"Mutual Fund Regulation: Developments At Home and Abroad" Remarks By Isaac C. Hunt, Jr., Commissioner, U.S. Securities and Exchange Commission 8th Annual Seminar on the Globalisation of Mutual Funds Sponsors: The International Bar Association and the Investment Company Institute Bermuda May 5, 1997 In the United States: The legislation was designed to eliminate duplicative state and federal securities regulation. * Federal law now preempts state blue-sky regulation of certain securities, such as securities listed on national exchanges, shares issued by mutual funds, and some private placement offerings. * States, however, retain the authority to investigate and bring enforcement actions with respect to a broker- dealer's fraudulent and deceitful activities in connection with the sale of all securities. * Federal law also now preempts state law requirements in the area of broker-dealer regulation that imposed financial responsibility and recordkeeping requirements. Simply put, broker-dealers are no long subject to differing state net capital and book & records requirements. * In addition, the new legislation provides the SEC with general exemptive authority under the Securities Act and the Exchange Act. Furthermore, the new legislation amended several provisions of the Investment Company Act and the Advisers Act * Fund of Funds restrictions were relaxed. These arrangements are now permitted for funds that are within the same fund complex. * The law also gives funds greater flexibility in their advertising. * The SEC has expanded recordkeeping authority with respect to mutual fund operations. * Furthermore, there is a new Investment Company Act exemption for privately offered investment funds that sell their shares solely to sophisticated investors -- who are referred to as "qualified purchasers." The investors would be limited to individuals who own at least $5 million in investments, or institutions which manage at least $25 million. * The bill also divides federal and state authority for investment adviser regulation. This division is based on the amount of assets under management. The SEC is presently considering rules to implement these provisions. * * * In the United States: * The SEC is trying to minimize prospectus disclosure about technical, legal and operational matters that are common to all mutual funds. * We want to focus prospectus disclosure on essential information about a particular fund that would assist investors in deciding whether to invest in that fund. * The profile would present a summary of key information about a fund, including the fund's investment strategies, risks, performance and fees -- in a concise, standardized format. * A fund that provides investors with profiles would be required to offer investors a choice of the amount of information they wish to consider before making an investment decision. * Investors would have the option of purchasing a fund's shares based on the information in the profile or requesting and reviewing the fund's complete prospectus. * An investor deciding to purchase fund shares based on information in a profile would receive the fund's prospectus with the confirmation of the purchase. * * * Abroad: * With globalized markets come market professionals that act globally -- across both geographic and regulatory boundaries. Indeed, foreign investment advisers can register to provide advice to U.S. mutual funds merely by completing a simple SEC form and paying a nominal fee. * Since our markets are open to foreign advisers, we must make sure that our means of oversight are sufficient to ensure that investors remain protected. There are approximately 392 foreign investment advisers registered with the SEC, with an aggregate of over $1.2 trillion under management. Some of these advise U.S. mutual and pension funds. Others advise individual investors about direct overseas investments. Unless we work with our counterparts to ensure compliance of market professionals who are based overseas, investors who look for opportunities beyond our borders will be unprotected. * In 1995, the SEC and IMRO were proud to announce that they had signed the first joint Declaration on Cooperation and Supervision of Cross-Border Investment Management Activity. This Declaration was a dynamic response to the challenges presented by the internationalization of the markets and the explosive growth in the mutual fund industry. * By using the Declaration, the SEC and IMRO are able to obtain on a regular basis information about U.S. and U.K. advisers who offer cross-border services. As a result, we are better positioned to detect and deter potential problems, and we continue to work together to conduct more efficient joint, on-site inspections. The Declaration enhances both the SEC's and IMRO's ability to oversee the markets and strengthens our hand as we seek to protect investors in this era of internationalization. * Since the SEC-IMRO Declaration, the SEC and IMRO have each signed similar Declarations with the Hong Kong Securities and Futures Commission. In addition, in 1996, the International Organization of Securities Commissions issued a model Declaration of Investment Advisory Oversight for its members to consider when negotiating similar bilateral Declarations. Thus, the SEC continues to work together with IMRO, the SFC and other foreign counterparts to enhance our supervision and compliance programs for those located outside of the United States. The more countries that enter into similar Declarations, the greater the safety net for all investors. * * * Abroad: * Since 1988 when the first joint inspection of a U.S. registered adviser was conducted with regulators from another country, inspections have been conducted of 42 investment advisers and one investment company located outside the U.S. * The joint inspections were conducted in the following countries: Argentina, Brazil, Chile, England, Hong Kong, Mexico and Scotland. The Commission staff has conducted inspections of advisers located in Brazil, England and Hong Kong on more than one occasion. * Staff from IMRO and the CVN in Brazil have been to the U.S. to conduct joint inspections of several jointly registered advisers and one mutual fund. * A majority of the 42 advisers inspected serve either as the primary or a sub-adviser to a U.S. registered mutual fund. Their role in the fund investment management process ranges from producing a list of recommended securities which is sent to the primary adviser located in the U.S. -- to making the final decisions concerning what securities a fund should purchase or sell and entering the orders for the fund with virtually no oversight by a U.S. based adviser. * The ability to conduct joint inspections and share inspection information is extremely important because of the organizational structure of multi-national investment advisory firms. These firms usually have subsidiaries or offices located in many countries and have created holding company structures which could facilitate a variety of abusive investment schemes. Conducting inspections country by country without a sharing of information might well result in any such schemes going undetected. * Most of the joint inspections the staff has conducted have found problems that were resolved through the use of deficiency letters. * The staff has found that there is a substantial overlap in the regulatory concerns related to investment advisers by regulators in these countries. Enforcement: * RUSS-INVEST was founded in 1992 and was licensed by the Russian government as a voucher investment fund, a type of entity created as part of Russia's privatization process. The Fund sold its shares to Russian investors in exchange for Russian privatization vouchers or cash, and it invested in the stock of Russian companies and Russian government securities. * On June 8, 1995, the Fund placed a half-page advertisement in The New York Times. The ad identified RUSS- INVEST as Russia's largest voucher investment fund, with $35 million in claimed share value. The ad solicited readers to call the Fund for additional information or to fax orders to buy and sell its shares. It also supplied telephone numbers in Russia and the United States for readers to use to respond. * In the next month, the SEC instituted an administrative proceeding against RUSS-INVEST. We took the position that the Fund had made a public offering of securities in the United States but did not register the offering with the Commission or register itself as an investment company. In a settled action, the Fund consented to an SEC order to cease and desist from further violations of the registration provisions. Conclusion As you can see, at home and abroad, the SEC is steadfastly continuing its mission to protect investors.