth. In accordance with the Constitution of the United Mexican States, the initiative will continue its passage through the legislative process. It has already been relayed to the Chamber of Deputies to be analyzed and debated and may undergo changes before it is eventually approved by that body and passed on to the Executive Branch for enactment and publication.
In summary, the initiative covers the following key issues:
A. Simplified issuer/registration
The initiative includes a new mechanism for issuing securities, whereby, through a procedure known as simplified registration, certain entities can be classified as simplified issuers and obtain registration of their securities – equity and debt – on the National Securities Register (RNV) maintained by the National Banking and Securities Commission (CNBV). In this respect, the initiative defines a simplified issuer as a legal entity other than a legal entity deemed to be an issuer in accordance with article 2(V) of the Securities Market Law (LMV), which requests and, where applicable, maintains the simplified registration of its securities with the RNV, including trustees acting in such capacity, provided that the trust estate has not been transferred (directly or indirectly) by an entity that is deemed to be an issuer on the abovementioned terms.
The eligibility requirements to be regarded as a simplified issuer, the special features of the registration process and the scope of the information and documentation that must be submitted in the relevant procedure, will be established in general provisions to be issued by the CNBV and those established in the internal regulations of the securities exchanges.
A relevant aspect of the simplified registration mechanism is that it will be applied before a securities exchange, jointly by the eligible issuer and the underwriter or placement agent, as part of the listing process for the respective securities. Once a favorable opinion has been obtained from the securities exchange for the listing for trading of the securities subject to simplified registration, the securities exchange will notify the CNBV so that the latter may proceed with the simplified registration of the relevant securities in the RNV. It should be noted that simplified issuers that have obtained registration of their securities in accordance with the mechanism described above will not be directly supervised by the CNBV but rather such responsibility is transferred to other market participants (securities exchanges, underwriters and investors in the securities subject to simplified registration), in accordance with the general provisions to be issued by the CNBV and expected afterwards to be reflected in the regulations, manuals and policies of the securities exchanges and brokerage firms respectively. To this end, it will be important to ascertain the criteria that the securities exchanges and brokerage firms will utilize to define the principle of relevant information when it comes to determining the type of information and documentation that will be requested from simplified issuers, not only to obtain registration of their securities but also to keep the market duly informed. By way of example, simplified issuers will not require approval from the CNBV to disclose information related to securities subject to simplified registration for marketing purposes, as long as they comply with the requirements set forth in the LMV and such disclosure is carried out through a securities exchange.
As regards their distribution and allocation, the initiative establishes that securities subject to simplified registration can only be offered to institutional or qualified investors, through a public offering or in accordance with the underwriting procedure without a public offering. It is important to highlight that the initiative does not seem to limit simplified issuers and underwriters or placement agents to making restricted public offerings targeted exclusively at institutional investors and/or investors qualified to participate in restricted public offers (i.e., individuals or legal entities that maintained on average over the last preceding year investments in securities equivalent in Pesos to at least 20 million investment units), and this could increase the investor base considering that, at least in principle, no limits are provided for regarding the participation of any category of qualified investors.
B. Liability of brokerage firms participating in offerings of securities by simplified issuers
The initiative provides for the addition of an article 177 Ter to the LMV which contains a special liability regime applicable to brokerage firms that participate in an offering of securities subject to simplified registration. This new set of obligations is additional to that already set forth in article 177 Bis of the LMV for securities issues that can be offered to the public in general. The proposed new regime largely reflects the spirit behind the overseeing function undertaken by the CNBV in offerings from issuers with securities registered with the RNV, which is now being transferred to underwriters and placement agents participating in a simplified registration process, and basically relates to or aim to cover the following three main premises:
- review the sufficiency and suitability of the information and documentation used to promote the offering of securities subject to simplified registration, and whether such information and documentation complies with the applicable regulations, manuals and policies of the securities exchange where the listing of the securities for trading is sought;
- structure the relevant transactions and ensure the inclusion, review and disclosure of all the information relating to the issuance of the securities subject to simplified registration, in accordance with CNBV’s general provisions and the contents of brokerage firms’ internal manuals and policies; and
- inform potential investors on the risks inherent or associated to securities subject to simplified registration.
thereby making them liable for any damage and loss-of-profits caused by the breach of their obligations within the context of the foregoing premises. It would seem counterintuitive to establish a more robust set of rules on liability for underwriters and placement agents in the case of simplified registration since these are securities whose acquisition is limited to institutional and qualified investors, who are assumed to be sophisticated professional investors with a greater depth of risk analysis than the rest of investors participating in securities issues eligible to the general public.
