May 27, 1999

Mr. Jonathan G. Katz

Secretary

Securities and Exchange Commission

450 5th Steet, N.W.

Washington, D.C. 20549-0609

Dear Mr. Katz:

This letter is in response to your request for comments on proposed rule 237 under the Securities Act of 1933, rule 7d-2 under the Investment Company Act of 1940 and amendments to rule 12g3-2 under the Securities Exchange Act of 1934 (hereinafter collectively referred to as the "proposed rules").

As a global employee benefits consulting firm with a strong presence in Canada and the United States, William M. Mercer has first-hand knowledge of the problems faced by U.S. residents who have assets invested in Canadian retirement savings accounts. We are very supportive of the proposed rules and are pleased to have the opportunity to provide our comments.

In the next section, you will find a summary of our comments, which will be followed by a more detailed discussion of each comment.

The SEC may want to consider amending the definition of "participant" in proposed rules 237 and 7d-2 to include the phrase "or will be in the future." The definition would be amended as follows:

Participant means a natural person who is resident of the United States, or is temporarily present in the United States, and currently is, or will be in the future, entitled to receive the income and assets from a Canadian Retirement Account.

We suggest that there be no prohibition against making new contributions after an individual becomes a U.S. resident.

We suggest that the definition of "Canadian retirement account" be expanded to include self-directed defined contribution plans.

Alternatively, the SEC could adopt the view that the purchaser of securities in the case of a self-directed defined contributions plan is the plan trustee, not individual members, which would eliminate the need to include self-directed defined contribution plans in the definition of "Canadian retirement account." If the SEC elects to follow this course of action, it should explicitly state its position.

The SEC may want to consider amending the definition of "participant" in proposed rules 237 and 7d-2 to include the phrase "or will be in the future." The definition would be amended as follows:

Participant means a natural person who is resident of the United States, or is temporarily present in the United States, and currently is, or will be in the future, entitled to receive the income and assets from a Canadian Retirement Account.

As currently drafted, the proposed rules appear not to apply to a special form of registered retirement savings plans ("RRSPs") and registered retirement income funds ("RRIFs") referred to as "locked-in retirement accounts" ("LIRAs") and "life income funds" ("LIFs"), respectively. While the difference between these retirement savings vehicles is explained in more detail later on, the following table summarizes some of their key features:

As a group, contributors to LIRAs and LIFs are the ones most in need of relief from the SEC, because unlike RRSP contributors, they are prohibited from withdrawing the assets held in their RRSP. Yet, under the current proposed rules, the members of this group would be unable either to manage their retirement portfolio or to withdraw the funds from their accounts.

Members of this group would be unable to manage their portfolios because of the clause in the definition of "participant" that requires the participant to be "currently entitled to receive the income and assets from a Canadian Retirement Account." Under a plain interpretation of the phrase "currently entitled to receive," the proposed rules would exclude LIRA and LIF participants. LIRA participants cannot receive either the income or the assets held in their account until they reach early retirement age. At that time, they have the option to convert their account to a LIF and begin receiving a monthly distribution form their account. However, Canadian minimum standards legislation (legislation controlling the terms and operations of pension plans) imposes a maximum annual amount that may be distributed from a LIF. Because of the inability to receive income and assets prior to early retirement and the limit on monthly distributions during retirement, it would appear that the proposed definition of "participant" would not include contributors to LIRAs and LIFs.

The next section provides a more detailed explanation of Canadian pension regulation and the effect of the proposed definition of "participant".

Governments regulate pension plans from two broad perspectives: the control of tax deferral and the control of the terms and operations of the plan. The federal government controls the level of tax deferral provided to pension plans through the Income Tax Act. Control of the terms and operations of pension plans is the primary focus of minimum standards legislation, which exists in nine of the ten provinces and at the federal level for federally regulated employers.

For contributions to be tax-deductible, an employer-sponsored pension plan must be registered under the Income Tax Act. However, such a plan would also fit the definition of a "pension plan" under minimum standards legislation and, consequently, would also have to be registered under the applicable minimum standards legislation statute.

