Latin American Capital Markets

148 KAREN GOLDSTEIN ROSSOTTOA Regulatory Framework Based on the Prudent Investor RuleRegulatory restrictions on the composition of pension funds should be gradually eliminatedto allow portfolio managers the flexibility to make innovative investment decisions,create new products, and diversify their portfolios to allow greater risk taking.However, because Latin America and the Caribbean does not have an established fiduciaryculture and enforcement resources are limited, certain regulatory protectionsneed to remain in place to establish investor confidence in the sector For example,when regulations are loosened, disclosure requirements become increasingly importantas a means for clients to monitor fiduciary activities (Frankel 1995). Informationmaterial to investors' decisions, such as financial status and past performance, is oneof the most important means of promoting market integrity, transparency, and sectoconfidence.Investors must be able to rely on reported financial information. If investorscannot distinguish between accurate and inaccurate financial information, they will discountall reported information. Because delivering information to investors is easy, butdelivering credible information is hard, financial statements must be certified by independentexternal auditors who, as intermediaries of information, place their reputationson the line (Black 2001).Many countries in the region have recognized the necessity of adopting highstandards of accounting and auditing of internationally acceptable quality. Continuedcommitment to these high standards of reporting and disclosure is critical to thegrowth of the institutional investor sector and capital markets overall.Governments must make a commitment to regulatory reform in the area ofentrenched collective interests. Entrenchment practices not only hurt market integrity,but also discourage local professionals within the sector from developing portfoliomanagement skills, thereby increasing the sector's dependence on foreign expertise.As markets develop and transparency and competition increase, institutional investorswill realize that adherence to fiduciary obligations and trust are of value to clients, antthe demand for these services will dictate the institutional market.Good Corporate GovernanceThere is no single model of good corporate governance. Governance systems are affectedby factors such as the larger economic context and the legal, regulatory, andinstitutional environment (OECD 1999). However, in general, good corporate governancerequires an examination of company structure to ensure that conflicts of in-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub