SEC norms hit NRI investments

Peter Arckal, TNN, Mar 6, 2010, 02.37am IST

MUMBAI: The tightening of compliance norms by US regulator Securities Exchange Commission (SEC) may force foreign financial companies in India with operations in the US to revisit their business strategy for NRIs based in that country. 

According to analysts, the norms, which come into effect on March 12, could increase costs for financial services companies. The amended rule will provide SEC and the public better information about the custodial practices of registered investment advisers. 

In light of these regulations, ING Vysya has discontinued securities services -- portfolio management scheme and MF investment -- for NRIs who are ‘‘designated US persons''. In a letter to an NRI based in the US, the bank said: ‘‘Various US securities and tax regulations relating to the provision of certain securities services have an extraterritorial reach. As a result, ING Vysya Bank (IVBL), too, is required to comply with procedures specifically applicable to designated US persons to provide these services. This vastly increases the cost of providing these services. As a result, IVBL has, based on an economic strategic and risk perspective, decided to discontinue providing securities activities to designated US persons.'' 

The bank, however, will continue to provide other services to NRIs based in the US. ‘‘Designated persons'' are generally defined as a natural person, residing in the US or any entity organised or incorporated under the laws of the US. US citizens living aboard may also be deemed US persons under certain rules. When contacted by TOI, an ING Vysya spokeswoman confirmed having discontinued securities services for designated US persons, including NRIs. ING Vysya said its focus on ‘‘NRI business has not been dominated by US customers and, hence, a very small number of customers are impacted''. 

SEC has made amendments to Investment Advisers Act of 1940 relating to custody of client assets to provide additional safeguards for investors. The amendments come after a review by SEC following the Madoff scandal and several Ponzi schemes involving misappropriation of customer assets. 

However, it's not immediately clear whether other foreign financial services companies, and as a result a large number of NRIs, would also be impacted by the SEC ruling. Several foreign financial services companies did not reply to TOI's email queries on whether the new norms would impact them or whether securities servicing costs would go up. 

However, a Franklin Templeton spokesman said: ‘‘We don't expect this development to have any impact on us as we do not distribute our India-domiciled products in the US. We have a US-domiciled Indian equity fund that US residents can access.'' 
Analysts said the SEC stipulations would increase costs. A source said: ‘‘Look, what did SOX (Sarbanes-Oxley Act of 2002 enacted as a reaction to scandals, including Enron and WorldCom) do? It made IT guys richer and banks poorer. The SEC norms will make auditors richer and banks poorer.'' Source: Economic Times