The main ways in which the cross-border marketing of CIS occurs is by direct marketing of foreign funds and the use of foreign advisers or fund managers by domestic CIS. A number of alternative fund structures have also been developed by fund managers over recent years to overcome some of the more onerous legal, regulatory and other restrictions which have been imposed on operators that wish to market CIS outside their jurisdictions.

In addition, there are some multilateral agreements which have facilitated cross border activity, such as the UCITS Directive, which applies to certain schemes in countries that are members of the European Union ("EU"). Where there is no such multilateral agreement in place, and where there are restrictions that prevent CIS being marketed into foreign jurisdictions, CIS operators may face a number of obstacles.

Current cross-border activities include:

The most straightforward way to market funds in a jurisdiction outside a CIS home jurisdiction is to be able to directly market the CIS to investors in a foreign country. Most jurisdictions at least, ensure that a foreign regulatory regime will provide the same or similar investor protection mechanisms as those provided by its own regulatory regime. In addition, the marketing or sale of CIS units is generally subject to various regulatory and legal conditions or restrictions.

There is an increasing demand by the providers of advisory services and their clients for services to be offered and provided across national borders. Cross-border activity may occur where a domestic CIS manager delegates certain of its functions and duties, or seeks assistance from a third party, such as an adviser or fund manager in a foreign jurisdiction. An organisation wishing to offer or provide services in another jurisdiction outside the home jurisdiction could do so by way of establishing a subsidiary or by providing services without any physical presence in the foreign jurisdiction. The choice may depend on many factors including the relationship between the home and the foreign regulatory authorities, and legal restrictions on managers in a foreign jurisdiction imposed by a regulatory authority.

Co-operation is important in this context as a home regulatory authority may be able to provide assistance to the foreign regulator in assessing the suitability of the adviser and its arrangements with the domestic CIS manager and the degree of compliance with the law of the home regulatory authority.

There are also a number of other ways in which cross-border activity can occur, which do not necessarily require substantial regulatory involvement by the home or foreign regulatory authority in terms of additional costs and resources.

These types of funds generally operate cross borders by establishing structures whereby a fund can invest a percentage or all of its assets in a foreign fund, or in a selection of foreign funds, without actually restructuring itself as a domestic fund. The structure of these funds assist CIS operators in overcoming some difficulties that for taxation, cultural and bureaucratic reasons, investors may tend to prefer investing in local funds, rather than investing directly in foreign funds. In this sense, they are often considered as marketing tools to promote investment in foreign funds.

The Working Group has collated certain statistical information in relation to cross border activity of CIS, which is in the Appendix to this Discussion Paper. The statistics were provided in response to the following four questions:

(a) Direct Marketing of Foreign Funds:

It is apparent that the current degree of cross-border activity varies considerably from jurisdiction to jurisdiction. For example, in Hong Kong and Switzerland, foreign CIS outnumber domestic CIS. Hong Kong may, subject to local offering requirements, accept any foreign CIS that it considers offers substantially equivalent investor protection to that available in Hong Kong. In comparison, Canada, the US and Mexico have virtually no foreign CIS at all. In the case of the US, only 19 foreign funds, mainly from Canada, have been authorised in the US, the last being in 1973. In 1994, Australia liberalised its policy on foreign CIS, but at present, there are only a few foreign CIS being marketed in Australia.

Over recent years the EU member countries have had an increasing amount of cross-border activity since the introduction of the UCITS Directive on CIS which seeks to harmonise the structure of certain CIS (UCITS) throughout EU member states and to remove barriers to the free movement of capital among them. It is fairly straightforward from an administrative point of view, for a UCITS to then sell its shares or units throughout the EU. It is generally only subject to compliance with certain conditions mainly in relation to notification and observance of the marketing and advertising rules of other member states. This has been a major factor in the rapid development in countries such as Luxembourg, as centres for off shore funds. There is much less cross-border activity for non-UCITS schemes in these member countries.

The extent to which foreign advisers or managers provide assistance to domestic CIS varies widely, although much depends on how one defines "management" or "advice". In many countries, such as Australia, Switzerland and EU countries, the management company must be a domestic entity under the control of the home regulatory authority. However, a CIS may also use external investment advisers or delegate investment responsibility, provided that the ultimate liability of the management company is not affected or that primary regulation of the home regulatory authority is not diminished.

