Investment Funds in Panama – an honest look to the last 20 years.
The current securities legislation in Panama celebrated its 20th birthday last year - hence the title of this article.
Looking at the snapshots of Before and After the enactment of the Law, in terms of the amount of collective investment vehicles registered - publicly traded or not – how many managers and other players are doing business in the area and the ability to attract investors, I would need to conclude that: not much has happened.
Let me share a few thoughts and hypothesis on why I think that is the case and even attempt a few pointers on a few items that I think need revision and in some cases, action.
1. Quality of the investment fund legislation (not the problem): Before the 1999 Law (which came into force in 2000), there were a few scattered and general regulations concerning collective investment vehicles. A couple of stubborn, true-believers local players managed to register and operate the first funds ever to offer shares and participations locally. As it can be expected, they were funds sponsored by banking groups.
The 1999 Securities Law was an absolute improvement in terms of providing a general frame for what should have been a new era in the fund industry. In a single act, it brought us up to date, acknowledging the industry´s broadly accepted classifications and types of investment funds, general provisions concerning investment managers and also introduced two sub-species: the private investment fund and a registration for funds to be offered abroad (no local investors allowed). It also made it possible to make mirror registrations of foreign registered funds. Most importantly, it enabled the regulator (Securities Commission back then, today the Superintendency of Securities) with ample powers to issue regulations.
So, at least in my view, our center’s lack of success (up to this point at least) in creating a buoyant fund industry is Not associated with a lack of sufficient or appropriate legislation. The regulations that have been issued -even if not particularly deep on a technical level – have not had a barrier-effect, at least by themselves.
2. Over-powered by competing banking services (a problem): Financial services offered by Banks have been able to satisfy the basic needs of the local economy, from consumer, commercial, services and industry. Operating in that thin line of private banking services (totally legal), banks and bank affiliates have captured most of the local markets needs for financial and investment products. It has also been successful in capturing the interest of regional clients, hence becoming sort of a Luxembourg or Switzerland, but for the LATAM region.
So -my theory is that the strength and competitiveness of the banking services has, in retrospective, caused that the fund industry and related services have unintentionally been the “man left behind”.
3. The regulator on an extended pro-regulation cycle and Investment Funds not high in the priority list (problem): the new regulator that emerged with the 1999 Law had to carve its place and make its name in the financial environment. It basically had to write the playbook from scratch, though it operated on the pre-existing regulations that were grandfathered. The new Commission came into the scene amidst that burst of the .com bubble, plus a couple of local hugely publicized cases during the first 5-6 years involving defaulted issuers. Inspections being conducted for the very first time to broker dealers and investment managers, fast forward to the 2008 crash of the global markets, fines, lists of different colors, more regulations, more inspections, new investigations. Along that path, each head of the securities regulatory body has imprinted its own style, from the first Commissioners, the Commissioners that were appointed afterwards, to the first Superintendent (with the reform in 2011) to the subsequent Superintendents that have occupied the chair.
And lets not even get started with the trauma of the 2016 “Papers” - which has basically been the equivalent of a “9-11” kind of event for the local financial and services industry, leaving it psychologically impaired and a little traumatized.
Promotion of Panama as an efficient and reliable jurisdiction for registration of investment funds has not been high in the priorities in the regulator’s book. This is not a critic, it is a fact supported by the results. And let me make my point point: with the exception of a few very specific initiatives, the regulator has been on a “pro-regulation” cycle for the last 20 years. Perhaps it is time for them to enter into a “pro-business” cycle, without compromising its mission and vision. Can it be done? I have attended conferences where certain regulatory bodies have paid sponsorships and addressed audiences in order to promote their jurisdictions. Food for thought.
4. Lack of interest from local entities to provide bank support plus Compliance-related difficulties (problem): You could entertain the notion of setting up a vehicle for collective investment in Panama, but would need to bank it elsewhere. Not surprisingly, local banks will only support the operations of their related vehicles. On top of that, you can throw the allergies that such a legal structure would cause to the compliance departments of institutions.
Now let us take a look at the situation of the industry, today (Sept 2020).
a. There are 39 registered funds that are authorized to trade publicly. Among the “stubborn” ones that have been around since the beginning, notably and against all odds: Fondo General de Inversiones and the Premier Family of Funds, both managed and sponsored by banking groups. Source: Superintendency of Securities Market public portal.
http://www.supervalores.gob.pa/files/iper/pj_er/soc_inv/Sociedades_Inversion_Panama.pdf
b. There are 30 private funds (those with certain limitations concerning the manner of offering and amount/qualification of investors) that have filed “notification” submissions – meaning they are not “registered” funds but have conducted a disclosure procedure and are subject to much lighter reporting requirements. Source: Superintendency of Securities Market public portal.
http://www.supervalores.gob.pa/files/iper/pj_er/soc_inv/Sociedades_Inversion_Privada.pdf
c. There are 5 registered funds limited to offering abroad Panama (no local investors allowed). I personally think it is one of the most interesting features contained in the legislation. There are of course many variables to be considered, such as the regulations in place in the jurisdiction where the offering is to be made and weather or not public means of offering are to be used. However, there is - regretfully- one condition regarding a minimum amount of assets to be under the custody of the local custody and settlement central. That particular requirement that was passed in 2012 has -in practice- been the reason for the de-registration of most of the funds in this category and the absence of any new registration since 2011. Source: Superintendency of Securities Market public portal.
d. There are 2 registered foreign funds. Source: Superintendency of Securities Market public portal.
The figures are not terribly impressive. There are no statistics published by the Superintendency regarding AUM of the ones that are publicly traded or the other categories. You could go one on one to the web pages of the publicly traded ones or of the local exchange (www.panabolsa.com) and attempt figure out an approximate on your own.
So, now to my final reflections:
- 1. The regulator needs to figure out what the private and restricted-for-local-offering funds means to them.
- - Do they want to incentivize – or not?
- - If yes – is a review of the current legislation in order?
- - Do they want these registrations to be somewhat “linked” to local service providers. There have been plenty of experiments (in the BVIs for instance) where certain legal schemes needed to retain, engage or somehow have a local component to make it compliant.
- I have some reservations in ascertaining if those experiments have been able to achieve the desired results.
- - Should they push for a reform to have these legal structures to pay reasonable fees for having a registration in this jurisdictions. As of today, the fees are either too low or inapplicable, resulting in an obvious lack of interest on the part of the regulator. A reasonable fee (fixed or variable) justifying the inclusion of said register would be logic.
- - Can these legal schemes even survive the current CRS requirements and environment?
- 2. Concerning the publicly traded funds: in the era of information, it is an almost unforgivable sin that the regulator does not maintain and publish basic statistics, given the fact that they receive all of the information required that would allow them to do so quite easily. On the part of the industry players, it is their duty to provide valuable offers to the investing public and yes, they have to compete for their attention. That would be step No. 1 in the road to creating more interest and drawing more attention to these particular financial products.
- 3. Banking and Compliance sensibilization towards the fund business would be a short to medium term goal to set. The know-how is still limited to a very reduced group of practitioners and that would need to change. The Compliance component would also need to be aligned.