U.S. sponsors should be aware of local restrictions before offering shares.

Exchange traded funds (ETFs) and similar vehicles organized in the United States have become increasingly popular investment choices for Latin American investors. As of year-end 2011, Latin American mutual and pension funds allocated $80 billion to nondomestic mutual funds, ETFs, stocks, and bonds.^[1] This is forecasted to grow to $235 billion in pension fund allocations and $61 billion in mutual fund assets by the end of 2016.^[2] As the markets in these countries have grown and the demand for ETFs has increased, ETF sponsors have focused their attention on ways to market and sell U.S.-based ETFs in Latin America. Although public marketing to retail investors is often quite restrictive, there are a number of available approaches for targeted marketing to institutions, including local pension funds. However, the methods by which U.S. sponsors and broker-dealers without local authorizations can market to Latin America can be a complicated web of regulatory requirements that vary by country.

Brazil

In Brazil, targeted offerings of ETFs by U.S. firms to domestic pension fund administrators and Brazilian mutual funds are permitted under certain circumstances without any local authorization of the ETF or the ETF sponsor. Such offerings must be structured, conducted, and characterized as private placements of securities for the purpose of applicable Brazilian laws and regulations.^[3] Brazilian pension funds, however, must invest in the ETF through a Brazilian-organized mutual fund that is approved by local authorities for foreign investment. The local mutual fund invests in the ETF and, in turn, issues quotas to the pension funds.^[4]

Chile

In Chile, ETFs may be offered only to certain qualified investors on a private placement basis in accordance with certain procedural, disclosure, and investor qualification requirements set forth in 2012 by the Superintendencia de Valores y Seguros (SVS), the Chilean securities regulatory authority.^[5] In addition, pursuant to SVS guidance, offers may also be made to a limited number of nonqualified investors under certain circumstances. Although Chilean pension funds are categorized as qualified investors, they may only invest in specified types of ETFs approved by the Comisión Clasificadora de Riesgo (CCR), a Chilean quasi-governmental regulatory body created by the Chilean pension fund statute and financed by the pension fund administrators. Before applying for approval by the CCR, an ETF must be listed on an approved foreign exchange and sponsored by a Chilean pension fund administrator.

Colombia

In Colombia, regulations generally prohibit foreign firms that are not authorized in Colombia from soliciting investments to all categories of Colombian investors.^[6] However, U.S. broker-dealers and ETF sponsors can solicit investors in Colombia using either of the following two approaches: (1) they can establish a representative office in Colombia through which they can solicit investments, or (2) they can enter into a correspondent agreement with a local broker, which, in turn, may solicit investments from Colombian investors. In either case, offers must be private and one-on-one and may include offers to Colombian retail investors. Certain regulated entitles, such as pension funds, must ensure that a U.S. ETF satisfies specific requirements before investing. For example, under the rules regulating Colombian pension funds, ETFs are permitted investments, provided that the manager of the ETF has at least $10 billion in assets under management, among other requirements.

Implications

As noted above, Latin America has been, and is expected to continue to be, an area with an appetite for U.S. ETFs. Pension funds, in particular, have made significant investments into U.S. ETFs. While many Latin American pension plans continue to grow and some local regulators have increased the foreign investment limits or lifted investment restrictions for pension plans to invest abroad, U.S. sponsors and broker-dealers need to be aware of each country's local regulations, including those specific to local pension funds.

_{[1]. Natan Levy, Overseas Investments by LatAm Pension Funds Set to Grow Significantly by 2016, Business News Americas (Feb. 5, 2013), available here (citing a report by Cerulli Associates).}

_[2]. Id.

_{[3]. All Brazilian information prepared in consultation with the Brazilian law firm Pinheiro Neto Advogados.}

_{[4]. Quotas are a form of security similar to units or shares.}

_{[5]. See Superintendencia de Valores y Seguros, Norma de Carácter General No. 336 (Jun. 27, 2012). All Chilean information provided in consultation with the Chilean law firm Alessandri & Compañia.}

_{[6] All Colombian information prepared in consultation with the Colombian law firm José Lloreda Camacho & Co.}