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International Regulators Strive to Cooperate on Structured Products


BOSTON -- In their efforts to harmonize international regulations and allow the trade of structured products between continents, regulators in the U.S. and abroad acknowledge that cooperation with financial industry leaders is key to creating successful, transparent products.

"If the industry cannot comply with new regulations, despite its best efforts, it is a waste of everyone's time," said Alexa Lam, executive director and deputy CEO of Policy, China and Investment Products at the Hong Kong Securities and Futures Commission, speaking at the 21st Annual Conference on the Globalisation of Investment Funds, held this year at the Boston Harbor Hotel.

There has been enormous growth in UCITS (Undertakings for Collective Investment in Transferable Securities), a type of structured product that can be traded among participating member countries. UCITS have been called the pan-European passport for the way they allow collective investment schemes to operate freely throughout the European Union on the basis of a single authorization from one member state.

Regulatory Overlay

However, many EU member nations have imposed additional regulatory requirements aimed at protecting local asset managers that have resulted in the restriction of operations.

Efforts to finalize the details of UCITS IV have been bogged down in a flurry of conflicting amendments (see related story, "Growth of UCITS," page one).

"Very small amendments can often torpedo the entire proposal," said Charlie McCreevy, former EU Commissioner for Internal Markets. He said financial industry leaders and policymakers should never underestimate the importance of building goodwill.

"Most politicians forget how much the people at the top really know," he said, "and most people in the finance departments have never worked on the other side."

Only about 2% of European parliamentarians have a relevant financial focus, McCreevy said, adding that targeting the right parliamentarians is critical. Firms should be devoting their lobbying resources to the key people in the European parliament.

While the European Union and the International Organization of Securities Commissions (IOSCO) struggle to find the appropriate balance of transparency, oversight and market integrity, elected leaders in the U.S. Congress are also undergoing similar struggles to craft valuable, lasting regulations in a timely fashion.

Europe and the U.S. are keenly aware of the importance of international cooperation, and both are keeping an eye on what's happening on the other side of the Atlantic, McCreevy said.

Strict Domicile Hurdles

The U.S. has had trouble trading structured products in Europe and elsewhere due to strict domicile requirements and other oversight issues. U.S. mutual funds fall under the Investment Act of 1940, and Europe has restrictions on foreign investments.

The financial regulatory reform bills being pushed through Congress offer exemptions for foreign private advisors, said David Vaughan, an attorney fellow at the U.S. Securities and Exchange Commission's Division of Investment Management.

"If there are no direct U.S. investors, the substantive rules of the U.S. should not apply," he said. "If you agree to do business in Europe, you can be under European rules. We look at custody as a due diligence issue. Different countries have different custody rules."

The U.S. is currently revising many of its accounting rules to bring them closer to International Financial Reporting Standards, and leaders say they hope to share the same standards the rest of the world uses by 2014.

Vaughan said the SEC has been trying to improve its cooperation with industry participants and is required to carefully consider public comments to rule proposals before passing new rules.

"We have a lot of dialog with the financial industry," he said, noting that last year's Money Fund Working Group, chaired by Vanguard Chairman Emeritus Jack Brennan, was extremely helpful to the SEC's investigation of money funds.

Vaughan said the Commission is required to do a cost-benefit analysis on proposed rules to determine their likely impact on the industry, but figuring this out is difficult without the help of detailed comment letters.

"We don't want to come out with new provisions that are cost-prohibitive," he said.

One of the key reasons the SEC did not require mutual fund boards of directors to be overseen by an independent chairman following the trading scandal, for instance, was the cost-benefit analysis data provided by the U.S. Chamber of Commerce.

Getting the industry to provide realistic numbers can be challenging, as in the case of the SEC's proposed custody rule that would require surprise exams, he said.

"How much will that cost?" he asked. "People write in their comment letters saying, 'This will be very expensive.' Yes, but how expensive? Sometimes people come out with wild estimates that aren't helpful either."

International Harmony

Regulators around the world are keenly aware of the correlative effects of globalization and realize that broad, principles-based regulations are much more effective on an international level than specific rules.

"We are seeing a number of directives from the European Union that are extremely prescriptive," said Joe Bannister, chairman of the Malta Financial Services Authority. Despite their best intensions, product innovation will eventually strip away those prescriptions, he said.

"A number of jurisdictions are prohibited by national legislation from sharing information with other countries," Bannister said. This needs to end, he said.

"There must be no restriction at the national level as to what they can exchange with other regulators," he said.

There needs to be more international harmonization, particularly in the area of consumer protection, Bannister said.

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