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Committee releases recommendations on mutual funds

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The Committee on Capital Markets Regulation, an independent research organisation dedicated to improving the regulation of US capital markets, has released a set of recommendations made

The Committee on Capital Markets Regulation, an independent research organisation dedicated to improving the regulation of US capital markets, has released a set of recommendations made by Professor John C. Coates of Harvard Law School.

His recommendations and accompanying study focus on tax and regulatory reforms for the domestic mutual fund industry.

In 2007, US mutual funds held more stock in US companies than did either individuals or any other type of financial institution for the first time. The committee says that given the increasing importance of US mutual funds for individuals and the global economy, several changes are needed to ensure the industry’s continued growth and long-term stability.

It says most Americans invest through mutual funds and US tax policy imposes unjustified burdens on these investment vehicles. Further, although the US mutual fund industry continues to be the world’s largest, its growth-rate now lags behind domestic and foreign competitors.

Professor Coates’ comparison of US and EU tax and securities laws governing mutual funds reveals key features of the US regime that are anti-competitive.

Harvard Professor Hal S. Scott, the committee’s president and director, says: "Compared to EU counterparts, US mutual funds are taxed less favourably and regulated less intelligently. The 70-year-old structure of US regulation, unlike the more modernized EU system, makes the success of US mutual funds dependent on the resources, responsiveness, and flexibility of an under-funded, under-resourced, and out-dated SEC."

The study demonstrates that despite tight regulatory constraints in the EU, competitive pressures have forced supervisors in the EU to be more flexible in adopting implementing regulations – unlike their SEC counterparts for whom flexibility is curtailed by both regulatory structure and historical practice.

Professor Coates seeks to correct US taxation of mutual funds by bringing it into line with the tax regime for collective investments in other developed nations.

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