Subject to this, the extent of involvement of the regulatory authority in the appointment of external advisers varies from the need for prior approval (France and Italy), to none, apart from disclosure (Australia, Germany, Luxembourg, Netherlands).

There are a number of multi-national arrangements covering cross-border provision of advisory services. These include the second European Banking Directive which recognises and facilitates cross-border advisory services among EU members, and the Financial Services Directive (FSD) (effective January 1996) where advisory activities are considered ancillary services under the Directive.

Although there is a significant amount of cross-border marketing of CIS, the Working Group has identified a number of impediments which at present discourage or create obstacles to cross-border activity. An effective and profitable CIS will therefore require extensive attention to the regulatory and legal issues governing cross-border transactions.

Whilst securities regulators authorities do not deal directly with taxation issues, domestic taxation laws can generally affect cross-border marketing of funds. Although taxation issues can be complex and the tax laws are often subject to frequent amendment, they may be an important consideration for a foreign fund manager as to the practical ability for a fund to be marketed in another jurisdiction.

Similarly, whilst CIS operators may consider that the imposition of trade barriers by some jurisdictions is an issue which underlies cross-border activity and affects distribution of CIS in foreign jurisdictions, the jurisdiction itself often views trade barriers as an appropriate part of domestic legislation which protects the interests of domestic investors and the local business community.

Whilst regulatory authorities in most countries have the power to recognise foreign CIS, almost all jurisdictions have legislation which at the very least, prohibits marketing of foreign CIS unless there is comparable level of investor protection in the foreign regulatory regime. Other jurisdictions have very restrictive laws in relation to foreign CIS which makes it virtually impossible from a practical perspective to register or approve a foreign CIS.

For example, in Spain, no non-EU country has yet satisfied the regulatory authority that it has comparable investor protection.

US requirements provide that a foreign fund can be registered only if the SEC can enforce its regulatory requirements against it and that authorisation is consistent with public interest and the protection of investors. As a practical matter, this means that the SEC looks to the organisation, structure and operations of the foreign CIS to determine if it complies with the Investment Company Act, and if it would be feasible for the SEC to take enforcement action against the foreign CIS for any failure to comply with the Act. Because foreign regulatory systems differ from the requirements of the Investment Company Act, to date, most foreign CIS have been unwilling or unable to restructure themselves to conform with the Investment Company Act. In addition, any issuer offering its shares in the US would be required to comply with the securities laws of the various states in which it made offers or sales as well as with the federal securities laws.

(ii) Investigations of CIS by Foreign Regulatory Authorities:

Jurisdictions such as Canada (Ontario), France, Germany, Italy, Japan, Luxembourg, Mexico, Spain and Sweden all have legal barriers to foreign regulatory authorities entering their jurisdiction and conducting investigations. It is common in many countries such as Hong Kong, where although there are no legal impediments to a foreign regulatory authority conducting investigations, the foreign regulatory authority should seek the permission of the SFC prior to conducting the investigation. In the Netherlands, a foreign regulator is permitted to participate in an investigation conducted by the Dutch regulator on behalf of that foreign regulator. With respect to the ability of foreign regulatory authorities to enter the US to conduct an inspection, there are no legal barriers, apart from notice to the US Justice Department.

However, there are some jurisdictions that prohibit a foreign regulatory authority from conducting an investigation or surveillance of a foreign CIS in its jurisdiction. For example, in Luxembourg and Switzerland, a foreign regulatory authority is not allowed to conduct either alone or in association with the home regulatory authority, investigations or inspections. In France and Japan, investigations by foreign regulatory authorities of CIS are also prohibited. In Australia, formal enquiries by foreign regulators may only be conducted through mutual assistance legislation.

There may also be a restriction upon a regulatory authority that an investigation in the foreign jurisdiction can only be done with the consent of the fund manager or relevant person being investigated in that foreign jurisdiction. In Canada (Ontario), a foreign regulatory authority can enter Ontario and conduct an investigation only with the co-operation of the Ontario resident who possesses the relevant information. If that person refuses to provide information voluntarily, the foreign regulatory authority will be unable to investigate unless it enlists the assistance of the OSC.

(iii) Surveillance or routine inspections of CIS by Foreign Regulatory Authorities:

In some jurisdictions surveillance by a foreign regulatory authority will only be permitted if it is done in conjunction with the home regulatory authority. The UK will permit a joint inspection where the foreign regulatory authority has a clearly identifiable interest. In other jurisdictions, such as Germany, there must be an reciprocal agreement in place, for a foreign regulatory authority to be able to conduct an investigation in the home jurisdiction.

