Ensuring Compliance with Electronic Signature Lawfulness for Financial Services in Mexico

How to eSign a document: electronic signature lawfulness for Financial Services in Mexico

hi today we're going to have a look at mexico's recently passed securities law and how to illustrate some of the themes we've been talking about about trust finance and law lending someone money or giving the money to invest equity in their firm clearly requires a lot of trust the problem is is that trust is scarce we don't have a lot of it we need law to generate trust and in many developing countries the law itself is not trust that the law doesn't work very well so in order to lend or in order to invest people often just rely have to rely on family or friends they have to rely on extra legal social sanctions or social pressure if you want to go beyond family firms if you want to go beyond family lending however you need law so consider something even as simple as collecting on a bounced check in many countries the legal system is so Byzantine and inefficient that it takes a long time and is very costly to collect on a bounced check as a result there isn't much trust and there isn't much lending same thing with renting the home so if you rent a home and the renter doesn't pay and you don't have social sanctions you don't the renter is not family or friends then how do you evict them you need the legal system but to evict someone if the legal system again isn't working well that can take an awfully long time as a result in many developed countries even though there's a fairly well functioning market to buy a house because the money and the house change place at the same time two simultaneous exchange the rental market in developing countries tends to be much much more restricted because you don't have trust and you don't have a legal system which can help you to generate trust or consider the problem of venture capital venture capital we have what cooter and Schafer in their book solemn is not call a double trust problem the lender the venture capitalist is afraid that the entrepreneur is going to make off for their money or fritter it all away the entrepreneur is afraid that the lender is going to take their idea so in order to get around this you need really quite sophisticated law you need sophisticated contract law corporate law non-disclosure agreements and so forth in order to generate enough trust to make these agreements happen or think about how difficult it is to get a legal system where people trust enough so that they're willing to invest in the stock market or they're willing to invest in the bond market this is really a big leap to invest in the stock market to give somebody money to get ownership in a firm where you yourself are not an insider you yourself will not be running the firm but you must trust that the people running the firm are going to run it for the benefit of all the shareholders even the minority shareholders even the small shareholders that is a significant trust problem and it can only be solved by a complex well-developed body of corporate law of directorships of fiduciary responsibilities of penalties for inside dealing and for ripping off your your fellow shareholders and so forth it requires a sophisticated legal system to generate enough trust so that people feel so the people are able to invest their retirement earnings in something as nebulous as the stock market you investing ownership in a firm which you may never even see that requires a lot of trust requires a lot of sophisticated law so as we saw in our discussion of the financial system the bridge between savers and borrowers the bridge between savers and people who have productive ideas for investment this financial institutions bridge can be broken in many different ways including for example by insecure property rights this thing can happen directly from the government as when Argentina for example expropriate bank accounts or when people fear that Greece will expropriate bank accounts insecure property rights however can also come from private sources so one of the reasons that stock markets and bond markets are small relative to GDP in developed countries is that people in these countries fear that if they lend or if they buy shares in a firm the fear that insiders will rip them off minority shareholders fear or believe that they will not be well treated by insiders that instead of using their information to increase the value of the firm for all shareholders the insiders will use their information to expropriate wealth from minority shareholders from minority lenders and instead transfer that wealth to themselves that's a type of insecure property rights the minority shareholders are insecure about their property rights in the firm and this is one reason why stock markets are actually quite rare around the world why not a lot of firms actually are able to raise money on stock markets lets look at Mexico as an example so Mexico has traditionally had a very small financial system relative to the size of its economies had small stock markets not very much financial foreign investment relative to the size of its economy so in 2004 for example Mexico had only 150 companies listed on the stock exchange sixty percent of them were controlled by a single shareholder well part of the problem was that nobody wanted to invest in Mexican companies because if you weren't that single large shareholder you were likely to be ripped off subsidiaries for example they didn't even have to comply with corporate government's requirements so everything was channeled through the subsidiary minority shareholders had difficulty verifying what the managers were doing with their money the result was that insider deals were frequent money was channeled out of the company into the shareholders that rolling shareholders pockets this is sometimes called tunneling as someone said in Mexico when you have rich businessman you have poor companies so in order to address some of these problems Mexico created a new securities law and that came into effect in 2006 the new law to find more clearly the duties of company directors in particular that the directors had a duty to all of the shareholders moreover it heightened disclosure requirements for transactions with company insiders so one of the ways in which insiders used to rip off the outside shareholders is they would take anomaly public company and that company would then buy from a private company which was controlled by the insider and it would buy it artificially high prices in order to shift profits from the public company to the private company and therefore into the hands of the company insider this was reduced with now these new disclosure requirements the new law required Committees of independent board members to review compensation and related party transactions for public publicly traded companies it lowered the threshold for minority shareholders to sue for damages and a new more transparent corporate form was created so that corporations could signal you know we are going to be in this more transparent form so you can freely and with security invest with us the result of all this was a dramatically increasing stock market and more foreign investment you