To that extent, it will be important to better understand the parameters established in the general provisions to be issued by the CNBV for purposes of ensuring that the actions of underwriters and placement agents participating in simplified registration securities offerings comply with the above premises although it would seem unlikely that such secondary regulations will provide undoubtedly certainty to ensure compliance.
If the purpose of the initiative is truly making the process and costs involved in accessing financing through the market less burdensome and onerous for SMEs, it would seem difficult not to expect costs and risks associated thereof assumed by brokerage firms and investors participating in the offering of securities with simplified registration somehow replicated or otherwise transferred (contractually) to simplified issuers.
C. Flexibility on requirements applicable to SAPIBs
Currently a public investment promotion company (SAPIB or sociedad anónima promotora de inversión bursátil) shall evolve into a publicly traded company (SAB or sociedad anónima bursátil) within a maximum term of 10 years or at the time its equity exceeds the equivalent of 250 million investment units. The initiative proposes repealing this provision thereby eliminating the need for a transition program to allow SAPIBs to progressively adopt the SAB regime and the obligation incumbent on brokerage firms to verify compliance thereof. The proposed amendments seek to flexibilize the SAPIB regime acknowledging the possibility for a company to remain in such form permanently.
D. SABs will be able to issue differentiated shares
The initiative establishes the possibility for SABs to offer shares granting differentiated rights (including shares with voting restrictions) among its shareholders without the prior authorization from the CNBV or otherwise being applicable the existing percentage limits for the issue of shares with special rights. To that effect, it is intended that SABs announce through the securities exchange on which their securities are listed for trading, the rights or restrictions conferred by series or classes of series of shares and their capital structure.
The proposed amendment provides owners/entrepreneurs with greater flexibility to pursue capital structures that will allow them to secure control of their companies, which we assume could be a relevant aspect to consider when deciding a potential listing on a securities exchange; however, institutional investors’ codes of best practices of corporate governance tend to privilege the “one share, one vote” principle (see OECD Lack of Proportionality between Ownership and Control: Overview and Issues for Discussion (2007), pages 24 to 28). This tension between conflicting interests, in the case of simplified issuers, will have to be settled in the markets.
E. Investment advisors
According to the initiative, individuals that apply for an authorization to operate as investment advisors should also be required to hold a certification issued by a gremial association recognized by the CNBV as a self-regulatory body. Likewise, the initiative states that investment advisors would also be able to act as exclusive founding members of investment funds and to provide portfolio management services in respect of different types of assets which will include securities subject to simplified registration measures.
F. Hedge funds
The initiative proposes adding the concept of hedge funds to the Investment Funds Law, based on proven experience regarding the contribution that this type of vehicles have made to the evolution of financial markets internationally. In addition to seeking for investing and financing alternatives with a broader scope, the initiative envisages these type of vehicles as natural promoters or takers of securities issued pursuant to simplified registration measures.
G. Sustainable development on the agenda
Lastly, the initiative enables the Ministry of Finance and Public Credit to regulate issues relating to sustainable development and the implementation of affirmative gender-related actions for the board of directors of companies with securities registered with the RNV. In line with the initiative, it is expected that the CNBV issues general provisions relating thereof to understand the extent and relevance of the obligations to be incumbent on issuers and the complexities and costs associated therewith for their fulfillment.
The Garrigues team will continue to closely monitor the initiative’s passage through the legislature and will provide timely updates on all the relevant changes that may have an impact on the stock market.