Since there are ten minimum standards statutes in Canada, for ease of reading, we have used the Pension Benefits Act of Ontario, which governs most Canadian registered pension plans, to illustrate the minimum standards legislation requirements. Moreover, all minimum standards legislation statutes have a similar intent and although the details are sometimes quite different from one jurisdiction to another, the substantive requirements are generally quite similar.

Canadian minimum standards legislation, much like ERISA, requires that Canadian pension plans offer a minimum range of portability options upon termination of membership. However, unlike ERISA, withdrawal of pension assets for purposes other than to provide retirement income is restricted. Generally, upon termination of membership in a plan, a member who does not want to leave his accrued benefit in his former employer’s pension plan would be required to transfer the assets to either a LIRA or a LIF.

To address the need to include LIRAs and LIFs in the proposed rules, we will summarize the locking-in requirements and portability options offered to terminating members, and the differences between RRSPs, RRIFs, LIRAs, and LIFs.

A member is considered to be vested in his pension benefit if he is entitled under the terms of the plan to the pension benefit provided by employer contributions. A member who is 100% vested when he terminates plan membership would therefore be entitled to his accumulated pension benefit payable at normal retirement age, or to a reduced pension payable at an earlier age, which is generally not earlier than age 55.

In Ontario, pension benefits earned between January 1, 1965, and December 31, 1986, must vest (and are locked-in) when the member attains age 45 and has either 10 years of continuous service or 10 years of plan membership. On and after January 1, 1987, benefits for service after 1986 vest and are locked-in after 24 months of plan membership.

If a pension is "locked-in," both member and employer contributions must be used to provide a pension at retirement and cannot be paid to the member in cash. The locking-in requirement is not lifted when the commuted value of the locked-in pension is transferred to one of the transfer options available to the member: the amount transferred must be used to provide a lifetime income.

A pension may be vested but not locked-in, but generally both will occur at the same time.

Most jurisdictions require that if a plan member terminates employment, the member be given the option to transfer, usually within a specified time limit and on a locked-in basis, the commuted value of the pension to another retirement savings arrangement. The same options may also be offered at retirement.

In Ontario, a pension plan must offer a terminated plan member the option to transfer his commuted value to:

• another registered pension plan, if the other plan will accept the transfer;
• an RRSP or a RRIF, in certain limited circumstances;
• an insurance company for the purchase of a deferred life annuity;
• a LIRA; or
• a LIF.

Although it is sometimes possible for a member to receive the commuted value of his pension benefit as a cash payment or to transfer that value to a regular RRSP (i.e., an RRSP where the money is not locked-in), that option is strictly limited. In Ontario, the following amounts are not locked-in:

• additional voluntary contributions made by the member;
• the commuted value of the accrued benefit if the annual benefit at normal retirement date does not exceed 2% of Yearly Maximum Pensionable Earnings (as defined in the Income Tax Act and equal to $37,400 in 1999) in the year of termination;
• commutation of 25% of pre-1987 benefits is possible;
• in the case of a contributory plan, for service on and after January 1, 1987, a member’s contributions with interest cannot provide more than 50% of the total value of the pension; if they do, the excess may be reimbursed to the member in cash;
• if a member has a disability that is likely to shorten considerably his life expectancy, a pension plan may permit variation in the terms of payment;
• finally, the Income Tax Regulations impose a maximum on the amount that may be transferred on a tax-deferred basis; any amount in excess of this maximum may be paid to the member in cash.

The Income Tax Act creates two different types of retirement savings vehicles that allow the tax deferral on pension benefits to continue: RRSPs and RRIFs. The main characteristics of RRSPs and RRIFs are similar in all respects but one: each year a minimum amount of assets must be withdrawn from a RRIF. In effect, the Income Tax Act requires that annuitants mature their RRSPs by the end of the calendar year in which they reach age 69. On maturity, retirement income must commence to be paid, whether by an annuity or by required minimum payments under a RRIF.

