INTRODUCTION:

The previous chapters in this Paper outlined the types of cross-border activity of CIS and the extent to which such activity currently occurs, given legal, regulatory and other restrictions. The purpose of this chapter is to identify a strategy for active facilitation of cross-border marketing of CIS whilst ensuring that there are adequate regulatory safeguards to protect investors as well as local markets.

The level of cross-border activity indicates that it may be possible for CIS to be directly marketed into foreign jurisdictions. The adoption by IOSCO of the Principles (and its publication) provides a strong foundation for CIS promoters and regulatory authorities to pursue further multilateral and bilateral arrangements on their own initiative in relation to mutual recognition of CIS. Nevertheless, it would be desirable for such arrangements to be based on a consistent approach which in time, would contribute to regulatory harmonisation and multilateral arrangements.

It is suggested that a more co-ordinated approach to facilitating cross-border activity would be to use the Principles as the basis for a standardised approach by regulatory authorities. A framework for an agreement for the recognition of foreign CIS and foreign advisers has been drafted by the Working Group, which would apply to CIS that come within the Principles and that meet any additional conditions relating to distribution. The draft agreement also encompasses mechanisms whereby information relating to CIS and their operators can be readily exchanged amongst regulatory authorities.

This draft agreement is based on the assumption that effective and efficient information exchange mechanisms amongst regulatory authorities will facilitate cross-border activity whilst also accommodating the differences in regulatory regimes.

The advantage in adopting this strategy is that it will assist regulatory authorities in obtaining information on a CIS, its operators and advisers, prior and during the marketing or distribution of a CIS in a foreign jurisdiction.

Whilst this agreement may initially be adopted as an appropriate framework for a bilateral arrangement for co-operation and information exchange, over time it is likely to evolve into a multilateral approach by regulatory authorities.

The terms in the draft Agreement are defined in the Glossary of Terms of the Discussion Paper, and may be incorporated in the Agreement.

MUTUAL RECOGNITION AGREEMENT

1. Object of the Agreement between Regulatory Authorities ("the parties"):

1.1 Distribution of a Foreign Collective Investment Scheme ("CIS"): 1.1.1 The object of this Agreement is to permit cross-border marketing of CIS in accordance with a simplified administrative procedure, coupled with arrangements for communication of information and co-operation between regulatory authorities, with a view to ensuring proper supervision of the CIS marketed under this procedure and in maintaining investor confidence.

1.1.2 It would be the responsibility of the parties to specify the scope of the Agreement, together with the minimum standards permitted for operation of the CIS and any additional conditions relating to distribution, but it is intended that it should apply to those CIS that meet the IOSCO Principles.

1.1.3 This Agreement may be initially a "bilateral" agreement, but could also be extended to include other regulatory authorities, thus becoming multilateral.

1.2 Provision of Services by a Foreign Entity to a Domestic CIS: The Agreement could also cover:

1.2.1 Delegation of management or custodian activity by a domestic CIS in favour of an entity coming under the authority of a regulatory authority who is party to the Agreement.

1.2.2 Delegation of certain responsibilities by a CIS marketed in a foreign jurisdiction to an entity coming under a third authority who is not a party to the Agreement.

2. How the Agreement would operate:

2.1 Where CIS units are distributed to the general public: 2.1.1 The Agreement should include procedures for the exchange of information between the home regulatory authority and the foreign regulatory authority. A certificate of registration or authorisation status of the CIS should be issued by the home regulatory authority and taken into account by the foreign regulatory authority in permitting the CIS to distribute its products to the public in the foreign jurisdiction.

2.1.2 The Agreement should state that any CIS must have a local licensed representative who would be responsible for:

® financial services to the investor (including subscriptions, redemptions and payment of dividends);

® information circulated to investors; and

® liaison with the management company and timely correspondence with the foreign regulatory authority.

2.2 Where CIS units are purchased by professional investors: Where CIS are purchased by professional investors or fund managers, the provisions of this Agreement concerning the requirements for information and co-operation may be less strict. In terms of procedure, investment in CIS may be unrestricted provided they were approved by the home regulatory authority in accordance with the provisions in the IOSCO Principles.

