Sales between funds, the Sartor and Continuation Fund case (II): exegesis of Article 22(g) of the Chilean Funds Law

Rule 

One of the rules breached by Sartor was Article 22, letter g), of the Chilean Single Funds Law (LUF). This rule sets out the prohibitions applicable to the fund manager (asset management). The law states that the following acts or omissions are contrary to it when carried out by (i) the managers or (ii) those who participate in the fund’s investment decisions, and that involve the acquisition or disposal of assets on behalf of the (affected) fund in which the (i) manager, (ii) a private investment fund under the manager’s administration, or (iii) a company related to the manager acts for its own account as seller or buyer.

Violating parties: the manager

The parties that may breach this rule are the manager and those who make the fund’s investment decisions, as follows from the wording of Article 22 LUF. We will analyze the former.

Managers are defined in the same law, Article 1, as the joint‑stock company that, in accordance with the provisions of this law, is responsible for the administration of the fund’s resources on behalf of and at the risk of the contributors. In other words, to be qualified as a manager under the law in question, an entity must be (i) a joint‑stock company, (ii) subject to this law, and (iii) responsible for administering contributors’ resources.

It may be any joint‑stock company, whether publicly held, privately held, or special. In addition, managers must be subject to the LUF. Under Article 2 LUF, this law applies to funds and managers, in the plural, with respect to the scope that the LUF itself regulates. Therefore, the manager must fall within that scope. Thus, within that scope we must include General Fund Managers (Administradoras Generales de Fondos, AGF), Managers of Private Investment Funds (Administradoras de Fondos de Inversión Privados, AFIP) and Portfolio Managers (Administradoras de Carteras, AC) if those entities are constituted as joint‑stock companies, which is not always the case.

Although the definition of manager does not distinguish between publicly held, privately held, or special joint‑stock companies, the law itself, in its Article 3 LUF, when defining Managing Companies (AGF), makes clear that these must be special joint‑stock companies. Special companies are those that must be constituted in accordance with Title XIII of the Corporations Law, whose main characteristic is that they must obtain a license issued by the Financial Market Commission (Comisión para el Mercado Financiero, CMF).

In the case of AGF, in analyzing Article 22, letter g), LUF, it is easy to understand that they are covered by the prohibition, since they can manage funds, carry out acts on behalf of any fund, and in any type of funds, including private ones, which is one of the scenarios contemplated by the infringement, as well as administer or manage any type of portfolio. There is no problem whatsoever.

Next, we include another type of manager, namely managers of private investment funds (Chapter V of the LUF, the AFIP). These are constituted as closed joint‑stock companies, registered with the CMF as reporting entities, in accordance with Article 7 of the LMV (unless they are in the Securities Register, in which case they still fulfill the same obligations).

Again, it is easy to fit them within the provision we are analyzing in Article 22, since they can also be administering or performing acts on behalf of a fund. As we will see, the fund affected by the provision under analysis may be public or private, because the law makes no distinction.

We must also include Portfolio Managers (AC) if they are joint‑stock companies, since they too are subject to the LUF.

At this point, the question arises whether the law refers only to those AC that are already regulated by the LUF, such as AGF and AFIP, or also to those joint‑stock companies that, without being AGF or AFIP, are subject to CMF supervision under Article 95 LUF or enroll in the Register of Portfolio Managers.

It is clear that those who are (i) joint‑stock companies, (ii) subject to this law (LUF), and (iii) responsible for administering contributors’ resources, are managers. Notwithstanding that the law speaks of “contributors,” if we interpret that concept as “third parties,” it is possible to include within the definition those AC that are not AGF or AFIP. Otherwise, one must decline to classify them within the definition of manager provided by Article 1.

Then, if we accept that AC that are not AGF or AFIP are managers (pursuant to Article 1 LUF), it remains to determine whether they can meet the requirements of the letter g) under analysis. We know that these managers cannot administer funds (whether public or private), so they could not satisfy the scenario of acquiring or disposing of assets on behalf of the fund as a manager. But we believe there could be a case, namely when that AC acts on behalf of the fund precisely because it operates as a third party providing an external service to an AGF or AFIP, since it could meet the requirements of being a manager that carries out an acquisition or disposal of assets on behalf of the fund, provided it also meets the other requirement of the prohibition, which is to acquire for itself or for a related company (for if the purpose of the operation is that the buyer or seller be the AGF or AFIP responsible for the fund, this scenario would not apply). A different matter is the debate over whether the sanction attached to breaching this rule can be extended in this way by means of such an interpretation. At least we can be certain that this perspective can be stipulated in a contract or private act, but whether the sanction or its effects can be applied will depend on the specific case.

On the other hand, the relevant manager must also be the one responsible for the administration of a fund’s resources on behalf of and at the risk of the contributors. As we well know, managers are dedicated, as their exclusive object, to the administration of third‑party resources. In addition, managers are responsible for the administration function in a non‑delegable manner. This means that their liability cannot be altered by a legal act because, even if they delegate part of the administration to a third party, for example the actual management, the manager that established the fund will remain liable.

We know that the concept of “certain acts” in Article 15 LUF has been interpreted somewhat restrictively. But that does not prevent understanding that management is delegable, since an act to carry out a transaction is, in the same way, a delegation of management, even if only partially.

The law insistently differentiates administration as a whole, on the one hand, from management (Article 9 LUF), operation (paragraph 4 of Chapter III), external services (Article 16 LUF), etc., as partial acts, on the other. In Chile it is possible to understand both concepts separately.

A manager is the “responsible” party in legal terms, that is, the entity that formally registers the fund. But it is not necessarily the one that materially manages, the one that is partially in charge of an activity, regardless of the degree of burden it assumes to contribute to that third party’s business. It is not a quantitative issue, nor even a qualitative one; it focuses solely on legal responsibility. The law leaves to the fund rules, between the contributors and the manager, the arrangement of the different activities, businesses, or acts.

We conclude that, for these purposes in our analysis of Article 22, letter g), this prohibition can be infringed by the manager who, meeting both requirements conjunctively, (i) acts on behalf of the fund, whether or not she is the fund’s legally responsible manager (whether she manages by order of another manager that is responsible for the fund, or she herself is the fund’s responsible manager) and (ii) acts for her own account as seller or buyer — herself, a private investment fund, or a related company.