LIRAs and LIFs are not defined in the Income Tax Act, but are rather the creation of minimum standards legislation. For example, in Ontario, the Pension Benefits Act defines a LIRA as an RRSP where no money transferred, including all investment earnings, will be withdrawn prior to maturity, except to transfer the money to another LIRA, a LIF, the pension fund of another registered pension plan, or to purchase an immediate or deferred life annuity. Moreover, no money transferred, including interest, will be assigned, charged, anticipated or given as security and any transaction purporting to do that is void. Similarly, a LIF is defined in relation to a RRIF. However, whereas the Income Tax Act imposes minimum annual distribution requirements, the Pension Benefits Act imposes a cap on the annual distribution out of a LIF.

As stated previously, the requirement contained in the definition of "participant" that a participant be "currently entitled to receive the income and assets from a Canadian Retirement Account" will prevent contributors to a LIRA or a LIF account from managing their portfolios since they are not currently "entitled to receive income or assets."

In the Cost-Benefit Analysis section of the release, it is stated there might be a cost to U.S. issuers in the form of lost new business since participants "might cash out their Canadian retirement accounts and invest those assets in securities registered in the United States," absent the proposals. This concern does not apply to LIRAs and LIFs since cashing out is not an option.

The SEC requested comments on whether the proposed rules should include a prohibition against additional acquisitions of securities with new contributions after an individual becomes a U.S. resident. We suggest that there be no such prohibition.

The SEC is concerned about the potential cost of the proposed rules in the form of lost new business for U.S. issuers. One solution proposed in the release is to restrict the exemption to assets invested in Canadian retirement savings vehicles by a participant prior to his move to the United States. This restriction would be counterproductive and fail to provide relief to participants who are most in need since these participants may not be able to withdraw their account balance.

Also, under the proposed rules as currently drafted, the exemption proposed by the SEC may not extend to a subsequent retirement savings vehicle upon a transfer of a participant’s account balance from one retirement savings vehicle to another. Therefore, a U.S. resident required to transfer his registered retirement savings plan ("RRSP") account balance to a registered retirement income fund ("RRIF") pursuant to Canadian tax law would be unable to manage the assets in the RRIF following the transfer.

Assets contributed to Canadian retirement savings vehicles following the participant’s move to the United States would fall into two distinct categories: assets contributed to LIRAs and assets contributed to RRSPs.

New acquisitions may result from contributions originating from a registered defined benefit or defined contribution plan in which an individual participated prior to moving to the U.S. This situation would arise, for example, if a U.S. resident who is a terminated vested member in a Canadian registered plan decided to exercise his portability option.

A typical situation involves an employee who moves from Canada to a new employer in the United States. Usually that employee will not have a chance to make an election to transfer on a tax-free basis the accrued benefits in his registered pension plan to a LIRA prior to becoming a U.S. resident as many plan administrators will take a few months before forwarding the election forms to the employee. By then the employee is already a U.S. resident and may not have any portability option unless "new acquisitions" are made possible.

Since the contribution is originating from a registered pension plan, it is locked-in and may only transferred in a LIRA: the employee does not have the option to receive a lump sum payment in cash. Therefore, extending the exemption to include these new contributions would not result in loss of business to U.S. issuers.

Another scenario would be an employee who elected to leave his accrued benefit in the registered pension plan of his former employer. This employee may need to avail himself of the portability options if the registered pension plan is terminated subsequent to the individual’s move to the United States.

Not allowing the exemption to apply to this situation may leave participants in an impossible situation upon a plan termination. Since they would not be able to transfer assets to a LIRA, the only remaining alternative on plan termination would be to buy a life annuity with an insurance company. For smaller plans, this option may not be available as the market for terminal funding of pension plans is almost non-existent in Canada, and the purchase price of the annuity is very expensive.

Section I(A)(1) of the proposing release states that

[t]he Commission 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 SEC has requested comments as to whether this view of Canadian tax law is accurate. While the statement is accurate, we would like to point out that following a move to the United States, a participant may be allowed to contribute to an RRSP with respect to income earned in Canada in years prior to his move to the United States: under current tax law, unused contribution room may be carried forward indefinitely. This fact is unlikely to result in much lost business opportunity for U.S. issuers. Given that this individual did not make a tax-deductible contribution to an RRSP while in Canada, the fact that he would not have any Canadian income to take advantage of the deduction greatly reduces the probability that he will later decide to do so. However, it may be simpler to administer the proposed rules if there is no prohibition against making new contributions after an individual becomes a U.S. resident.

