Inter-fund Sales, Sartor Case, and Continuation Fund (V): Exegesis of Article 22, Letter g), of the Chilean Funds Act

The Chilean Single Funds Act (*Ley única de fondos* - LUF) prescribes in Article 22, letter g), without prejudice to other prohibitions contained in other laws, that acts or omissions committed by management companies and, as applicable in each case, by persons participating in the fund's investment decisions or who, by reason of their office or position, have access to information regarding the fund's investments, which entail a breach of the following prohibition, are contrary to the LUF: the acquisition or alienation of assets on behalf of the fund in which the management company, a private fund under its management, or a related company acts for itself as a seller or buyer.

In this installment, we will continue analyzing the wording of this article; that is, we will reflect on what the law refers to when it establishes the precept of "Prohibitions" in its heading. The wording of the rule itself then describes that these mandates are without prejudice to "other prohibitions contained in other laws."

Prohibition

As we previously noted, we must consider two approaches to the meaning of "prohibition" underlying the title of the rule: a privatist approach and a financial approach. In this installment, we will focus on the financial approach, having already analyzed the civil approach.

The Approach to Prohibitions in Financial Law

Those who participate as actors in financial markets are usually subject to the rules of commercial law at the same time. For example, issuers must effectively comply with securities rules (Securities Market Act), but also with the Corporations Act.

This implies that there is a cardinal difference between financial law, on the one hand, and commercial law, on the other. This is understandable if we consider that securities rules, belonging to financial law, focus on the disclosure of information; or, in banking matters, the law adds a prudential approach and tempers the disclosure aspect with a behavioral approach. All of this occurs while commercial matters deal with, let's say, more substantial issues (requirements of banking acts, corporate formation, among others).

In fact, the separation we have just stated appears to be erroneous. In commercial matters, unsurprisingly, stock exchange and banking operations are acts of commerce. Securities markets are a realization of corporate law, as they allow companies to be transformed or taken public, or brought into the public market. Furthermore, banking law is an expansion of credit circulation, as it allows money to be prudentially scaled.

This does not mean that securities and banking rules do not seek to protect investors; on the contrary, they do. The point is that financial law does not completely sever itself from the overall logic of commercial law. The investor is not a consumer, victim, or civil counterparty, notwithstanding (not) fully justified exceptions (e.g., banking consumers, brokerage clients, or FinTech).

Financial regulations accompany the investor. Initially, when holding passive assets as investments or acting as a debtor within the market (banking law), and subsequently purchasing or selling a financial asset based on price signal analysis (securities law), and during the investment period—holding an asset—they are subject to commercial rules (corporate law, but generally commercial law, such as when a company falls into insolvency). The investor acts as a fund collector or allocator, a merchant, and an owner.

All these private rules are responsible for protecting investors throughout this entire process under a logic that looks at investor autonomy. However, at each investment stage, it is necessary to differentiate the community of interests of the parties as a whole. Therefore, investor autonomy under these circumstances is not sufficient as the sole object that the law seeks to regulate; rather, it requires looking at all actors together. Here, the law raises its gaze to find not only the investor, but a somewhat different counterparty or an intermediary with other sophisticated interests.

When looking at the banking market, the heterogeneity of interests between the bank and the client, between banks themselves, and between them and the authority is clear. Subsequently, in the securities market, interests tend to become somewhat more homogeneous between investors, intermediaries, and other agents in general. Finally, in commercial law, we see an endless array of different or similar, opposing or coinciding interests, which the law undertakes to frame when parties contract with one another.

Financial rules are rather uniform and mandatory for the most part, because the interests within that sphere should converge toward a shared goal. Interests may or may not coincide, but they ultimately flow, so to speak, into the same place. Put differently, the law guides agents despite their interests, because theoretically they seek the same end. In contrast, in commercial matters, rules are dissimilar and mostly supplementary, since interests among owners are often difficult to reconcile without the pursuit of a shared goal.

To exemplify the above, we can note that no one desires a bank run because everyone loses (clients and banks), yet individuals often fall into dynamic inconsistency; everyone seeks correct price formation because we want reliable securities signals, but information asymmetry always exists; and ultimately, in a public company, shareholders may want completely different things (think of minority vs. majority shareholders, dividend withdrawals, or general investment decisions).

In financial law, the objective is clear, making it necessary to weigh interests. In contrast, commercial law is governed by full autonomy and the individual pursuit of interests. The point is that this distinction does not distance financial law from its privatist and patrimonial soul.

This has concrete consequences, such as Article 22 of the LUF discussed here, which is applicable solely by the authority since it belongs to financial law. For this reason, Article 22, penultimate paragraph, establishes the distinction among administrative, civil, and criminal law, in addition to the indemnification action. The provision carefully allows financial discipline to be separated from other areas of law—including the damages action—without detaching it from commercial law.

Thus, financial law will seek to value assets, form prices, and foster credit. Meanwhile, commercial law will oversee agreements among more or less dissimilar interests of agents performing acts of commerce.

Furthermore, this distinction is necessary due to the tools to be deployed for achieving investor interests and the intended goals. In price and capital formation, the optimal tool will be full information disclosure, behavioral compliance, and prudential action. Conversely, when acting as an invested owner, interests are much broader, characteristic of commercial freedom of contract, making the optimal tools those rules that permit agreements among agents regarding internal matters of commercial acts and corporations.

Both fields share common duties of care, but financial law focuses on disclosure, conduct, and prudence, whereas commercial law looks at substantive elements of loyalty and diligence. Caveat emptor, merit, or disclosure.

Now, taking into account the privatist inspiration of financial law, it is possible to properly understand a prohibition within this context.

Considering that a financial rule can be enforced in a centralized or decentralized manner—that is, whether one, a few, or many are responsible for enforcing it (regulator, investor, prosecutors, etc.)—we will focus on non-compliance before the authority (the CMF in Chile or the SEC in the USA).

In turn, rules can be analyzed as either rules or principles, which, to oversimplify somewhat, means they are more or less defined. Rules are more concrete, unlike principles. At the same time, when seeking to determine these norms from the perspective of financial law, we can analyze them through an approach of dangerousness or reasonableness. Dangerousness examines the context, whereas reasonableness examines common practices.

The rules of financial law cannot all be lumped together into one category or the other; rather, several rules from different categories coexist. Consider, furthermore, that how each is applied, especially at the level of rules versus principles, can lead to blurring this distinction.

Consequently, we can affirm that regulators usually emphasize principles-based enforcement when enforcing rules, in this case, when sanctioning a prohibition. Yet they face a limitation. Being a regulator and a rule-maker, they typically do not set aside rules-based action entirely.

The prohibition, therefore, will be the result of all this. Its concrete determination places different values in competition. When something is prohibited by law, the regulator must consider industry values (predictability and common standards), regulatory values (consistency and self-imposed guidance), and public values (customs, usages, practices, and anticipation).

In this regard, we will highlight an element that must be considered when applying a prohibition. As we stated earlier, financial rules are part of or related to commercial law. This demands keeping in mind that a prohibition cannot behave statically; rather, it should be dynamic. The only way to make the privatist sphere of financial law compatible is to account for the mutation of interpretation in such matters.

We therefore conclude that the prohibition under Article 22 of the LUF must be open to incorporating commercial transactions into its understanding as a norm. Furthermore, it is not possible to close it off a priori to a static interpretation.