Resolution of the General Intendancy of Entity Supervision

No. 122-2024-SMV/10.2

Lima, 19 September 2024

The General Intendant of Entity Supervision

WHEREAS:

File No. 2024024802 initiated by Flip Sociedad Administradora de Fondos Sociedad Anónima Cerrada (hereinafter, FLIP SAF), formerly Independiente Sociedad Administradora de Fondos Sociedad Anónima Cerrada, as well as Report No. 1231-2024-SMV/10.2 dated 19 September 2024 issued by the General Intendancy of Entity Supervision of the Superintendency of the Securities Market;

CONSIDERING:

That, Article 12 of the Investment Funds Law approved by Legislative Decree No. 862, establishes that investment fund management companies have as their corporate purpose the management of one or more investment funds. Additionally, the aforementioned article establishes that investment fund management companies may carry out activities complementary to their corporate purpose provided that there is prior authorization from the Superintendency of the Securities Market;

That, the first paragraph of Article 22 of the Regulation of Investment Funds and their Management Companies, approved by SMV Resolution No. 029-2014-SMV/01 and its amendments (hereinafter, the REGULATION), establishes that the management company may carry out complementary activities provided that they are related to its corporate purpose, such as financial advisory, structuring and portfolio management in compliance with the regulations issued by the SMV;

That, the second paragraph of Article 22 of the REGULATION states that the Management Company may carry out complementary activities other than those expressly indicated in the previous paragraph provided that such activity is not reserved exclusively for another entity, according to the regulations, with prior authorization from the SMV;

That, for this purpose, an application must be submitted to the General Intendancy of Entity Supervision or the body acting in its place, accompanied by the following documentation: a) copy of the minutes of the general shareholders' meeting containing the resolution adopted under the suspensive condition that the respective authorization from the SMV is obtained, to carry out a certain complementary activity to its corporate purpose, by the management company; b) description of the risks associated with the development of the complementary activity and the possible impact they could have on the activities or functions it carries out, as well as its financial solvency; c) detailed description of the activity to be carried out, situations of conflict of interest that could arise and the measures it will implement to mitigate them; d) draft amendment of the bylaws, if applicable; and, e) any other documentation required by the SMV;

That, in Joint Report No. 918-2014-SMV/06/10/121, which summarizes and analyzes the main comments received during the public consultation of the regulatory proposal for the approval of the REGULATION, regarding the complementary activity of investment fund management companies, it is indicated:

"2.10. Complementary Activities (Article 22) (…) Likewise, Fondos Sura requests clarification as to whether the concept of financial consultancy also includes the power to provide advisory services in securities matters and operations on and off the exchange. In this regard, it is not considered necessary to clarify this point, since the power to provide advisory services in securities matters and operations on and off the exchange under the indicated terms could not be carried out, except only in the case that this activity is linked to its corporate purpose. However, for greater precision, the term financial consultancy has been changed to financial advisory".

That, likewise, through Official Letter No. 2508-2021-SMV/102 dated 21 June 2021, the Deputy Superintendency of Prudential Supervision responded to a query regarding the scope of the complementary activity of financial advisory that an investment fund management company could carry out, in accordance with Article 22 of the REGULATION, especially when advisory is provided to private equity companies that are part of the investment portfolio of the funds managed by the same management company, indicating that:

"In this framework, and in response to your question, investment fund management companies may provide financial advisory to private equity companies that are part of the investment portfolio of the funds managed by that same management company, provided that such service is related to its corporate purpose. However, in accordance with the provisions of Article 2, literal n), of the Regulation in accordance with Article 5, numeral 5.2.8 of the Regulation of Indirect Ownership, Linkage and Economic Groups, approved by SMV Resolution No. 019-2015-SMV/01 and amendments, it must be taken into account that, in such case, the recipient of the financial advisory could become a "Related Person" to the management company, and therefore, consequently, the restrictions and conditions set forth in Article 78, literal b), of the Regulation could subsequently apply, with respect to investments made with "Related Persons".

[1] File No. 2014043127.

