Latin American Capital Markets

138 KAREN GOLDSTEIN ROSSOTTOticularly relevant to mutual funds, which rely on household demand. In the UnitedStates before 1970, high fees and advertising restrictions created an expensive distributionsystem for mutual fund shares. Regulatory flexibility and technology led to thecreation of new, more cost-efficient, and effective distribution channels through mail,direct marketing, and third parties in the form of fund supermarkets. In some countries,technology has provided additional distribution channels for mutual fund shares,such as automatic teller machines and the InternetTechnology has accelerated the trend toward the integration of brokerage, investmentmanagement, insurance, and banking services into single entities or complexes,creating efficiencies through economies of scale and the retention of a customerbase. Through complexes, mutual funds began offering specialized products to appealto different investors, such as those tailored to market capitalization, industry sectors,and foreign markets.Technology has also allowed institutions to operate in locations remotefrom their clients and facilitated cross-border flows, leading to increasing globalizationand easier international portfolio diversification (Gaa and others 2001).Supply FactorsAssets under institutional management in the United States have grown through accessto a vast, integrated economy with a GDP of more than $ 10 trillion. Althoughthe United States consists of 50 separate states with differences in corporate, tax, andsecurities laws, a constitutional prohibition on interference with interstate commerceenables transactions from state to state to flow easily. With the exception of insurancecompanies, state laws have affected institutional investors primarily through stateregistration requirements that have slowly been eliminated in favor of a federal registrationand oversight system. U.S. equity markets, although previously fragmented,now essentially operate as a national market system, which has led to significant improvementsin market operations (U.S. SEC 1994).'' U.S. markets operate through aconsolidated clearance and settlement system and have a sophisticated distributionsystem for mutual fund shares that allows funds to market their shares to parts of thecountry that may be experiencing greater economic prosperity relative to others(Gaa and others 2001).1 ' In 1975, the U.S. Congress mandated a national market system for the U.S. securities markets through the SecuritiesExchange Act of 1934.The purpose of the national market system was to ensure efficient execution of securitiestransactions, fair competition among broker-dealers and markets, and best execution of investors' orders.The marketsestablished a consolidated quotation system and transaction tape and an intermarket trading system to link marketsfor listed securities (U.S. SEC 1994).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub