General Standard No. 507

On May 8, 2024, the Financial Market Commission (hereinafter, the “CMF”) issued General Rule No. 507, whereby it issued instructions on corporate governance and comprehensive risk management for general fund managers ( hereinafter, “AGFs”), thus repealing Circular No. 1,869 of 2008.

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The standard structures its regulations in four main points:

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1. Regarding the organizational aspects of risk management and internal control, the regulations establish that the FGAs must maintain an optimal organizational structure for the definition, administration and control of all risks derived from the development of their activities based on certain criteria such as the size and activities of the entity; types and amount of funds it manages; assets under management; number and type of participants or contributors; the complexity of relationships with other entities; the volume of its business; possible conflicts of interest; among others.

Likewise, the standard points out some aspects to be considered in relation to the organizational structure:

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‍i) the responsibility of the Board of Directors in its function of approving and authorizing the risk management and internal control policies of the AGF, at least once a year or when there are relevant changes in such policies, which must be guided by certain requirements established by the regulations to achieve effective management, such as, for example, the creation of a Risk Management Committee, the determination of the risk appetite, the approval of a Code of Ethics, among others; and

‍ii) the organizational structure, policies and procedures, which implies establishing, first, an independent risk management unit responsible for identifying, measuring, monitoring and managing the AGF’s relevant financial, operational and compliance risks and, second, an independent internal audit unit responsible for verifying the proper functioning of the entity’s internal control and risk management system. Both units must report directly to the AGF’s Board of Directors.

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2.   With respect to the risk management, control and internal audit programThe standard states that the program must fulfill two essential functions: i) the risk management function, the purpose of which is to ensure that the FGA adopts measures, such as the implementation of contingency policies, aimed at identifying and quantifying the relevant risks in the development of its activities; and ii) the internal audit functionIts purpose is to verify the correct functioning of the internal control and risk management system, executing the guidelines established in the AGF’s policies, together with complying with the different legal provisions applicable to the entity.

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3. The identification of risks in the functional areas of the FGA, which is related to the entity’s duty to identify all existing risks associated with the business it carries out, together with all other activities that may affect the interests of its investors, and the FGA must group such risks according to their relevance to the entity (e.g., market, credit, liquidity, operational, technological, legal, etc.).

For the above, the regulation establishes functions to be fulfilled by the AGF, structured and related to different cycles of the entity’s activity, these being the investment cycle, the cycle of contributions and redemptions and the accounting and treasury cycle. Together with the above, the standard establishes the requirements and guidelines to be considered for the preparation of a risk matrix for the AGF.

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4. Regarding risk management and internal control policies and procedures, the CMF orders the entities to formally develop and implement risk management and internal control policies and procedures that contemplate the risks associated with all the activities of the FGAs and, specifically, in each of their functional areas in relation to the cycles indicated in the previous point. 

The regulations establish that, at a minimum, such policies and procedures must address matters such as the investment portfolio; the quota value of the funds; liquidity management policies; conflicts of interest; confidentiality of information; management of queries, claims and complaints; financial risk; advertising; investor information; product offerings; approval of new products; valuation of assets held in the investment portfolios; methodology for approval, evaluation and control of algorithms; prevention of money laundering, financing of terrorism and financing of weapons; and compliance with legal provisions governing the operation of the AGF.

Finally, the regulation establishes the duty to prepare a risk management plan for the activities of the FGA, which must be approved at least every six months or as often as deemed necessary by the entity’s Board of Directors.

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General Standard No. 507 will become effective as of February 1, 2025.

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For any question related to this topic, please contact Javier Edwards or Ainhoa Yeregui.