Proposal for a corporate governance and comprehensive risk management standard for registered fund managers  

The Financial Market Commission of Chile ("CMF") submitted for consultation a General Applicability Rule ("NCG") whose purpose is to establish a Regulatory Framework for Corporate Governance and Comprehensive Risk Management for Registered Fund Managers ("AGFs"), including the provisions of Law 21,521 ("FINTECH Law") and Circular Letter 1,869 of the CMF
The main aspects of the proposed NCG are as follows:

1.  The Board of Directors of an AGF will have a more active role, having to comply, as a first line of defense, with the following: (i) approve risk appetite levels; (ii) approve the Risk Management and Internal Control Policies and Procedures, for an AGF and the funds it manages; (iii) approve the Code of Ethics; (iv) have a Risk Management Committee and evaluate the need to form committees or other instances related to Audit, Money Laundering, Investments, New Products, Business Continuity, Information Security, Cybersecurity, among others; (v) approve the Annual Plans of the Risk Management Unit and the Internal Audit Unit; (vi) periodically evaluate the adequacy of the Risk Management and Internal Audit Units; (vii) have adequate technology and information systems for the management of investment funds; be responsible for the proper functioning of the Risk Management Unit and the Internal Audit Unit; as well as for the establishment and implementation of employee hiring, remuneration and compensation policies of an AGF.

2.  The AGF must have a Risk Management Unit independent from the risk generating units and the Internal Audit Unit; and an Internal Audit Unit, independent from the Risk Management Unit and the risk generating units. The aforementioned Units shall issue quarterly and half-yearly reports, respectively, and submit annual plans, respectively, to the Board of Directors for its knowledge and approval, as the case may be.

3.  The risk management function is a second line of defense in charge of adopting measures to identify and quantify the relevant risks faced in the performance of AGF’s functions and then establish policies and procedures accordingly.

4.  The internal audit function is a third line of defense whose purpose is to verify the proper functioning of the internal control and risk management system and its consistency with the organization’s objectives and policies, as well as compliance with the legal and regulatory provisions applicable to an AGF.

5.  The AGF must identify all existing risks to its own business and those that may affect the interests of investors, whether market, credit, liquidity, operational, technological, legal, compliance, conflict of interest and any other risk related to the business model of an AGF, grouping them according to the functions of the investment cycle, contributions and redemptions, accounting and treasury, for which an AGF must develop and document a risk matrix.

6.  The Risk Management Unit will be responsible for ensuring the development of all policies and procedures by the managers of the different risk generating areas; and for the accuracy, completeness and updating of such Policies and Procedures, which, as noted, must be approved by the Board of Directors.

The proposed NCG further regulates certain policies already required by Circular Letter 1,869 of the CMF, such as: (i) Liquidity Management (formerly Share Redemption); (ii) Financial Risk; (iii) Advertising; (iv) Investor Information; (v) Product Offering according to Investor Profile (formerly Suitability); and incorporates to such requirements, the need to define policies and procedures related to: (i) Approval of new products; (ii) Valuation of assets held in custody; and (iii) Review of algorithms.

7.  In addition to the Annual Risk Management Plan, the Unit performing this function shall submit to the Board of Directors for approval, at least twice a year, a risk mitigation plan and contingency planning in relation to the main risks arising from the activities of the fund manager in its functional areas.

8.  The External Auditing Companies registered in the Register of External Auditing Companies of the fund managers, in their annual report, must opine on the internal control mechanisms they impose on themselves to ensure faithful compliance with the law, as well as on the information and filing systems to record the origin, destination and timeliness of the transactions made with the assets of each fund.

It can be concluded that, in the opinion of the CMF, risk prevention and monitoring would mean: (i) an economic benefit for the AGFs and their clients, providing more robust liquidity, profitability, solvency and financial coverage indicators; (ii) improving the financial viability of the entity in the medium term and the trust of clients, mitigating reputational risk; (iii) mitigate the legal risk derived from incidents that could affect the integrity and accuracy of the information handled by the entity for regulatory compliance purposes; recognize positive externalities derived from the coordinated management of operational failures or data leaks that have the potential to generate contagion risks throughout the financial system; (iv) strengthen the risk management supervision of these entities and a better focus of the supervisor’s resources; and (v) adapt local regulation to international risk management standards.

In addition, it should be noted that the proposed NCG gives the AGFs certain discretion in determining their corporate governance and risk management, determining minimum conditions and requirements for the proper performance of these, expecting, as a counterpart to this, prudence on the part of the supervisory authority considering the costs of hiring personnel or development and implementation of algorithms and the adaptation and implementation of different policies, processes, procedures and controls to the criteria established in the NCG.

The regulatory proposal allows for comments until September 14, 2023.

The regulatory proposal shall become enforceable 12 months after its publication, notwithstanding the fact that the AGFs must submit to the CMF a progress report with the main steps and deadlines involved, 6 months after its publication.

Circular Letter 1,869 of the CMF is repealed.

For further information please contact Felipe Cousiño Prieto (Partner) and Francisca Donoso Fernández (Associate Attorney).

A full text of NCG’s proposal can be found here.

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