May 27, 1999 Direct Dial: (617) 728-7161

Mr. Jonathan G. Katz

Dear Mr. Katz:

We represent The Investment Funds Institute of Canada ("IFIC"), the national association of the Canadian mutual fund industry, and appreciate the opportunity to respond on IFIC’s behalf to the request by the Securities and Exchange Commission (the "Commission") in Release Nos. 33-7656, 34-41189 and IC-23745 (March 19, 1999) (the "Proposing Release") for comments on proposed rules that would permit foreign securities to be offered to U.S. participants in certain Canadian tax-deferred retirement accounts and sold to those accounts without being registered under the Securities Act of 1933 (the "Securities Act") and that would permit foreign investment companies to offer securities to those U.S. participants and sell securities to their Canadian retirement accounts without registering under the Investment Company Act of 1940, as amended (the "1940 Act") (collectively, the "Proposed Rules"). (Unless otherwise noted, capitalized terms in this letter have the same meaning used in the Proposed Rules.)

IFIC strongly supports the Proposed Rules, and applauds the Commission for its efforts in facilitating the resolution of a troublesome dilemma that Participants have faced in attempting to manage the securities held in their Canadian Retirement Accounts. As discussed in the Proposing Release, Canadian Retirement Accounts are the principal means by which many Canadians structure their retirement assets and it is vital to Participants that they be able to freely adjust their Canadian Retirement Account holdings when appropriate to reflect their changing income needs and risk tolerance levels. In permitting such activities, the Proposed Rules represent a milestone in the ongoing efforts of securities regulators in the United States and Canada to ensure that investors in each country are given access to the securities markets of the other country where such access serves a legitimate purpose and is subject to a level of investor protection that is appropriate in light of the transactions contemplated.

IFIC does have several comments regarding the Proposed Rules, which are discussed in more detail below along with certain other issues of a more general nature upon which the Commission has requested comment.

I. Proposed Securities Act Rule and Proposed 1940 Act Rule

A. Permitted solicitations by "Authorized Agents". Proposed Rule 237 under the Securities Act ("Rule 237") and Proposed Rule 7d-2 under the 1940 Act ("Rule 7d-2") would permit a Participant’s "authorized agent" to solicit the Participant regarding transactions in Eligible Securities involving the Participant’s Canadian Retirement Account. IFIC supports this feature of the Proposed Rules because it permits Canadian broker-dealers to exercise their fiduciary duty under Canadian law to keep their Participant clients apprised of market developments that might trigger the need for adjustments to their Canadian Retirement Accounts. IFIC recommends, however, that the Commission replace the phrase "authorized agent" in §§ (b)(1)(i) and (b)(3) of Rule 237 and Rule 7d-2 with the phrase "dealer of record". Specifically, we recommend that the language in these sections be changed as follows:

§§ (b)(1)(i) Processing requests from a Participant (or his or her authorized agent or the dealer of record with respect to the Participant) for the purchase . . .

§§ (b)(3) Has not directly or indirectly solicited the Participant concerning the an Eligible Security, unless the person was an authorized agent of the dealer of record with respect to the Participant at the time of the solicitation.

These changes would limit the class of persons who are able to solicit Participants under the Proposed Rules to those persons with whom Participants have an existing relationship at the time of the solicitation, and would also facilitate compliance monitoring by persons seeking to rely on the Proposed Rules (and by the Commission).

IFIC also recommends that the Commission clarify that the condition in § (b)(1)(iii) of Rule 237 and Rule 7d-2 that written offering materials concerning Eligible Securities be delivered to Participants only "upon request" does not apply to the activities involving Participants and their "authorized agents" that are permitted under § (b)(3). We believe this could be accomplished by changing § (b)(1)(iii) as follows:

delivering to a Participant, upon request (or on an unrequested basis in connection with a solicitation permitted in subparagraph (3) of this section), written offering materials or other informational materials concerning an Eligible Security . . .

