ICAP seeks priority status for RICA bill

The proposed Revised Investment Company Act (RICA) will not only help develop the country’s flegdling capital markets. It will also even the level playing field for the different industry players.

That was the position taken by the Investment Companies Association of the Philippines (ICAP), the recognized voice of the mutual fund industry.

In a position letter to the Department of Finance (DOF) and Congress, ICAP chairman Hector C. de Leon and ICAP president Efren LL. Cruz claims that they have the full support of the Securities and Exchange Commission (SEC) and the Capital Market Development Council (CMDC).

"We would like to enlist your support in asking President Gloria Macapagal-Arroyo to certify the proposed Revised Investment Company Act or RICA as an urgent bill," the ICAP officials begged.

ICAP claims that the RICA helps to level the playing field between mutual funds and other collective investment schemes. That is achievable with the following provisions in the proposed legislation. These are: that foreigners will be allowed to sit in the boards of mutual funds; that mutual funds would continue offering their shares beyond their original authorized capital without the need to comply with the 25-25 rule for applications for capital increase; and, an adoption of a simplified and unified SEC registration process.

However, the ICAP wants a few additions to the RICA or through the regulatory functions of the SEC, the government agency mandated to regulate the mutual fund industry.

These are: requiring mutual funds to incorporate only once and then allowing them to establish as many mutual fund products as they wish, with each mutual fund product being denominated in units and not shares of stock; exemption from reporting the top shareholders of each fund; promotion of funds; promotion of Real Estate Investment Trusts (REIT); expressly allowing banks to sell mutual funds; inclusion of mutual funds in the five years plus one day tax exemption available to bank products under the 1998 CTRP; competitive start up and supervision fees being levied by the SEC; the application of DST based on the authorized shares of mutual funds, and not on shares sold so as to avoid double DST charging; more frequent and computerized selling agent licensing exams with SEC-conducted review sessions; lower initial (currently at P50 million) and subsequent (currently between P20 million to P50 million) fund capitalization requirements; ability to invest nearly 100 percent of net assets in foreign securities; reduction in tax on income from abroad to 20 percent from 32; low capitalization requirement for sub-distributors (i.e. at least P1 million); and inclusion of mutual funds as one of the acceptable investment vehicles under the proposed Private Equity Retirement Account or PERA bill.

Cruz explained that the industry, which has just under $800 million in net assets, pales in comparison to those of its Asian neighbors.

"In addition to helping develop the capital markets, mutual funds also do their share in nation building by contribution to the national coffers.

In 2004 alone, mutual funds either paid or provided taxes and government fees amounting to over P300 million," Cruz said.

The country’s first mutual fund was established in the ’50s. But it collapsed due to a series of scams and the failure of the stock market in ’70s. The original Investment Company Act (ICA) was then passed largely to control the scams plaguing the industry then.

However, it was too restrictive and now obsolete in the face of the many developments in the capital markets that ensued over forty years later.

Meanwhile, other investment schemes like the pre-need industry, variable insurance products, and the unit investment trust funds (UITF) surfaced as alternatives to mutual funds.

These investment schemes enjoy one or a combination of the advantages over the mutual fund industry.

These include the tax advantage afforded by the 1998 Comprehensive Tax Reform Package (CTRP), lower supervision fees; self-administered and therefore more frequent selling agent licensing exams;lower start up fees (incorporation and share registration fees); exemption from documentary stamp taxes (DST); absence of minimum initial and subsequent fund capitalization requirements; absence of minimum capitalization for sub-distributors; ability to invest nearly 100 percent of their net assets in foreign securities; openness to foreign fund sponsors/investors; treatment by regulators of investors as mere passive investors and, therefore, negating the need to report their top investors to their respective regulators and co-investors; and the use of banks for product distribution.

A mutual fund is a savings instrument preferred by small investors. Funds accept as low as P2,000 in initial investments (in the case of the GSIS Kanabukasan Fund) or the standard initial amount of between P5,000 to P10,000.