DECREE AMENDING, DEROGATING AND ADDING CERTAIN PROVISIONS OF THE SECURITIES MARKET LAW AND THE INVESTMENT FUNDS LAW

On December 28, 2023, the decree amending, derogating and adding certain provisions of the Securities Market Law (the “SML”) and the Investment Funds Law (the “IFL”) was published in the Official Gazette of the Federation “Diario Oficial de la Federación” (the “Reform”).

  1. Background

    The stock market in Mexico is rather small as compared with the size of the national economy, since it only represents 36% (thirty-six per cent) of the Gross Domestic Product (GDP, 2020), so it is considered a small market compared to other economies, such as Russia (47%), Chile (67%) and Brazil (69%).

    Likewise, there are 109 companies in Mexico that, due to their size or level of capitalization, could be listed but are not.

    Given this situation, the main objective of the Reform to the SML is to procure a more competitive stock market system that encourages growth and strengthens the sources of financing for small and medium-sized companies. As for the reform to the IFL, it seeks to enhance investors’ returns and improve the risk management of assets that are the subject matter of investment. The above through: (i) the incorporation in the SML of a new type of securities registry named “simplified registration” and (ii) the incorporation of hedge funds in the IFL.

  2. Main Changes to the SML

    1. Simplified issuers and simplified securities registration.

      The SML Reform incorporated a new simplified securities registration procedure (“SSR”) that will make it easier for small and medium-sized companies to participate in the stock market, through the public offering of debt or equity securities, helping to obtain an alternative source of financing to boost their growth.

      The Reform proposes to significantly reduce the level of supervision of the National Banking and Securities Commission (the “Commission”) with respect to simplified issuers. Thus, the supervision of simplified issuers will be entrusted mainly to the brokerage firms that participate as placement intermediaries and to the stock exchanges, in accordance with their principle of self-regulation and in compliance with the provisions issued by the Commission.

    2. Requirements to obtain and maintain the SSR in the National Securities Registry

      The requirements to be complied with to obtain and maintain the SSR in the National Securities Registry (the “Registry”) are as follows:

      1. To be carried out by simplified issuers that comply with the characteristics determined by the Commission as set forth in the general provisions to be issued by the Commission.
      2. That the amount of the issue and the aggregate amount per issuer or trustor (in the case of asset-backed trust securities), does not exceed the maximum amount set forth in the general provisions to be issued by the Commission.
      3. That they are offered exclusively to institutional or qualified investors.

      Likewise, it is also established that those legal entities that wish to obtain the SSR in the Registry must prepare, through the placement intermediary, an abbreviated, preliminary, and definitive placement prospectus or information supplement, in accordance with the general provisions to be issued by the Commission. In the case of simplified registration, without a public offering, a preliminary and definitive prospectus must be prepared.

    3. Information and documents of the simplified issuer for its filling in the Registry

      It will be brokerage firms’ responsibility to participate in the structuring of the transactions of the companies that intend to become simplified issuers, by reviewing the necessary documents evidencing that the company meets the requirements to participate in a simplified issuance and they must also subscribe, together with the simplified issuer, the listing application with the respective stock exchange. The favorable opinion of the relevant stock exchange must also be secured.

      The Reform establishes the general guidelines related to the information and documents that the placement intermediaries must review, as follows:

      1. The manuals of the placement intermediaries must indicate the information and documents to be reviewed, in accordance with the principle of self-regulation and in terms of the provisions to be issued by the Commission.
      2. Once the review has been completed, the simplified issuer and the placement intermediary will request the favorable opinion from the corresponding stock exchange as part of the filing to be made to obtain the registration of the securities at the Registry.
      3. The corresponding stock exchange will review that the information and documents of the application for a simplified registration comply with the requirements established in its internal regulations and, if applicable, will issue a favorable opinion so that, jointly with the issuer, the issuer may apply for the SSR before the Commission.

      The favorable opinion of the stock exchange shall suffice to grant the authorization for the simplified registration of the securities at the Registry.

      Once the authorization for simplified registration of securities in the Registry has been granted by the Commission, the stock exchange will proceed to list the corresponding securities. The Commission will establish the following, in the general provisions governing simplified registrations: (i) the differentiated regulation as to the requirements that simplified issuers must comply with at the time of obtaining their registration in the Registry, in connection with their equity, assets, liabilities, income, financing capacity, characteristics and transparency of their corporate governance, among other things, and (ii) other elements which purpose is to promote more participation of small and medium-sized companies in the market.

      The SSR has declarative effects only and may not be considered as a validation, confirmation, opinion, recommendation nor assurance of the actions performed by the placement intermediary, the stock exchange or the Commission, in connection with the registered securities, nor in connection with the simplified issuer’s solvency, liquidity or credit quality.

    4. Brokerage firms obligations

      The main obligations of brokerage firms participating in the securities placement process in an SSR are the following:

      1. Review that the information and documents required to carry out the SSR comply with the provisions of the manuals that the brokerage firms must issue, in accordance with the provisions to be issued by the Commission, as well as the provisions of the internal regulations of the stock exchange where the listing is intended to be carried out.
      2. Structure the securities transactions, integrating, reviewing and disseminating all the necessary information for the listing and issuance, in terms of the general provisions to be issued by the Commission and those included in the corresponding manual.
      3. Verify that the contents of the documents (placement prospectus, brochure, supplement or securities) comply with the applicable legal provisions; comply with the applicable legislation, as well as with the service agreements entered into with the issuers, as applicable, and assess the characteristics of the relevant issuer, based on the methods generally recognized in the industry.
      4. Inform institutional or qualified investors of the inherent risks derived from the securities subject to simplified registration, in accordance with the provisions to be issued by the Commission.

    5. Supervisory authorities of the Commission

      It is established that, notwithstanding the supervisory powers of the Commission with respect to issuers in general, the full scope of such powers will not be applicable to simplified issuers (i.e., the Commission shall not be authorized to carry out inspection visits and require information and documents related to the activities of simplified issuers, nor will the inspection and surveillance powers of the Commission be applicable).

  3. Amendments to the Investment Funds Law

    The Reform proposes to eliminate the so-called Limited Purpose Investment Funds and incorporate to the IFL the so-called hedge funds (“Hedge Funds”). The main points to be highlighted are the following:

    1. The shares of the Hedge Funds may only be offered to qualified and institutional investors.
    2. The Hedge Funds shall only operate with assets that are contemplated in its information prospectus.
    3. Such funds shall be exempted from establishing maximum holding limits per shareholder.
    4. Their investment strategies may be subject to change according to market circumstances or the needs of the fund itself.
    5. They will be exempted from the obligation of being operated through an investment fund operating company (sociedad operadora de fondos de inversión), since Hedge Funds may be operated by authorized investment advisors.
    6. It is envisaged that Hedge Funds may engage price providers that are independent from the investment funds and founding shareholders.

    The general provisions to be issued by the Commission must be issued within a term that cannot exceed 365 calendar days from the day following the effective date of the Reform.

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