B. Definition of "Canadian Retirement Account". IFIC believes that the requirement in the definition that an Account be "self-directed" is appropriate, and that by virtue of this requirement some employer sponsored plans, such as certain defined contribution "Registered Pension Plans" ("RPPs") that function as self-directed (in that plan participants, rather than plan trustees or fiduciaries, decide how to invest account assets) are covered by the definition. In the Proposing Release, however, the Commission indicated that RPPs are excluded from the exemption provided by the Proposed Rules (presumably based on the assumptions that they cannot be self-directed and they are not operated "exclusively to provide retirement benefits"). Similarly, certain retirement accounts that technically are classified as "single vendor" function as "self-directed" in practice and appear to be covered by the definition, though language in the Proposing Release is at odds with this presumption. IFIC recommends that the Commission clarify, for interpretive purposes, that the terms "single vendor" and "self-directed" are not mutually exclusive, and that any retirement plan that meets all of the requirements of the definition of "Canadian Retirement Account" and over which a Participant has direction, for investment purposes, is covered by the proposed exemption.

The Commission should also clarify that the definition of "Canadian Retirement Account" does not render ineligible for the exemption provided by the Proposed Rules any Canadian retirement plans, such as certain Deferred Profit Sharing Plans ("DPSPs"), that meet the key criteria set forth in the definition (including the requirement that they be "self-directed") but that are excluded from the definition by virtue of the manner in which they are technically classified under applicable Canadian law. The issue raised in the current definition stems from the requirement that an account be "operated exclusively to provide retirement benefits to a Participant" (emphasis added). To eliminate any confusion as to whether these types of retirement plans are covered by the exemption provided by the Proposed Rules, IFIC recommends that the word "exclusively" be deleted from the definition of "Canadian Retirement Account".

C. Limited ability of Participants to make additional contributions. The Commission has requested comment regarding the accuracy of its view that most 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.

IFIC confirms that the Commission’s view of Canadian tax law is accurate. Under Canadian tax law, an individual may contribute to his or her Canadian Retirement Account(s) in any given year a maximum of 18% of his or her Canadian earned income or $13,500 (Can.), whichever is less. With only limited exceptions (for example, copyright income earned from Canadian sources), persons not employed or working in Canada typically would not have income earned from employment in Canada, and consequently would not, while in the United States, be creating room for significant additional contributions to their Canadian Retirement Accounts. As such, exchanges of securities in which a Participant has already invested before moving to the United States, rather than new sales, are expected to comprise the vast majority of transactions for which issuers of Eligible Securities would be seeking an exemption pursuant to the Proposed Rules.

D. Use of joint prospectuses and other informational materials. The Commission has requested comment as to whether Canadian funds commonly use joint prospectuses or other joint informational materials to offer and sell securities of several affiliated funds or different classes or series of the same fund, and if so whether Rule 237 (and, indirectly, Rule 7d-2) should specifically permit persons relying on the Rule(s) to deliver updated joint prospectuses and other joint materials that concern both securities that are held in a Participant’s Canadian Retirement Account and securities that are not held in the Account.

Virtually all IFIC’s mutual fund manager members manage more than one mutual fund, and in IFIC’s experience, all of these multifund managers consolidate information about some or all of the funds they manage into combined documents. The joint document approach used by most Canadian funds typically applies to all fund-related information, including prospectuses, periodic reports to shareholders and advertisements. Given the large number of Canadian mutual fund shareholders, and more particularly, the small number of Participants relative to the size of the overall market, it would be cost prohibitive for Canadian funds to develop unconsolidated offering materials solely as a means of transacting business with Participants. IFIC therefore recommends that the Commission modify §§ (b)(1)(iii) and (iv) of Rule 237 and Rule 7d-2 so that Canadian mutual funds that might otherwise be eligible to rely on the Proposed Rules are not prevented from doing so (to the ultimate detriment of Participants in the form of reduced investment options) merely because their prospectuses and other informational materials contain information about more than one fund. This could be accomplished by adding a new § (c) to Rule 237 and Rule 7d-2, substantially as follows:

E. Prohibition against resales. The Commission has also requested comment as to whether the Proposed Rules should prohibit resales in the United States of securities offered and sold in reliance on the proposed exemption. IFIC believes that no such restriction is necessary.