In other jurisdictions, surveillance by a foreign regulatory authority does not require permission from the home regulatory authority. For instance, the US does not require a foreign regulatory authority to obtain permission from the SEC to conduct a surveillance of a regulated entity. The foreign regulatory authority is required to provide notice of the surveillance to the US Justice Department, which then notifies the US State Department.

The issues described above in relation to the ability of a foreign regulatory authority to conduct an investigation or surveillance of a CIS in a home jurisdiction, are also linked to sovereignty issues. If CIS are to be regulated by the home regulatory authority where the CIS is based, rather than by the foreign regulatory authority, the question arises as to whether the foreign regulatory authority should be permitted to enter into another jurisdiction to conduct surveillances or inspections of a fund, in particular without the presence of the other regulatory authority. Regulatory authorities are therefore faced with balancing sovereignty concerns with the need to develop reciprocal mechanisms to facilitate cross border activity and the ability to conduct adequate oversight.

Sovereignty issues may for example, arise in circumstances where foreign regulatory authorities may wish to conduct an inspection or surveillance of a CIS where they are perhaps interested in looking at specific issues relating to the fund, which may not be of interest, or considered to be inappropriate by the home regulatory authority. In some jurisdictions, this problem is partly overcome by the home regulatory authority allowing the foreign regulatory authority to inspect the CIS, provided the home regulatory authority is also present, or by allowing the foreign regulatory authority to view relevant documents at the home regulatory authority's premises.

As the concept of sovereignty is an integral one to all jurisdictions, it may be difficult for regulatory authorities to supervise the activities of a fund marketed or sold in another jurisdiction.

Domestic confidentiality laws can be important legal and regulatory issues as regulatory authorities are often prohibited from releasing confidential information (except in certain circumstances usually set out in domestic legislation), in relation to providing relevant information on a CIS fund manager or adviser. For example, in Australia, there are domestic laws (and case law) which prohibit the release of confidential information unless specific conditions are satisfied.

As the concept of sovereignty is an integral one to all jurisdictions, it may be difficult for regulatory authorities to supervise the activities of a fund marketed or sold in another jurisdiction.

(b) Other factors which can affect cross-border activity:

One issue that regulatory authorities should resolve is how to regulate effectively with limited resources. Taking a proactive approach to developing regulatory mechanisms for improving cross border oversight ultimately should facilitate efficient management of these resources.

Most regulatory authorities have implemented some information exchange processes with other regulatory authorities in order to promote co-operation and efficiency. This also applies to jurisdictions, such as Australia and the UK, which offer mutual assistance in investigative activity and the collection of evidence on behalf of a foreign jurisdiction.

(ii) Recovery of losses:

A consideration for many investors in deciding whether to invest in a foreign fund is their ability, or lack thereof, to recover any monies for losses incurred by those funds. Whilst this is an issue which primarily relates to investor protection, it may be of concern to CIS operators who wish to market CIS outside their home jurisdiction.

It may not be that significant in countries such as Australia, where there is domestic legislation which provides that a promoter of a foreign CIS must demonstrate to the regulator that either:

(a) there is an arrangement or understanding for the recognition and enforcement of a judgment in an Australian Court in that foreign jurisdiction, or that there are regulatory requirements that facilitate the recovery by an Australian investor of any money owing in foreign jurisdictions; or

(b) that it will comply with all the provisions of the Australian Corporations Law, including registration of companies.

(iii) Cultural Issues:

Another issue which may be an impediment to marketing schemes across borders, are the cultural barriers which could detract from a foreign fund's attractiveness to domestic investors. That is, investors in one jurisdiction may not necessarily be comfortable with an investment vehicle that is incorporated under a foreign law and with a structure that may be unfamiliar to them. To a certain extent, the master-feeder fund structure overcomes this problem as the feeder fund which is marketed domestically will be tailored to meet the needs of domestic investors and the regulatory regime.

(4) Conclusion:

It is evident that investment in foreign markets has increased in the past decade, although no regulated country will permit direct marketing of funds without imposing minimal restrictions and conditions relating to protection of domestic consumer standards. Regulatory authorities have in the past largely regulated such activity by establishing and enforcing a legislative regime which, by its nature, inhibits such activity, or alternatively, promotes the attractiveness of investment in domestic funds in preference to foreign funds.