Investment Dealers Association of CanadA
Association Canadienne Des Courtiers en Valeurs MobiliÈres
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Dear Mr. Katz:
Re: Request for Comments on Exemption from Registration for Foreign Securities to be Offered and Sold to U.S. Participants in Certain Canadian Tax-Deferred Retirement Savings Accounts – File No. S7-10-99
The Investment Dealers Association of Canada (the "IDA"), as the national self-regulatory organization of the Canadian securities industry and the Canadian investment industry’s national association, would like to take this opportunity to express its support of the initiative undertaken by the Commission to develop these proposed rules that would provide relief from the U.S. registration requirements in order to enable Canadians who later move to the United States to continue to manage the assets in their Canadian retirement accounts.
The proposals made by the Commission are consistent with the IDA’s request for exemptive relief under Section 15(a)(2) of the 1934 Act regarding the registration of Canadian broker-dealers with the Commission when such broker-dealers are trading on behalf of or advising individuals resident in the United States with respect to their Canadian retirement accounts. This request was submitted to the Commission on January 7, 1999. We understand that the Commission will be considering this request for exemptive relief shortly and we suggest that it would be most beneficial for the relief and the proposed rules to be implemented simultaneously.
On May 17, 1999 the Joint Securities Industry Committee on Cross-Border Issues (the "Committee") submitted a comment letter on the proposed rules to the Commission. The IDA supports the comments outlined in that letter and wishes to elaborate on some of the points discussed by that Committee as well as some of the additional requests for comment by the Commission.
Additional Contributions to Canadian Retirement Accounts:
The proposed rules plan to exempt sales to a Canadian/U.S. Participant’s retirement account in connection with an exchange or re-allocation of existing Canadian retirement account investments, as well as sales in connection with new investments made with additional contributions to the account. The Commission stated that it "believes that most Canadian/U.S. Participants would not be permitted to make significant additional contributions to their Canadian retirement accounts, because Canadian tax law penalizes contributions greater than a specified percentage of an individual’s Canadian earned income (i.e. income that is earned and taxable in Canada), which an individual residing in the United States ordinarily would not have." The Commission requested comment on whether the proposed exemptions should exclude additional purchases if Participants are capable of making significant additional contributions to their Canadian retirement accounts.
The IDA submits that the proposed exemption should not exclude additional contributions to Canadian retirement accounts. Although it is correct that significant additional contributions to Canadian retirement accounts would subject those Participants to penalties for over-contribution, limiting the proposed rule so that it only applies to sales in connection with the exchange or re-allocation of previous Canadian retirement account investments would not address the needs of many Participants to appropriately manage their money in order to meet their changing investment goals or income needs.
While the issue of additional contributions would rarely be applicable to an individual permanently residing in the U.S., a limit on the exemption to exclude additional contributions does have an impact on individuals who are temporarily resident in the U.S. and for the remainder of the year live in Canada, or those individuals who only move down to the U.S. mid-year. In these circumstances, such individuals have the potential to earn income that is taxable in Canada and therefore increase the permitted amount that the individual may contribute to their retirement account.
The IDA wishes to point out that significant additional contributions may also be possible in limited situations where a Participant wishes to transfer assets from one plan to another or where a Participant withdraws from a pension plan and wishes to transfer the proceeds to a Canadian retirement account. The Commission, in footnote 33 to its Request for Comment paper, recognized that these rollovers or transfers are routine transactions that should not entail registration under the Securities Act. Furthermore, Participants should be able to continue to effectively manage these assets, which are similar to the securities presently in their retirement accounts.
The Commission has proposed conditions that limit the activities of persons relying on the rule in order to prevent the exemption from being used as an avenue for a distribution of securities in the United States beyond the rule’s limited purpose. Consequently, the rule permits that the only updated written offering materials or other materials that could be delivered to a Canadian/U.S. Participant would be those that concern securities already held in the Participant’s retirement account. The Commission requested comment on whether Canadian funds commonly use joint prospectuses or other joint materials to offer and sell securities of several affiliated funds or different classes or series of the same fund, which would result in the participant receiving joint materials that concern both securities held in the participant’s retirement account and securities that are not held in the account.
Canadian mutual fund companies do not prepare a "joint" prospectus but prepare a simplified prospectus, which may in fact be substantially similar to a joint prospectus. This simplified prospectus often pertains to a fund family, usually comprised of a large number of mutual funds and not simply fund specific information pertaining to mutual funds in which the investor has an interest.