According to a survey conducted by Goldfarb Consultants for the Bank of Nova Scotia released on December 18, 1997, Canadian mutual funds comprise nearly half of the value of Canadian Retirement Accounts. Canadian mutual fund shares are redeemed directly through their issuers, regardless of where the redemption requests originate. As such, there is nothing in the Proposed Rules that changes the current regulatory regime as it relates to the establishment of a secondary market for such shares in the United States, and any restrictions in this regard would therefore serve no purpose.

With respect to the non-mutual fund assets held in Canadian Retirement Accounts, IFIC believes that no restriction is practicably required to prevent the subsequent transfer of these assets to non-Participants. Under Canadian tax law, Canadian Retirement Accounts must be structured such that a custodian in Canada is the legal owner and holder of the assets in which these Accounts have invested. As such, all transactions relating to a Canadian Retirement Account are placed with a custodian in Canada, who is only able to execute transactions through dealers that are conducting their business in Canada. IFIC believes it is highly unlikely that any assets held in Canadian Retirement Accounts by virtue of the exemption provided by the Proposed Rules would find their way into the hands of persons in the United States who are not Participants in any manner or to any extent other than Canadian Retirement Account assets currently are being purchased by such persons.

F. Disclosure regarding non-registration under U.S. law. The Commission has requested comment as to the requirement that offering materials for eligible securities prominently disclose 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. This disclosure requirement would apply to all written offering materials, including prospectuses, advertisements and newsletters that are sent to participants in reliance on the proposed exemption. The Commission also requested comment on the costs associated with the proposed disclosure requirements.

For a variety of reasons, IFIC recommends that the prominent statement requirement apply only to prospectuses. To begin with, Participants cannot engage in transactions in Eligible Securities without receiving a prospectus that complies with applicable disclosure requirements under the Canadian securities laws. As such, inclusion of the proposed statement in shareholder reports, which are only sent to existing shareholders, would be redundant. In addition, we believe that the inclusion of the proposed statement in other types of offering materials (such as fund advertisements) is largely unnecessary, since (i) the vast majority of Canadian fund investors are Canadian residents for whom the statement has no meaning and serves no purpose, and (ii) Participants, like other Canadian investors, would have to receive a prospectus in connection with any transaction in Eligible Securities in which they engage, at which time the non-registration status of the issuer under U.S. law would be disclosed. IFIC also believes that special disclosure requirements beyond what is practically necessary to put Participants on notice that the securities they are considering for their Canadian Retirement Accounts may not be registered under the U.S. securities laws is inconsistent with the notion and spirit of an "exemption" (which should not be so burdensome from a compliance standpoint that the class of persons for whom it was intended are prevented from seeking its protections).

G. Applicable law and production of information. The Commission has requested comment on the condition in Rule 237 (and, indirectly, Rule 7d-2) that a person relying on the Rule not disclaim the applicability of Canadian or U.S. law or jurisdiction (or the jurisdiction of the courts of the United States) in any proceeding involving Eligible Securities. The Commission has also requested comment as to whether it would be unduly burdensome for Rule 237 (and/or Rule 7d-2) to require any person that relies on the Rule(s) to provide the Commission, upon request, with information, documents, testimony and assistance relating to their offers and sales of securities in reliance on the Rule(s) (or, in the alternative, whether the Rule(s) should require any person relying on the rule to designate an agent for service of process in the United States).

IFIC acknowledges that the best interests of Participants are served by the requirement that persons relying on the Proposed Rules not disclaim the applicability of Canadian or U.S. law in any proceeding involving Eligible Securities. The Commission should clarify, however, that an offering document prepared in good faith under applicable Canadian rules would not be considered "misleading," within the meaning of the U.S. securities laws, solely because required information under U.S. federal securities disclosure rules has been omitted. This approach is consistent with the multijurisdictional disclosure system for Canadian and U.S. issuers that has been in effect since 1991.

With respect to the suggestion that persons who rely on the Proposed Rules be required to provide the Commission, upon request, with information, documents, testimony or assistance relating to offers and sales of securities in reliance on the rule, IFIC believes that this requirement is acceptable. As to the suggestion, in the alternative, that the Proposed Rules require any person relying on them to designate an agent for service of process in the United States, IFIC believes such a requirement is highly problematic. In most instances, Canadian issuers will look to the safe harbor provided by the Proposed Rules primarily to avoid inadvertent violations of the U.S. securities laws, and not as a means of gaining specific access to the Participant market. Further, a Participant’s primary relationship in connection with the securities transactions relating to a Canadian Retirement Account is with his or her dealer (and its representatives), not with the securities’ issuers. Thus, an issuer may not be able to determine that "reliance" on the Proposed Rules is needed until the issuer receives transaction instructions from a Participant (indirectly, through his or her dealer). IFIC believes that requiring the issuer under these circumstances to appoint an agent for service of process before it can invoke the protections of the Proposed Rules could delay the orderly execution of transaction requests, to the ultimate detriment of Participants.

H. Written acknowledgment. The Commission has requested comment as to whether persons relying on Rule 237 (and, indirectly, Rule 7d-2) should be required to obtain from each Participant who desires to purchase securities offered and sold in reliance on the Rule(s) a written acknowledgment that those securities are not subject to the registration provisions of the U.S. securities laws. IFIC believes that such a requirement is not necessary in light of the Proposed Rules’ existing "prominent disclosure" requirement. IFIC also believes that compliance with such a requirement would be so costly and administratively burdensome that persons otherwise qualified for the exemption provided by the Proposed Rules would decline to offer their securities to Participants (which would defeat the Proposed Rules’ purpose of increasing Participants’ range of legitimate investment options). We note further that § 4(2) of the Securities Act and Regulation D thereunder (which exempt certain transactions from the registration requirements of the Securities Act) do not require affirmative acknowledgments from investors regarding the registration status of the securities they are considering for purchase.

I. Promotion of efficiency, competition and capital formation; cost/benefit analysis. Finally, the Commission has requested comment as to whether the Proposed Rules, if adopted, would promote efficiency, competition and capital formation. The Commission has also asked whether the Proposed Rules would result in significant costs, in the form of lost new business or otherwise, for U.S. issuers (and, in particular, U.S. funds).

IFIC believes that the Proposed Rules would promote efficiency, insofar as they would eliminate the regulatory barriers that currently hinder the ability of Participants to manage their Canadian Retirement Accounts. Persons relying on the exemption provided by the Proposed Rules would also be relieved of the considerable burden of monitoring their securities transactions to ensure that they are not inadvertently running afoul of the U.S. securities laws.

IFIC also believes that the Proposed Rules would promote competition among the issuers of Eligible Securities, since Participants, who comprise a relatively small percentage of the Canadian Retirement Account market, nevertheless represent a significant market segment in terms of the dollar value of assets held in their Canadian Retirement Accounts. The issuers of Eligible Securities would therefore have an incentive to conduct their operations in a competitive fashion (through, for example, lowering their management fees and/or operating expenses). Finally, IFIC believes that the Proposed Rules are unlikely to result in significant costs, in the form of lost new business or otherwise, for U.S. issuers (specifically including U.S. funds), primarily because (i) the amount of new money that is available for investment by Participants is very limited (see discussion in section I(C) above) and (ii) no more than 20% of the value of a Canadian Retirement Account can be invested in non-Canadian securities. It is for these same reasons that the Proposed Rules are unlikely to result in significant costs, in the form of lost new business or otherwise, for U.S. issuers (and, in particular, U.S. funds).

