MutualFundWire.com
The insiders' edge for 40 Act industry executives!
an InvestmentWires' Publication
an InvestmentWires' Publication
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MutualFundWire.com
The insiders' edge for 40 Act industry executives!
an InvestmentWires' Publication |
|
Monday, March 31, 2008 Treasury Suggests Global Mutual Funds, Simpler ETF Registrations While much of the coverage of Hank Paulson's Blueprint for a Modernized Financial Regulatory Structure are focusing on the changes to the regulatory bodies, the plan has the potential to effect mutual funds directly. One of the proposals of the Treasury outlined in its blueprint is for the Investment Company Act of 1940 to be overhauled following the model implemented in 2003 for changes to the Securities Act of 1933. The potential changes to the Forty Act include provisions changing the tax treatment of capital gains and dividends for mutual funds to make them more competitive with products from other nations. That change would allow shareholders to not recognize those events until the sale of the fund's shares. The document also suggests the creation of a "global" investment company structure to allow U.S. companies to compete globally. Another recommendation is that the SEC allow the creation of new ETFs that follow the model of existing ETFs without the sponsor applying for exemptive relief under the Investment Company Act. The section of the blueprint covering the Investment Company Act are reprinted below. They start on page 113 of the Blueprint and end on page 115. * * *
From page 113 of the blueprint:
Investment Company Act Exemptions and Expansion The Investment Company Act governs three types of investment companies, the shares of which are offered widely to investors today: open-end funds (“mutual funds”), closed-end funds, and unit investment trusts.86 Since the passage of the Investment Company Act, investment companies and their products have developed in ways that were not anticipated at the time of the Investment Company Act’s enactment and do not fit squarely into traditional investment company categories. The SEC has often responded by using its broad exemptive authority under the Investment Company Act to exempt from registration innovative investment companies. For example, exchange-traded funds (“ETFs”) are not authorized under the Investment Company Act and ETF sponsors must seek exemptive relief from the SEC under the Investment Company Act. The SEC granted the first ETF exemptive relief in 1992 and since then has issued approximately fifty exemptive orders, some of which permit multiple ETFs. Currently over 300 ETFs are permitted to trade in the United States. Even with the issuance of several exemptions and the robust ETF market, ETF sponsors must still go through an extensive exemptive relief process. The SEC recently proposed a rule to codify its exemptive orders issued to ETFs from certain provisions of the Investment Company Act and its rules over fifteen years after the product was first granted relief. 87 A former SEC official has recently recommended that the SEC use its exemptive authority, consistent with investor protection, to modernize the Investment Company Act as the SEC recently did in relation to the Securities Act to allow the introduction into the United States of certain products currently trading successfully in other jurisdictions.88 The SEC itself has recognized the Investment Company Act’s limits. In its 1992 report, Protecting Investors: A Half Century of Investment Company Regulation, the SEC’s Division of Investment Management conceded these limits and recommended the creation of a new registered investment company, a unified fee investment company.89 In addition, the SEC noted in that same report the limits on the ability of U.S. investment companies to market their shares on a global basis. One of the more significant impediments is the tax treatment of investments in funds. For example, U.S. federal tax law imposes distribution and withholding requirements on income and gain on shareholder investments in investment companies’ shares. This is not the case for foreign-registered investment companies which do not impose a tax until redemption of the shares.90 In this report, the SEC did recommend eliminating the tax disadvantages for U.S. registered investment companies being offered overseas.91 Treasury is concerned with the fact that the limitations in the Investment Company Act and the registration processes may be compelling U.S.-based sponsors of investment vehicles to introduce their products offshore. This limits investor choice and industry competition. Treasury recommends that the SEC undertake a general exemptive rulemaking under the Investment Company Act, consistent with investor protection, to permit the trading of those products already actively trading in the United States or foreign jurisdictions, such as ETFs: This means that sponsors can introduce new funds that meet the same terms and conditions of previously exempted funds without registering as an investment company. Treasury also notes the inability of the U.S. fund industry to market successfully on a global basis shares of U.S. registered investment companies because of a variety of issues, including the tax implications outlined above. This limits investor choice and the growth and competitiveness of the U.S. fund industry. Thus, Treasury also recommends that the SEC, in consultation with retail and institutional investors, other domestic and international regulators, the asset management industry, academics, tax professionals, and other market participants, propose to Congress legislation to expand the Investment Company Act to provide for the registration of a new “global” investment company. This global investment company should provide investor protections equivalent to the current U.S. investment company regulatory framework, such as a robust governance system, fee disclosures, and other disclosures. Footnotes86 LOUIS LOSS AND JOEL SELIGMAN, FUNDAMENTALS OF SECURITIES REGULATION 40-42 (4th ed. 2001).87 See Proposed Rule: Exchange-Traded Funds, Securities Act Release No. 33-8901 (Mar. 11, 2008). 88 Alan L. Beller, Some Thoughts Regarding Capital Markets Regulatory Reform, C.V. STARR LECTURE, New York Law School (Feb. 21, 2007), at 6 (noting that the federal securities law “too often prohibits the offering of particular products or the execution of particular transactions. These prohibitions are not fraud- based. Many of them derive from the substantive prohibitions of the Investment Company Act or the treatment of different categories of financial instruments under the U.S. securities and commodities laws. These prohibitions should be eliminated where they can be consistent with investor protection…A business is being developed in London and not in New York solely for regulatory reasons. Is there really no regulatory regime under which transactions involving these products cannot be responsibly carried out in the United States?...The SEC has never attempted a broad modernization of its rules under or its administration of the Investment Company Act. The SEC succeeded in using its broad exemptive authority in 2005 to achieve far-reaching modernization of the rules for capital formation under a different regulatory regime, the Securities Act of 1933”). 89 DIVISION OF INVESTMENT MANAGEMENT, SEC, PROTECTING INVESTORS: A HALF CENTURY OF INVESTMENT COMPANY REGULATION 332-45 (May 1992). 90 Id., at 189 . 91 Id. at 215. See also David S. Ruder, Chairman of the Board, Mutual Fund Directors Forum, Comment Letter (Mar. 20, 2008). Printed from: MFWire.com/story.asp?s=17824 Copyright 2008, InvestmentWires, Inc. All Rights Reserved |