Are U.S. Banks Ready to send their mutual fund operations south of the border?
Banks and other managers of mutual funds will have that opportunity if Congress adopts the North American Free Trade Agreement this year.
The trade pact will allow U.S. investment companies to set up shop in Mexico and sell local residents mutual funds made up of Mexican securities.
Mexico is a large and virtually untapped market, according to the Investment Company Institute, the mutual fund trade group backing the trade pact.
Certainly the ramifications of a new market are not lost on major bank mutual fund players like NationsBank Corp.
"There's a lot of opportunity available to us in the investment area if it does pass," said Mark Williamson, senior vice president in charge of mutual funds at the Charlotte, N.C., bank.
"But it would be inappropriate for us to comment on any plans we may have on the drawing board," Mr. Williamson added.
Banks should look carefully, weighing the profit potential before making the plunge, said Charles Hurty, partner in the mutual fund practice at KPMG Peat Marwick. "There may be opportunities, but it will be a challenge to operate in a foreign market."
Smaller banks would probably do well to solidify their U.S. operations before serving up South American securities, Mr. Hurty said.
Securities regulators are frustrated by an exemption that banks enjoy under federal securities law.
Investment companies affiliated with banks must register with the Securities and Exchange Commission to sell mutual funds to the public. But unlike fund companies, banks do not have to register as investment advisers to manage private money in trust accounts.
Without access to this side of the business, SEC examiners find it harder to spot shady activities and have less enforcement oversight, said Thomas S. Harman, associate director of the SEC's office of chief counsel.
"We really have only half the picture when we do a mutual fund inspection," Mr. Harman told bankers at a recent mutual fund conference.
Mr. Harman said the SEC would have a full picture if banks that advise mutual funds register under the Investment Advisors Act of 1940. This is required for mainstream fund companies.
"Typically, when we inspect a fund organization, we look at the mutual fund and the non-mutual-fund activities," Mr. Harman said. "We don't have that ability" in the case of banks.
Despite this impediment, the SEC has significant oversight of bank mutual fund operations though the Securities Act of 1933 and the Securities Exchange Act of 1934, Mr. Harman said.
Because the provisions of these acts are extensive, the SEC sees no reason to join other regulators in issuing guidelines for banks in the mutual fund business.
"I don't think you'll see us jumping to do that in the next few months," Mr. Harman said.