For these reasons, we believe that there should be no prohibition against making new contributions after an individual becomes a U.S. resident.

We suggest that the definition of "Canadian retirement account" be expanded to include self-directed defined contribution plans.

Alternatively, the SEC could adopt the view that the purchaser of securities in the case of a self-directed defined contributions plan is the plan trustee, not individual members, which would eliminate the need to include self-directed defined contribution plans in the definition of "Canadian retirement account." If the SEC elects to follow this course of action, it should explicitly state its position.

By taking a clear position on this issue, the SEC will avoid creating confusion and uncertainty for members of self-directed defined contribution plans.

Footnote 26 in the proposing release states that

[t]he definition of "Canadian retirement account" would include self-directed individual retirement accounts that are both established and qualified for tax-advantaged treatment under Canadian law

but then goes on to state the proposed definition does not include registered pension plans.

Since most Canadian defined contribution plans are self-directed registered pension plans, the SEC should clarify whether these plans are included or excluded from the proposed rules. We are concerned that the exclusion of registered defined contribution plans where investment decisions are the sole responsibility of plan members (hereinafter referred to as "self-directed DC plans") would leave members of such plans unable to control their investments.

The Income Tax Act encourages retirement savings by providing tax advantages to selected retirement income programs, including RRSPs and registered pension plans. While the Income Tax Act and the regulations thereunder place restrictions on the level of contributions and the types of investments that may be made in a defined contribution plan, none of the provisions places any restrictions on which party (i.e., the plan sponsor or the members) should make investment decisions. Minimum standards legislation is also silent on the issue.

As a fiduciary, the plan sponsor has a statutory obligation to be prudent in selecting the funds that will be provided to members to invest their account balances. However, there is no additional regulation with which a plan sponsor must comply in the case of a self-directed DC plan.

In fact because of the vague fiduciary standard of care and the lack of related case law, many plan sponsors rely on the U.S. Department of Labor bulletin regarding self-directed plans for guidance.

Self-directed DC plans are prevalent in Canada. Moreover, many plan sponsors are considering converting their existing defined benefit plan to a defined contribution plan. For these reasons, it is necessary for the SEC to explicitly state their position with respect to self-directed DC plans. As of the end of 1996, the market value of the accumulated assets in different retirement income programs was as follows:

It is interesting to note that according to a recent survey of pension plans in Canada, 68.6% of registered defined contribution pension plans are self-directed DC plans. For another 21.4% of these plans, the decisions are the joint responsibility of the plan members and the plan sponsor. Plan sponsors retained the sole responsibility of making investment decisions in only 10.0% of the plans surveyed.

Registered defined contribution pension plan assets are invested mainly in money market mutual funds, fixed income funds, equity funds, balanced funds, and guaranteed investment contracts.

Canadian securities law requires that purchasers and prospective purchasers of mutual funds be provided with a prospectus. The question of who the purchaser of the mutual fund is, the member or the plan itself, has not been conclusively resolved yet.

Many dealers do not provide prospectuses to the members of self-directed DC plans since they are of the opinion that the plan trustee, not the individual members, is the purchaser. However, there is a growing body of legal opinions that express concern over that conclusion. This opposing view is based, among other things, on the recognition that it is rare that members of a self-directed DC plan deal only with the employer when choosing or altering their plan investments. In fact, many members deal directly with the plan's registered dealer instead of going through the employer.

For these reasons, we suggest that the definition of "Canadian retirement account" be expanded to include self-directed defined contribution plans.

We hope that the preceding comments were helpful.

We would welcome the opportunity to discuss any questions you may have with respect to our comments. Please do not hesitate to contact the undersigned at (415) 743-8857 with any questions or comments.

Sincerely,

Dany Mathieu