As raised by the Commission’s comment request, the IDA submits that the proposed rules should specifically permit persons relying on the rule to deliver this "joint" material. The IDA is aware of the Commission’s concern that abuses could occur leading to distributions of securities beyond the rules’ limited purpose. However, IDA supports the position of the Committee that permitting the mailing of joint prospectuses or other material to Participants would not condition the U.S. market for securities sales and furthermore, the costs of preparing investor-specific prospectuses and other material would prove to be quite substantial and significantly reduce the benefits these rules propose to create. In addition, a joint prospectus provides individuals with the opportunity to compare funds or classes of shares which have different investment objectives or fee structures and Participants should have access to full and complete disclosure in order to make informed decisions.
Restrictions on Resales:
The Commission requested comment on whether a restriction on resales is necessary in order to ensure that unregistered securities sold to Canadian retirement accounts are not later transferred to person in the U.S. who are not Participants.
Although the IDA supports the Committee’s position that such resales are generally unlikely, for greater certainly, the IDA has no objection to a provision restricting resales in the United Securities of securities offered and sold in reliance on the proposed exemptions. The proposed exemptions are welcome initiatives for Canadian broker-dealers and their clients. Consequently, these groups support any measures that will ensure that the proposed exemption is applied legitimately and appropriately and continues to be supported by the Commission as a useful tool for Participants as a means of managing their assets in Canadian retirement accounts.
The proposed rules require the prominent disclosure on offering materials that the securities are not registered with the Commission and may not be offered or sold in the United States unless registered or exempt from registration under the U.S. securities laws. Comment was requested on this disclosure requirement.
The current disclaimer language contained in Canadian prospectuses and offering material relating to mutual funds may not contain the language proposed by the Commission. The disclaimer required by Canadian securities law requires words to the effect:
This simplified prospectus constitutes a public offering of these securities only in those jurisdictions where they be lawfully offered for sale and therein only by persons permitted to sell such securities.
This prominent statement or "legend" would have to be amended to comply with the rule’s disclosure requirements. The Commission suggests that to meet these requirements the issuer, underwriter or broker-dealer may redraft the existing prospectus or other written offering material to add this disclosure statement, or may draft a sticker or supplement containing this disclosure to add to the existing materials. The IDA is of the view that the benefit of such a statement outweighs any of the minimal costs involved in its inclusion.
The Commission requested comment on whether a person relying on the proposed rules should be required to obtain from each Participant who desires to purchase securities offered and sold in reliance on the rules, a written acknowledgement that those securities are not subject to the registration provisions of U.S. securities laws.
The IDA supports the Committee’s position that such written acknowledgement is not necessary. As part of the IDA’s request for exemptive relief under Section 15(a)(2) of the 1934 Act, the Canadian self-regulatory organizations represented on behalf of their Canadian member broker-dealers that the member broker-dealers would disclose to U.S. account holders (at least once annually and any time a new account is opened) that Canadian retirement accounts are not regulated under the securities laws of the United States and member broker-dealers are not subject to the broker dealer regulations of the United States. Furthermore, a recently adopted proposed Amendment to Section 201 of the Uniform Securities Act by the North American Securities Administrators Association (the "NASAA"), permitting Canadian broker-dealers to trade on behalf of owners of Canadian retirement accounts and other self-directed tax advantaged retirement plans, would require under Paragraph (f)(4) that the Canadian broker-dealer to "disclose to its client in the state that the broker-dealer and its agents are not subject to the full regulatory requirements of the Act."
The IDA is of the view that it would be unduly burdensome for Canadian broker-dealers to obtain written acknowledgement from individuals currently residing in the U.S. Therefore, as the Commission has demonstrated its sensitivity to issues regarding significant compliance costs, the IDA submits that the disclosure proposal above, in addition to the NASAA requirements, would adequately address the Commission’s concerns.
We appreciate the Commission’s commitment to encourage and consider comments on these proposed rules. We believe that the proposed amendments ensure adequate investor protection while permitting investors to be able to appropriately manage their retirement accounts while residing in the United States.
We hope that you find these comments helpful.
Yours very truly,
G. M. Clarke
Senior Vice-President, Member Regulation