II. Proposed 1934 Act Rule

The Commission noted in the Proposing Release that Canadian broker-dealers that effect securities transactions for Participants in connection with their Canadian Retirement Accounts are subject to the broker-dealer registration requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and that the Commission is currently considering a related request for exemptive relief. IFIC urges the Commission to address this issue as expeditiously as is necessary to ensure that the Proposed Rules, when and if adopted, are not prevented from functioning as intended solely because of U.S. registration problems affecting the Canadian broker-dealers that are the "authorized agents" contemplated in Rule 237 and Rule 7d-2.

III. Related initiatives

We note that the Canadian Securities Administrators, the umbrella organization of the provincial and territorial securities regulatory authorities in Canada ("CSA"), released for comment in October 1997 Proposed National Instrument 35-101 ("Proposed NI35-101") which is designed to enable U.S. residents temporarily present in Canada to engage in securities transactions with U.S. issuers. In practice, Proposed NI35-101 would exempt any U.S. dealer from Canadian dealer registration requirements, and any U.S. issuer from the requirement to file a prospectus with a member of the CSA, in connection with trades by U.S. residents temporarily in Canada. Proposed NI35-101 would also confer relief similar to that contemplated by the Proposed Rules with respect to trades by U.S. persons residing in Canada made in connection with their U.S. retirement savings accounts (such as Individual Retirement Accounts).

We understand that the commentary received by the CSA on proposed NI35-101 has been largely supportive, and that the implementation of Proposed NI35-101 has been deferred in the interests of harmonizing the outcome of the CSA’s and the Commission’s respective rulemaking initiatives. In recent conversations with staff members of various CSA members, IFIC has been advised that, in light of the publication of the Proposed Rules, it is anticipated that the CSA will soon take action to implement Proposed NI35-101. We also understand that various members of the CSA are likely to provide comments directly to the Commission on the Proposed Rules.

Despite certain gaps in the reciprocal application of the Proposed Rules and Proposed NI35-101, IFIC emphatically supports the Proposed Rules and urges the Commission to adopt them quickly. IFIC has also urged the CSA to move expeditiously to adopt Proposed NI35-101.

* * * * * * *

Again, we commend the Commission for its groundbreaking efforts in formulating the Proposed Rules and thank the Commission for the opportunity to respond to its request for comments. If you have any questions regarding any aspect of this letter, please call me at (617) 728-7161 or Kate T. Alen at (617) 728-7178.

Sincerely,

Joseph R. Fleming

cc: John Mountain, Vice President, Regulation, IFIC

Paul F. Roye, Director, SEC Division of Investment Management

Robert E. Plaze, Associate Director, SEC Division of Investment Management

Cynthia Gurnee Pugh, Special Counsel, Division of Investment Management

Date: December 18, 1997

For further information: Patti Jordan, Public Affairs,
Scotiabank, 416-866-62-3
Ron Laursen, Senior V.P., Retail
Deposits & Services, 416-866-6684
Dr. Stephen Popiel, Goldfarb
Consultants, 416-250-3646

(TORONTO) – Canadians are making inroads in terms of their investment sophistication, risk tolerance, propensity to follow a financial plan, and adoption of a long-term approach. Yet even these indicators of investment sophistication are insufficient to close the obvious gap between retirement income expectations and reality, according to The Third Annual Scotiabank Investment Poll, conducted by Goldfarb Consultants.

On the bright side, a growing number of Canadians continue to invest in registered retirement savings plans, with 60 per cent reporting that they have some money invested in RRSPs. Encouragingly, nearly half (49 per cent) say they have a formal or general financial plan guiding their financial affairs. That’s up from 43 per cent in 1996. Moreover, a significant majority of RRSP investors (86 per cent) describe their approach to RRSP investing as long-term, with the average planning horizon being 16 years.

The survey found that just over four in ten Canadian RRSP investors (43 per cent) monitor their portfolio one or two times per year, and they don’t make any sudden decisions when the market changes radically. Eight-five per cent of RRSP investors indicate they ride out market fluctuations, reflecting their long-term view of investing. During recent national and international stock market volatility, only about one in seven RRSP investors reported seeking professional advice, and only one in fifteen made an adjustment to their portfolio. One-third of RRSP owners say that a decline of 20 per cent or more in the overall value of their portfolio would be required before they would make an adjustment.

