International Regulations Become More Complex
May 26, 2003
BERMUDA - As if raising assets in foreign markets isn't already hard enough, there are increasing regulations to contend with, as well.
Capital requirements, stock ownership reporting and proxy rules are more stringent in some nations, said speakers at the Globalisation of Mutual Funds conference here earlier this month. As well, regulation is becoming more aggressive and independent directors are becoming more powerful.
In Europe, the UCITS III directive, taking effect in February 2004, will require asset managers to have capital reserves of 125,000 euros as seed money, two basis points of all assets above 250,000 euros and three weeks of operating expenses, said Jennifer Choi, an attorney with the Investment Company Institute. At present, that requirement is only 5,000 euros. Africa requires 13 weeks of working capital. And Chile's capital requirements have become so high - $250,000 in seed money, plus another $250,000 to cover each fund - that the government is now allowing fund companies to use insurance to cover capital requirements. The European Union is also considering allowing fund companies to use such insurance, and the ICI has been pushing for this, Choi said.
Foreign regulators and issuers also impose investment restrictions and ownership disclosure requirements on foreign investors. "Certain industries are typically closed to foreign investment, like banking, insurance, media and sometimes natural resources," said Liliane Corzo, counsel with Capital Research and Management Co. in Los Angeles. In some cases, fund investors have to give prior notice or obtain consent before they can purchase shares, she said. "These [approvals] can take a long time, and by the time they're given, the portfolio manager might not have an interest in buying the security," Corzo said. Yet a further downside to this requirement is that the information is public, which can lead to front-running, she said.
Many nations also limit holdings to no more than 15% of a particular stock. As well, there is a push at the European Union to reduce requirements that fund companies report a stake in a company from 10% to 5%, noted Mary Podesta, a general counsel with the ICI.
International reporting requirements are very detailed, always changing and therefore very costly, said Corzo, who tracks 60 countries and finds changes almost daily. If a company does not have the resources to stay abreast of international regulatory requirements, it must hire local counsel, she said.
Fund companies that like to exercise their proxies will find the opaqueness of European and Asian governance difficult, said John Wilcox, vice chairman of Georgeson Shareholder Communications of New York.
"International stocks don't have proxy quorum requirements, which are 85% in the U.S.," Wilcox said. "Many act like they are privately held." Some foreign companies, in fact, intentionally publish shareholder meeting notices only in local papers, and in Japan, corporations disseminate proxy materials only two weeks before annual meetings, giving fund managers little time to prepare, Wilcox said.
Shareholder activism has become quite vigorous in the U.K., primarily due to the fact that split funds, which offer various share classes, have been accused of collusion, said Richard Paterson, a partner with Eversheds in London.
"Increasing regulation for both offshore and onshore funds and finding eligible independent directors will be a big issue for major fund houses throughout the world over coming years," predicted David T. Smith, a partner with Equus Asset Management Partnership of Bermuda.
He also believes that internationally, independent directors will become more empowered. That includes "working incessantly to assess the suitability of auditors, administrators, custodians, the fund's investment objective and distribution -- and the investment managers themselves," Smith said
As far as increasing regulations are concerned, speakers said that Europe certainly is a region where not only has the so-called UCITS passport failed to create a truly unified market, but further regulations are forthcoming.
"There is no coherent tax system or cross-border distribution," said Stephen Ross, a partner with Clifford Chance of London. Further, there are other pending directives besides UCITS III -- e-commerce, financial services marketing and investment services directives among them -- that "are very complicated and can be adopted differently in each country," added Paul Kleman, a partner with De Brauw Blackstone Westbroek of Amsterdam.
Finally, Europe does not have any industry standards for settlement or fund administration, said Stefan Bichsel, a member of the executive board of Robeco Group of Rotterdam.
"We would like a true passport, one central registrar and one set of guidelines for registering and distributing funds in Europe," said PeterPaul Pardi, a senior vice president with PIMCO Europe of London. "But the reality is, there are 15 unique markets in the European Union, and an investment company's passport must be perfected in 15 different markets."
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