Mutual funds see no big regulatory threat

LUXEMBOURG Wed Mar 18, 2009 10:37am EDT

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LUXEMBOURG (Reuters) - Mutual funds are quietly breathing a sigh of relief they are escaping a regulatory backlash from the credit crunch, while greater hedge fund supervision is even welcomed by some in the industry.

Delegates at the Reuters Funds Summit in Luxembourg say major regulatory reforms in the pipeline for bank capital and credit rating agencies won't be replicated in the world's $18 trillion mutual funds sector.

"A mutual fund has broadly done what it said on the tin. The industry has reflected the reality of the market," said Noel Fessey, managing director of Schroder Investment Management.

"The mutual funds industry has no mis-selling case to answer. Regulators are under political pressure to demonstrate they are doing their jobs. I don't think they are going about that, from a mutual fund perspective, in an unduly aggressive or reactionary way," Fessey said.

Global efforts underway by the G20 group of nations to reform how financial markets are regulated are only targeting the smaller $1.4 trillion hedge fund sector.

"I don't see any big threats out there," said Kathleen Hughes, head of liquidity at J.P. Morgan Asset Management in Europe.

A U.S. standard known as Rule 287 is being changed to stop another reserve fund from "breaking the buck": when the net value of a fund is worth less than what was paid into it.

Europe did not have a similar problem with its money funds, Hughes said.

TWEAKS NOT RADICAL CHANGE

Some changes are nevertheless expected.

The Madoff Ponzi scheme funds fraud in the United States led to losses in Europe which triggered a closer look at the role of custodians and depositories for funds in Europe.

The European Union has just adopted a major reform of its UCITS mutual funds rules which cover most funds sold to small investors.

Industry officials don't see the credit crunch triggering calls for a radical overhaul of the framework.

"I don't expect fundamental change to UCITS ... there is not going to be a spill-over effect," said Peter de Proft, director general of industry body EFAMA.

It requires mutual funds to give a clear, simple statement to retail investors about what they are buying and Amin Rajan, chief executive of Create Research believes such a document will be required for institutional customers as well.

Rajan said it was inevitable that regulators in Europe will have to follow their U.S. counterparts and offer mutual fund managers immunity from class action lawsuits.

This would allow the managers to give investment advice to customers of defined contribution plans, seen by governments as the main tool to wean people off unaffordable state pensions.

"I don't think regulation will be the answer in the long term. You have got to be careful of unintended consequences. One size fits all does not really fly," Rajan said.

New European rules to stamp down on conflicts of interest among distributors of products to ensure real choice for investors are also expected, Rajan said.

HEDGE FUNDS

But one part of the funds industry will face a major shift in regulation -- the hedge funds.

The European Union's executive European Commission will propose a draft law on April 21 that is expected to oblige hedge funds to register in the EU and supply data to regulators about their exposures in a bid to make broader markets safer.

The industry has anticipated the move for many months and some hedge funds even see a silver lining by making the sector more trustworthy and persuade regulators to allow it to offer products to retail investors.

"I really think hedge funds should be regulated. Bring it on," Ken Kinsey-Quick, head of multi-manager at Thames River Capital, told the Reuters Fund Summit.

"People have not been able to get access to hedge funds. Will it increase costs? Most certainly, but that is a price you have got to pay. The hedge funds will be merging with the UCITS world at some stage," Quick said.

(Editing by Rupert Winchester)

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