"Canadians have made great strides to take control of their financial future, and have become much better investors," says Ron Laursen, Scotiabank’s Senior Vice-President of Retail Deposits and Services. "Nevertheless, some investors cold be doing a few more things to enhance their retirement income even further."

Laursen points to the fact that nearly half (49 per cent) of RRSP holders are not aware of their personal unused contribution amount. As well, fewer than four in ten Canadians making RRSP contributions in 1997 reported that they intend to utilize their maximum contribution level.^*

"This suggests that most Canadians are not taking maximum advantage of the benefits of an RRSP – including tax-savings and tax-deferral," says Laursen. The Goldfarb data corresponds to recent Statscan results which found that Canadians have more room than ever before for contributions to registered retirement savings plans in the 1997 tax year.

A majority of Canadians (67 per cent) agree that an RRSP/RRIF portfolio mix diversified across different kinds of investments will perform better than one that holds only one type of investment. Despite this, four in ten RRSP investors report that they in fact hold only one type of investment in their RRSP at present. As well, four in ten have no foreign content in their RRSP, despite the tendency for many investment professionals to advise their clients to diversify a portion of their investment portfolios to include international economies.

Laursen claims Canadians are missing out on opportunities to boost their future retirement income by failing to maximize unused RRSP contribution room, and by not maximizing allowable foreign content in their RRSPs. "These are two examples of the dichotomy between what Canadians say and what they actually do, which may cause them to fall short of their retirement income expectations," says Laursen.

"Education is the key to successful retirement planning," says Dr. Stephen Popiel of Goldfarb Consultants. "People would be even more successful if they spent as much time planning their investments as they do reading the sports page."

According to the survey, only one in ten Canadians not-yet-retired expects that their standard of living will drop in retirement, while in reality almost twice as many retirees (17 per cent) report their standard of living has dropped.

Not-yet-retired Canadians expect their personal savings and investments will account for 43 per cent of their retirement income, while, in reality, retirees find their personal savings and investments account for only 21 per cent of their income.

Private or company pension plans are estimated by not-yet-retired Canadians to account for twenty-seven per cent of their retirement income, and this source accounts for 30 per cent of income for retirees.

Finally, not-yet-retired Canadian expect only 25 per cent of their retirement income will come from government pension plans like CPP or QPP, but retirees actually find that government pension plans account for 44 per cent of their retirement income.

"Although people increasingly realize they will have to rely more on personal savings and investments for the bulk of their retirement income, it appears many are still not saving enough to avoid a retirement income shortfall," say Laursen. "Given the increasing responsibility that Canadians are going to have to assume for their own financial well-being in retirement, there’s little doubt that sources of income for future retirees will be quite different from today’s retirees."

The average not-yet-retired Canadian plans to retire at age 59. Sixty per cent of Canadians have money invested in an RRSP. Of those with RRSPs, 79 per cent usually contribute every year. More than half (54 per cent) of Canadians with RRSPs have less than $50,000 in their plan. Mutual funds play a role in two-thirds (64 per cent) of Canadian investors’ RRSP portfolios, and comprise close to half (48 per cent) of the RRSP portfolio value among those with mutual funds. GICs and cash are the next most popular vehicles, owned by 36 per cent and 32 per cent of RRSP investors, respectively.

One thousand Canadian household financial decision makers were randomly selected and surveyed by telephone in November, 1997. A survey of this size is considered accurate to within +/- three per cent, 19 times out of 20.

Scotiabank offers a full range of investment products and planning services through its extensive branch network and Personal Investment Managers. The Bank is one of North America’s premier financial institutions, with more than $196 billion in assets and approximately 38,500 employees worldwide. It is also Canada’s most international bank, with over 1,600 branches and offices in more than 50 countries on five continents. Scotiabank is on the World Wide Web at www.scotiabank.ca.

Note to editors: For a booklet of key survey findings – including regional breakdowns – or to arrange an interview call Patti Jordan at 416-866-6203.

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