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