[2] File No. 2021016344

That, through writings submitted up to 08 August 2024, FLIP SAF requested the Superintendency of the Securities Market for authorization to carry out the complementary activity of financial advisory;

That, the purpose of FLIP SAF would be to develop the complementary activity of financial advisory in a broad sense. Financial advisory in general would be provided to natural and legal persons. The contractual relationship between FLIP SAF and its potential clients would have as its object the provision of advisory services, both to its clients (CLIENT) and to their client portfolio (FINAL CLIENT);

Description of the risks associated with the development of the complementary activity and the possible impact that these could have on the activities or functions carried out, as well as its financial solvency

That FLIP SAF has indicated that the risks associated with carrying out the complementary activities are (i) reputational risk and (ii) information security risk;

That, regarding reputational risk, FLIP SAF indicates that potential harm to its reputation could be caused, due to unethical, illicit or inappropriate actions by its collaborators; as well as by poor quality of the advisory service as it is not adjusted to the risk profile of the FINAL CLIENT;

That, likewise, in general terms FLIP SAF mentions that the potential risk is mitigated through a process of review and analysis of the final clients in question, as well as of the potential client, as well as with the creation of filters for the adequate selection of the potential client;

That, in that sense, FLIP SAF states that the impacts of reputational risk are: (i) impact on public relations management due to public statements by Final Clients, (ii) conflict of interest between promoters and investment advisors, and (iii) poor quality of service;

That, in relation to the impact of reputational risk referred to public relations management due to public statements by Final Clients, FLIP SAF provides for adequate selection to avoid contracting with controversial subjects or those involved in public statements of a negative nature. This aspect would be part of the filters indicated as mitigators;

That, except for that particular aspect, regarding the mitigators, it is not developed what the review and analysis processes and the respective applicable filters for final clients and/or potential clients consist of;

That, in relation to the impact of reputational risk referred to the conflict of interest between promoters and investment advisors, it mentions that the collaborators, promoters and workers of FLIP SAF may not prioritize their own interests and those of related third parties over those of the final clients, considering that this may negatively affect their reputation and the relationship with the counterparty. However, it does not develop the specific conflict of interest situations3 that may arise with the complementary activity;

[3] The aforementioned is already established in the REGULATION, in subsection b) of article 3, as a general rule of conduct.

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That, likewise, it is indicated that the potential risk described is mitigated through the separation and regulation of tasks to provide the financial advisory service, it being essential that FLIP SAF collaborators understand that the activities and operations they are in charge of with a final client or client are not the same as those carried out as part of the management of mutual funds for investment in securities and investment funds of FLIP SAF, even changing the personnel designated for such tasks;

That, in this regard, although it cites the separation and regulation of tasks, as well as the "understanding" of the collaborators about the financial advisory activity and its differentiation from fund management, it does not specifically establish what said separation and regulation of tasks consists of, nor does it indicate what activities will be developed or how the collaborators' understanding will be implemented;

That, on the other hand, it states that collaborators will be designated to attend to the requirements of the final clients, who will perform non-exclusive tasks and will not have contact with said clients. It specifies that said collaborators, in addition to attending to the operational requirements for Preserva Group Ltd, hereinafter, PRESERVA (company designated by FLIP SAF as the client), may also fulfill tasks4 of a routine or support nature for FLIP SAF;

That, however, it does not specify what those operational requirements of the clients are and how they are related to financial advisory, consequently the scope of its financial advisory activity would not be delimited;

That, likewise, regarding the measurement or level of impact of the risk, the same has not been established in detail. Without prejudice to the foregoing, considering that a detailed document on risk identification and analysis has not been presented, it could not be determined that the mitigators provided are adequate nor could the measurement of the impact and its support be evaluated;

That, in relation to the impact of reputational risk referred to poor quality of service, it mentions that deficient or unprofessional advice by those in charge of financial advisory on the part of FLIP SAF can cause the final client who contracts the financial advisory service to lose trust and harm its reputation;

That, on the other hand, unprofessional or deficient advice refers to investment recommendations not in accordance with the client's profile, or that do not adjust to their investment objectives;

That, regarding information security risk, this is defined as the possibility of losses derived from theft or unauthorized disclosure of confidential client information;

That, in this regard, it specifies that the information will be protected with a password, for exclusive access by FLIP SAF personnel in charge of the service, thus access to the servers will be protected under the same parameters

