With Fidelity Investments telling U.S. clients who live outside the U.S. that they can no longer buy or trade mutual funds in their brokerage accounts as of Aug. 1, what other moves might lie ahead as mutual fund providers respond to global regulatory changes?
In a recent letter to overseas clients, originally outlined in TheWall Street Journal, Fidelity said the prohibition would apply to both Fidelity and non-Fidelity mutual funds, and to exchanges between funds. However, account holders will still be permitted to reinvest dividends in additional shares of a fund.
Our lead story by Adrienne M. Baker, a partner at Dechert, an international law firm, says that U.S. mutual funds might also be tempted to restrict sales to non-U.S. clients in light of the U.S. Foreign Account Tax Compliance Act, which took effect on July 1 and imposes an array of new compliance obligations on U.S. mutual funds.
Baker writes: "Signed into law on March 18, 2010, as part of the Hiring Incentives to Restore Employment Act (the HIRE Act), FATCA's primary goal is to combat tax evasion by U.S. taxpayers who fail to report income from overseas investments. To this end, FATCA imposes stringent due diligence, reporting and withholding obligations on "foreign financial institutions" (FFIs). Certain other non-U.S. entities that derive largely passive, investment type income (passive non-financial foreign entities or passive NFFEs) must disclose direct or indirect substantial U.S. owners. Enforcement of this new tax compliance regime, however, falls primarily upon U.S. mutual funds and other providers of U.S. investment products."
In other words, mutual fund and ETF providers may be forced to become more conservative in the wake of the U.S. Foreign Account Tax Compliance Act and similar regulatory developments abroad.
From an operations perspective, this will spur new systems requirements for mutual funds, such as a push to identify shareholders and code accounts in greater detail and eventually classify a wider array of payments for withholding to foreign holders. Tax reporting obligations will also expand, Baker predicts.