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investment in the U.S. The specific provisions dictating complete disclosure in

public offerings and the anti-fraud provisions which protect investors in unregis

tered offerings are indications of a strongly regulated fair marketplace which is

attractive to foreign portfolio investors. The availability of financial information

and prompt reporting of changes in financial condition present the foreign investor

with a reasonable basis for portfolio decisions.

The liabilities outlined under U.S.

law to prevent fraud, insider trading, etc., also present the U.S. securities

market in a positive light. The restrictions on credit for portfolio investment do

not inhibit foreign portfolio investors and are also regarded as another example of

strong regulation of the securities market.

Rules of fair practice imposed on the

brokerage community in their relations with portfolio investors also add to the

positive image of the U.S. The Securities and Exchange Commission strengthens

the image of the U.S. as a fair, regulated securities market which enforces its

law against fraud and manipulation. In summary, the provisions of U.S. securi

ties law which detail remedies against fraud provide for disclosure of material

financial information, regulate credit, prevent insider trading, etc., present a

strong positive securities market which is attractive to foreign portfolio capital.

The U.S. is viewed as having the most mature, sophisticated, and fairest securi

ties market in the world.

2. U.S. Law on Expropriation

The U.S. law and policies on freezing and expropriating foreign portfolio

investment is regarded as a strong selling point for attracting foreign portfolio

investment.

In general, the U.S. practice and record in the area of expropria

tion is regarded as better than the rest of the world. Sophisticated foreign port

folio investors have considered the provisions of the Trading with the Enemy Act,

the U.S. record in invoking its provisions, and have concluded that unfair expro

priation is very unlikely in the U.S. The general belief is that rules of interna

tional law and U.S. constitutional limitations will be observed, and thus foreign

portfolio investment here is safer than anywhere else in the world.

Thus the U.S.

is regarded as a sanctuary from expropriation for foreign portfolio investment.

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The most intensely negative factor in the U.S. legal environment which

deters foreign portfolio investment is the disclosure of ownership and exchange

of information provisions of U.S. law. Specifically, the exchange of information

provisions, of the majority of our tax treaties, is of great concern to foreign

portfolio investors. The disclosure of beneficial ownership rules under current

securities law and those proposals for future legislation requiring more extensive

disclosure have an enormously negative impact in deterring foreign portfolio

investment.

The provisions of the regulatory agencies requiring more beneficial

ownership disclosure and the provisions of the Bank Secrecy Act requiring U.S.

financial institutions to maintain extensive records which could be subjected to

public disclosure reinforce the fear of foreign portfolio investors. State law

requiring pre-trial discovery procedures which lead to public disclosure of

assets with U.S. financial institutions are another deterrent factor.

In attempting to understand this negative impact, it must be understood

that most foreign investors' experience with public reporting is much different

from that of the U.S. portfolio investor. The foreign portfolio investor is con

cerned with the avoidance of taxation and confiscation of assets by his home

government. Specifically, in many cases, the foreign investor is not complying

with the provisions of his own country's tax or capital control law. Accordingly,

any U.S. legal requirements which would require disclosure first to the U.S.

Government and ultimately to the investor's home government have an enormous

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U.S. tax on income from portfolio investments is considered a strong

negative factor insofar as it applies to income oriented stock issues and debt

securities. The statutory rate of 30% on income from these types of investments is

considered as a deterrent factor for foreign portfolio investment. More competitive

yields in income stocks and debt securities are available in other markets. To the

extent that U.S. treaties with other countries mitigate this rate of tax on interest and

dividends, the impact of the tax becomes less of a factor in deterring foreign

portfolio investment.

The collection process imposed on U.S. withholding agents

and foreign institutions bound under treaty obligation to collect the U.S. withholding tax is also regarded as a negative factor in the process of investing in the U.S.

securities market.

The costs involved in collection and communications with U.S.

taxing authorities is regarded negatively.

The estate tax applicable to non-resident alien estates is a strong factor in

deterring foreign portfolio investment.

The foreign portfolio investor, if he is

inclined to comply with U.S. law, will form a foreign personal holding company

for the purpose of making investments in the U.S. securities market.

Under

current law, the shares of the personal holding company are exempt from U.S.

estate tax.

Other investors use off-shore trusts and other vehicles, etc.,

Lichtenstein corporations or the Swiss banks, and escape the impact of the U.S.

estate tax altogether. Thus, the withholding tax, the collection process, and

the estate tax applicable to foreign portfolio investments are currently regarded as

negative factors in regard to attracting foreign portfolio investment. Their elimination,

if U.S. policy dictates, could be effective in eliminating barriers to more foreign

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tive industries has not been a major factor in influencing whether or not a

foreign portfolio investor commits his portfolio capital to the U.S. securities

market.

The foreign portfolio investor, in many cases, is not aware of such

restrictions and, when informed of such restrictions, is not deterred from

placing his portfolio in other permissible areas of the U.S. securities market.

As a practical matter, the prohibited percentages, in most instances, are so

high as not to inhibit the pure portfolio investor should he desire to invest in

restrictive industries on a portfolio basis. Thus, in generally speaking, the

foreign portfolio investor is not influenced in his decision to invest or not to

invest in the U.S. securities market by the existence of restrictions on invest

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The major areas of state law have not been a factor in influencing foreign

portfolio investors to commit capital to the U.S. securities market or in deterring

such capital from the U.S. market.

The majority of foreign portfolio investors

review the provisions of U.S. law rather than state law in evaluating their deci

sion.

Specifically, in the majority of states, non-residents are exempt from

income tax on income from portfolio investments. State securities laws are

basically duplicates of federal remedies provided to investors. Thus, in general,

state law is a neutral factor.

It should be noted pre-trial discovery procedures

used for disclosure purposes are an exception. This aspect, as noted earlier,

is a negative factor.

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