[4] They include administrative support such as payment to suppliers, review and validation of administrative services for the office, coordination and negotiation of banking products such as letters of guarantee, IT support for the maintenance and updating of the website as well as its functionality, among others.

of security than those of FLIP SAF, in such a way that the complementary service will not alter either the operations or the risks exposed in matters of information security;

That, additionally, in response to the observations letter No. 2881-2024-SMV/10.2, FLIP SAF submitted a risk matrix in which, according to frequency and impact, the risks would be at a low level. However, the matrix does not show a development for the identification and analysis of risks that would allow concluding that said level is the result of a detailed analysis of all risks and the application of mitigators;

That, likewise, the aforementioned matrix would not present complete or consistent information, because in the occurrence or frequency field, for all risks a value of five (05) “times” per year is recorded without specifying what is meant by “times” and the events involved. Furthermore, it is indicated that mitigators were established for reputational risk, information security risk and operational risk; however, the latter has not been included in the risk description of the initial application;

That, regarding the possible impact that the aforementioned risks could have on the activities or functions it carries out, as well as its financial solvency, FLIP SAF states that if any of the aforementioned risks materialize, it is estimated that they would not impact its operation to the extent that additional resources would be allocated to resolve the incidents through capital increases that prevent FLIP SAF from failing to comply with its regulatory obligations. However, it has not submitted any information that supports the impact analysis carried out on its equity levels and its capacity to face them;

That, from the foregoing, FLIP SAF has not clearly delimited the scope of the financial advisory activity. In that sense, it has not submitted a risk description supported by a detailed evaluation and analysis of all the risks involved in the new activity. Likewise, it has indicated impacts in a general manner, which furthermore would not have been analyzed completely as all additional tasks and all risks involved have not been identified or delimited;

That, consequently, this Superintendency has not been able to conclude that the description of the risks and impact has been determined completely, supported by a detailed evaluation and analysis of the risks associated with the complementary activity whose authorization is requested;

Detailed description of the activity to be carried out, situations of conflict of interest that could arise and the measures it will implement to mitigate them.

That, FLIP SAF states that financial advisory in general would be provided to natural and legal persons and the contractual relationship would have as its object the provision of the advisory service, both to its clients and to the client portfolio of the same (End Client5 ). It specifies that the clients of FLIP SAF and

[5] High-net-worth clients (above two million US dollars) who have their money in foreign investment platforms and actively seek investment alternatives for wealth preservation without going through Peruvian investment vehicles.

PRESERVA (client) do not converge due to the difference in locality of the vehicle desired by the end clients;

That, financial advisory in general would include (i) the review of the financial situation of the client or end client, (ii) the performance of an analysis of the investment risk profile of the client or end client, (iii) preparing an investment policy in different financial assets (fundamentally securities) appropriate to the risk profile of the client or end client, (iv) providing through specific meetings or presentations the information effectively analyzed, and (v) performing a periodic evaluation of the behavior of the investments recommended to the client or end client that have been adopted by the latter. It specifies that the advisory service does not include the active management of an investment portfolio directly or indirectly for the client or end client, and that all information corresponding to the end client will be communicated to FLIP SAF through the client, so FLIP SAF will not have contact with the end client;

That, from the foregoing, it is noted that the activity would include even tasks subsequent to the investment recommendation, such as monitoring of investments, which would imply a broader scope than the common or typical tasks of a financial advisory, which may give rise to other risks and situations of conflicts of interest;

That, on the other hand, FLIP SAF has not clearly delimited the scope of the financial advisory activity, because the list has not included the handling of requests from end clients mentioned in the document “Detailed description of the activity to be carried out, situations of conflict of interest that could arise and the measures it will implement to mitigate them”. Likewise, FLIP SAF intends to carry out other tasks in response to operational requirements on the part of PRESERVA, as indicated in the response to letter No. 2881-2024- SMV/10.2;

That, on the other hand, considering that FLIP SAF will not have a direct relationship with the end clients and that the advisory activity would be provided through the contractual relationship with PRESERVA, it is not clear whether such aspect is financial advisory in favor of said end clients or is an activity for PRESERVA to be able to fulfill certain functions contracted with its clients, the scope of which is not clearly defined or determined by what is described in the preceding paragraphs;

