CONFERENCE CALL: SEC, FIRMS TANGLE OVER OFFSHORE SALES

Offshore sales via the Internet are creating a whole new set of regulatory headaches for firms like Charles Schwab & Co.

In order to avoid registering their offshore activities with the Securities and Exchange Commission, Schwab and others must seek to “guard against” sales to U.S. residents by screening for U.S. mailing addresses and other red flags.

That’s according to the SEC’s new “guiding principles” on Web sales, which were outlined by commission officials at a conference hosted by the Investment Company Institute earlier this month. The event, held in Bermuda, drew 475 attendees.

The rapid growth of technology, especially the increased use of the Internet to sell stocks and mutual funds, is giving money managers new ways to increase sales and better serve their customers.

But new technology — combined with mergers and acquisitions and global expansion by many investment managers — is keeping the SEC on its toes, officials said.

“Technology increases expectations,” said Barry P. Barbash, head of the SEC’s Division of Investment Management. “As investors are given more services, they want more.”

But, he added, if the securities industry doesn’t address the challenges associated with the evolution of technology, “we’re not going to be able to ensure that the promise of that technology won’t become simply an empty dream.”

keep it offshore

The agency’s new World Wide Web guidelines are one attempt to “provide guidance” to companies doing business on the Internet, including those in the fast-growing offshore market. But some firms, such as Schwab, which sells to consumers in Latin America, Europe and Hong Kong via the web, say the guidelines are a bit too stringent.

“They simply capture too much,” said Carl Landauer, a senior corporate counsel at San Francisco-based Schwab.

The SEC, he said, is asking companies to take too many steps to ensure that they are not selling offshore products to U.S. citizens, including obtaining information on prospective customers prior to making a web-based sale and displaying often lengthy disclaimers. The guidelines state the disclaimers should note that offerings are not intended for U.S. residents and list the targeted countries.

What’s more, companies that want to post materials on third-party web sites should also ensure that those sites will avoid sales to U.S. residents. That requirement “creates a great deal of homework,” said Mr. Landauer.

But in the end, said Doug

Scheidt, associate director of the SEC’s Division of Investment Management, “the courts will make the final judgments on the scope of any regulator’s jurisdiction.”

Still, such complaints haven’t always fallen on deaf ears. Mr. Barbash said the agency plans to postpone the scheduled implementa-tion in June of a rule on foreign custody arrangements that some fund companies have complained is unrealistic. It requires fund boards to determine whether foreign custodians can “provide reasonable protection for fund assets.”

“The complaint we’ve heard is our rule is unrealistic because boards can’t come up with enough information to decide whether these depositories are safe,” said Mr. Barbash. But, he added, “you mean to tell me that for all these years you’ve been using these and nobody bothered to find out whether they were safe?”

Mimicking the sec

In the meantime, Mr. Barbash said, the SEC is keeping a close eye on “angst” caused by the flurry of mergers and acquisitions and continued global expansion — including the need to integrate diverse corporate cultures (including compliance policies).

Regulators from around the world, he said, are increasingly working together to address such concerns and create greater consistency from country to country. Many, he predicted, will seek to mimic the SEC’s “active enforcement and inspection program.”

“You’ll see more trending toward what we do at the SEC,” he said. But the prediction raised eyebrows among at least a few of those attending.

“Most Europeans bristle at that concept,” said Beth A. B. Cazalet, compliance director for Lazard Asset Management Ltd. in London. England’s Investment Management Regulatory Organization, she added, “does a bit more monitoring than the SEC does.”

Other non-U.S. attendees said they have a more cooperative relationship with their regulators than the SEC has with the companies it monitors. “The SEC is more feared than supported,” said Martin Vogel, a vice president of Zurich, Switzerland-based Julius Baer Investment Fund Services.