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SEC Will Explore International Rules

Industry executives largely agree that international standards or reciprocity agreements between countries allowing funds to be sold internationally are a long way from becoming a reality.

But, because the Internet has created an international emporium that expands the reach of any mutual fund across the globe, the SEC, in the coming year, will explore whether international regulations concerning the sale of funds over the Internet are necessary, said Douglas Scheidt, associate director and chief counsel for the division of investment management at the SEC.

Working with the International Organization of Securities Commissioners, an association of regulators from 80 nations based in Madrid, the SEC will explore whether in certain cases, such as for expatriates living abroad, investors should be allowed to invest in funds domiciled in a foreign country, Scheidt said.

The SEC also wants to work with IOSCO on the possibility of establishing international guidelines recommending that funds with web sites that can be viewed internationally post notification that their funds can only be purchased by residents of the nation in which the fund is domiciled, Scheidt said.

In the U.S., the SEC has asked foreign fund companies that have web sites that can be viewed here to include such disclaimers on their sites, Scheidt said. But the U.S. is the only nation that currently makes such a request, and many foreign nations have a hands-off approach, he said. This is a growing concern to the SEC as a guardian of U.S. investors, he said.

"We will put our heads together with IOSCO to see whether IOSCO is comfortable issuing some guidance on issues relating to the Internet," Scheidt said.

Industry executives believe that between the Internet, the burgeoning international financial services marketplace and the mergers and acquisitions that the Financial Modernization Services Act will inevitably cause, there will be sufficient motivation to produce international regulations permitting mutual funds to be sold internationally. However, this is not expected to happen quickly.

"I don't think there is any question that inevitably there is going to be reciprocity between many areas of the world," said Burton Greenwald, president of B.J. Greenwald Associates, a mutual fund consulting firm in Philadelphia. "It will eliminate operational expenses for transfer agencies and custody, which are superfluous, redundant and costly."

"It would certainly be in firms' interests to have more uniform regulations throughout the world," said Debra Brown, director of investment company services for National Regulatory Services of Lakeville, Conn. "The Internet opens up the possibility of selling internationally. Plus, the [Modernization Act] will undoubtedly result in more global enterprises that will press the issue. (MFMN 11/ 8/99) But I think we are a long, long way from having uniform securities regulations."

The SEC and IOSCO will not be agreeing on any international recommendation anytime soon, Brown said. Instead, mutual funds will gradually become available internationally through the incremental process of reciprocal sales agreements between nations, she said. Australia's recent decision to remove unrealized capital gains taxes from U.S. domiciled funds sold in that country is an example of such a reciprocal agreement, she said. (MFMN 10/11/99)

"I don't think you will have a single set of regulations but a series of treaties in which reciprocity will be exercised based on the faith that the other country's regulators will sufficiently protect shareholders," Greenwald said. The U.S. is most likely to reach reciprocity agreements with the European Union and Japan, Greenwald said.

Because many foreign countries work with the SEC to apply its standards to their own nations, the SEC may be willing to reach reciprocity agreements with such nations, said Isaac Hunt, Jr., an SEC commissioner.

"We regularly share our knowledge and experience through IOSCO, and I hope that we will get to a uniform regulatory scheme," Hunt said.

However, even if regulations are developed, there still are widely different tax laws, accounting standards, distribution systems, computer and clearing networks throughout the world that will continue to make selling mutual funds internationally a challenge, said Geoffrey Kenyon, a partner with Goodwin, Procter & Hoar of Boston.

"On the face of it, international sales of mutual funds is very exciting," Kenyon said. "But even if people got over the securities law hurdle, I think they would find there are too many other hurdles to try to do it."

Steven Wallman, a former SEC commissioner, foresaw such difficulties in creating international regulation in a speech he made in March 1996 before the Institute of International Bankers in Washington, D.C., in which he underscored the phenomenal power and dynamics of the Internet.

"Because it is so hard, there will be those who throw up their hands and suggest that there should be no regulation," said Wallman. "[But] how long will it be before there is a simple mechanism for an Iowa resident to buy, for example, Frankfurt Stock Exchange-listed stocks over the Internet? . . . Such an example clearly illustrates the need for greater coordination among international regulators."

"There must . . . be a dramatic change in regulatory approach [to] . . macro regulation. This necessitates a massive change in the way regulators think. The usual regulation by geographic jurisdiction is about to disappear. What is really needed [is] a single international regulator for global financial markets," Wallman said.