ADB urges quick passage of revised law on mutual funds

The Asian Development Bank is seeking the immediate passage of the Revised Investment Company Act (RICA), which will replace the law currently governing mutual funds, to spur the growth of the capital market.

The ADB said the present mutual fund law or the Investment Company Act (ICA), which is based on the then existing US Investment Company Act of 1940, is deemed restrictive and not responsive to the needs of the industry.

"Given the serious limitation of the ICA, there is an urgent need to enact the RICA in order to modernize the regulatory framework for investment companies in line with international best practice to ensure investor protection and increase the supply of investment funds," the ADB said.

One provision under the law that is deemed overly restrictive is that all members of the boards of investment companies must be Filipino citizens, effectively preventing foreign participation in mutual fund firms organized in the Philippines.

The minimum paid-up capital requirement of P500,000 under ICA is also deemed too low. Likewise, investment companies are allowed to engage in direct lending despite potential conflict of interest and abuses.

The ADB believes that the RICA would allow greater competition and greater market entry by removing the requirement that all board directors for all mutual funds must be non-foreign, and raising the minimum paid-up capital requirement for mutual fund companies significantly to ensure their financial viability.

It is also seeking the increase of penalties for violation of certain provisions of the mutual fund law and the establishment of standards to avoid potential conflicts of interest and abuses.

Corporate governance of investment companies, according to the ADB,. Must also be improved by strengthening the fiduciary obligations of the board of directors with respect to management and the performance of quasi-regulatory compliance, including the application of rules and regulations for the safekeeping and the valuation of fund assets.

Mutual funds bring together multiple investors to form pools of investible funds that afford individual stockholders the same economical access to capital markets as larger and wealthy investors. The pooled funds are then invested by professional fund managers in various securities such as stocks, government securities and commercial papers.

The RICA is aimed at promoting the growth and development of the mutual fund industry which is miniscule compared to other markets overseas. It is also aimed at further safeguarding the interest of the investing public.

Under the proposed RICA, an investment company is required to maintain a minimum paid-up capital of P50 million compared with the existing P500,000 capital requirement. There is an added provision that the initial paid-up capital cannot be withdrawn for a period of one year following registration. This is to discourage so-called "fly-by-night operators" from establishing mutual funds.

The RICA now allows foreigners to gain representation in funds that they may establish in the Philippines.

Although the Philippine mutual fund industry grew significantly from P100 million in 1991 to P11.6 billion in 2001, it still lags behind its Asian neighbors in terms of the number of funds and total assets under management.