2.3 Cross-border delegation of Management Services:

2.3.1 Where the Agreement includes provision of services by a foreign entity to a domestic CIS, the regulatory authority of the entity by delegation should:

® advise the regulatory authority of the CIS of any decision made with regard to the foreign entity (including decisions relating to investigations or administrative or criminal sanctions);

® provide, if so requested by the regulatory authority of the CIS, any information necessary for supervision of the CIS by the latter, when such information comes under its direct jurisdiction; and

® use its best efforts to provide information relating to the foreign entity, where it does not come under its direct jurisdiction.

2.3.2 Where the services are provided in a foreign jurisdiction not a party to the Agreement:

® the guiding principle should be that the CIS shall remain responsible for the normal operation of the activity delegated to an external entity. The CIS must therefore possess any information which would satisfy a request from the home regulatory authority, or from the foreign regulatory authority in the country of distribution; and

® the home regulatory authority of the CIS shall use its best efforts to provide any information relating to an entity, operating under delegation, whether it is situated in the same jurisdiction, while at the same time coming under a different regulatory authority, or whether it is situated in another jurisdiction and therefore come under a third authority who is not a party to the Agreement.

3. Co-operation with regard to exchange of information: As a general rule, the CIS itself, should be responsible for providing any information requested by the foreign regulatory authority. The Agreement should establish the role of the CIS as well as set out the mutual responsibilities of the parties to the Agreement.

3.1 Information to be provided by the CIS: 3.1.1 Initial Information

The CIS would be expected to notify its regulatory authority as to the countries in which it distributes its products and provide to the foreign regulatory authority, prior to its introduction into that jurisdiction, material comprising:

® the certificate of registration or authorisation status from its home regulatory authority;

® the prospectus of the CIS drawn up in the language as required by the foreign regulatory authority and containing such information as required by that authority;

® a commitment, in the form required by the foreign regulatory authority, to comply with the regulations of the foreign regulatory authority regarding the marketing of units and the information to be provided to investors;

® the identity of the local licensed representative (responsible for financial services) who would provide information relating to the CIS to foreign investors; and

l any other information that may be required by the foreign regulatory authority from funds in its own jurisdiction.

3.1.2 Subsequent information

The CIS should also provide to the foreign regulatory authority:

® any statutory periodical information or other reports drawn up in the language as required by the foreign regulatory authority;

® any information relating to material changes affecting the operation of the CIS;

® any information which may have financial consequences for investors in the foreign jurisdiction;

® any information or literature to be distributed to investors in the foreign jurisdiction;

® any information that the foreign regulatory authority deems necessary for its proper information and for the protection of the interests of investors; and

® any suspension of dealing must be immediately notified to the foreign regulatory authority.

3.2 Mutual Responsibilities of the Parties: While supervision of the CIS should be essentially the responsibility of the home regulatory authority, the foreign regulatory authority should be responsible for supervision of the conditions of marketing of the CIS in its own jurisdiction.

3.2.1 Responsibility of the Home Regulatory Authority

Prior to a CIS being distributed in a foreign jurisdiction, the home regulatory authority should issue a certificate of registration to the CIS and confirm such status directly to the foreign regulatory authority upon request.

It should also:

® at all times promptly inform the foreign regulatory authority of any decision made with regard to the CIS or entities coming under its direct authority (including decisions relating to investigations or administrative or criminal sanctions), where such a decision may impact upon the operation of the CIS or the interests of investors in the foreign jurisdiction;

® promptly respond to requests for information from the foreign regulatory authority; and

® immediately notify the foreign regulatory authority of any suspension in dealing.

3.2.2 Responsibility of the Foreign Regulatory Authority

The Foreign Regulatory Authority:

® should authorise the CIS for distribution on the basis of information provided in 3.1.1 above, while restricting supervision to the quality of the local licensed representative and distribution activities;

® may also be responsible for the supervision of the management company and depositary, should they be placed under its authority whilst operating under delegation; and

® should inform the home regulatory authority of any decision made relating to the CIS, or any facts likely to facilitate supervision of the CIS by the home regulatory authority, including suspension of subscriptions and redemptions in the foreign jurisdiction or failure to observe the relevant rules in the foreign jurisdiction.

3.3 Terms of the Co-operation Agreement:

The Agreement should at least comprise of:

® a commitment by the parties to perform the responsibilities set out in 3.2.1 and 3.2.2 above; and

® specific procedures for exchange of information concerning the CIS and its entities at the request of either authority.