That, in relation to conflicts of interest, FLIP SAF has pointed out the conflicts of interest that may arise in the performance of the complementary activities and control measures;

That, regarding the investment policy and/or investment recommendations made by the officer in charge of advising the client or end client, it is specified that for the purposes of avoiding conflicts of interest these recommendations will not include investments within the mutual funds for investment in securities and investment funds managed directly by FLIP SAF, nor by its external manager. Likewise, it is specified that the officer in charge of the advisory service will not carry out the marketing of the mutual funds and/or investment funds managed by FLIP SAF, and that the collaborators who handle requirements of the complementary activity provided to PRESERVA will not be promoters of the mutual funds;

That, FLIP SAF points out that the collaborators who handle requirements requested by PRESERVA may perform tasks or activities for FLIP SAF, in non-critical tasks, being mainly administrative and support;

That, FLIP SAF indicates that it will have one or more officers in charge of individual advisory to each end client, who will differentiate the functions they perform with respect to the financial advisory service, the service of management and effective management of mutual funds for investment in securities and investment funds or tasks necessary for the proper fulfillment of their operations. It specifies that there will be separation of teams and specific tasks for the complementary activity, but they would not be exclusive, because they will also perform tasks or functions entrusted in the fund management company;

That, from the foregoing it follows that there will be no personnel assigned exclusively to perform the complementary activity and that the personnel participating in the management of FLIP SAF's funds will also perform tasks for the advisory activity. However, the risks of that situation have not been described and analyzed;

That, FLIP SAF indicates that collaborators may have situations of conflict of interest, basically referring to recommending investment in mutual funds and investment funds managed by FLIP SAF or in products that are on its balance sheet, as well as use of investor information for their own benefit or that of related parties;

That, FLIP SAF specifies that the activities and operations for which the collaborators are responsible are not the same as those they may eventually perform with respect to the mutual funds for investment in securities and investment funds it manages. Likewise, it points out that by having differentiated tasks, any eventual deficiency in the process is mitigated and clear direction in FLIP SAF's objectives;

That, in this regard, FLIP SAF has only described the conflicts related to the investment recommendation and has not developed those inherent to the monitoring activities it intends to carry out, nor those related to the tasks to fulfill the operational requirements carried out by PRESERVA. Therefore, such situation does not allow evaluating all the conflicts of interest that may arise in the advisory activity it intends to carry out, nor evaluating the suitability of the measures to be adopted for the mitigation of the respective conflicts of interest;

Draft amendment of the bylaws

That, FLIP SAF presented the literal copy of entry No. 13545724 which contains the partial amendment of article 2 of the bylaws, by which it is specified that the company may carry out other activities complementary to its corporate purpose, among them financial advisory, structuring and administration;

That, the aforementioned amendment was registered in public registries without having the prior authorization of the SMV;

That, for the considerations set forth, it is appropriate to deny the request of Flip Sociedad Administradora de Fondos Sociedad Anónima Cerrada, in the part in which it requests authorization to carry out the complementary activity of financial advisory;

In accordance with the provisions of article 12 of the Investment Funds Law, approved by Legislative Decree No. 862 and its amendments; article 22 of the Regulation of Investment Funds and their Management Companies, approved by SMV Resolution No. 029-2014-SMV/01 and its amendments; and article 38, numeral 5, subsection ii), of the Regulation of Organization and Functions of the Superintendency of the Securities Market, approved by Supreme Decree No. 216-2011-EF and its amendment;

RESOLVES:

Article 1.- Deny the request of Flip Sociedad Administradora de Fondos Sociedad Anónima Cerrada for authorization to carry out the complementary activity of financial advisory.

Article 2.- Order the dissemination of this resolution on the Securities Market Portal of the Superintendency of the Securities Market (www.gob.pe/smv).

Article 3.- Transcribe this resolution to Flip Sociedad Administradora de Fondos Sociedad Anónima Cerrada.

Register, communicate and publish.

Armando Manco Manco
Intendente General
General Superintendency of Supervision of Entities