[Federal Register Volume 64, Number 58 (Friday, March 26, 1999)]
[Proposed Rules]
[Pages 14648-14658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7237]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 240 and 270
[Release Nos. 33-7656, 34-41189, IC-23745; File No. S7-10-99;
International Series Release No. 1188]
RIN 3235-AH32
Offer and Sale of Securities to Canadian Tax-Deferred Retirement
Savings Accounts
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is proposing a new rule 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
Commission also is proposing a new rule 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. These rules would
enable investors who hold securities in certain Canadian tax-deferred
retirement accounts, and who reside or are temporarily present in the
United States, to manage their investments within those accounts.
DATES: Comments must be received on or before May 28, 1999.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 5th Street,
NW, Washington, DC 20549-0609. Comments also may be submitted
electronically to the following E-mail address: [email protected].
All comment letters should refer to File No. S7-10-99; this file number
should be included on the subject line if E-mail is used. Comment
letters will be available for public inspection and copying in the
Commission's Public Reference Room, 450 5th Street, NW, Washington, DC
20549. Electronically submitted comment letters will be posted on the
Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Cynthia Gurnee Pugh, Special Counsel,
at (202) 942-0690, Office of Regulatory Policy, Division of Investment
Management, Securities and Exchange Commission, 450 5th Street NW,
Washington DC 20549-0506, or Paul M. Dudek, Chief, at (202) 942-2990,
Office of International Corporate Finance, Division of Corporation
Finance, Securities and Exchange Commission, 450 5th Street NW,
Washington DC 20549-0302.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') today is proposing for public comment rule 237 (17 CFR
230.237) under the Securities Act of 1933 (15 U.S.C. 77a) (the
``Securities Act''), rule 7d-2 (17 CFR 270.7d-2) under the Investment
Company Act of 1940 (15 U.S.C. 80a) (the ``Investment Company Act''),
and amendments to rule 12g3-2 under the Securities Exchange Act of 1934
(15 U.S.C. 78a) (the ``Exchange Act'').
Table of Contents
Executive Summary
I. Introduction
II. Discussion
A. Proposed Securities Act Rule
1. Scope of the Rule
2. Conditions of the Rule
a. Limitations on Marketing Activities
b. Restriction on Disclaiming Canadian or U.S. Law or
Jurisdiction
B. Proposed Investment Company Act Rule
C. Proposed Amendments to Exchange Act Rule 12g3-2
D. General Request for Comments
III. Cost-Benefit Analysis
IV. Paperwork Reduction Act
V. Summary of Initial Regulatory Flexibility Analysis
VI. Statutory Authority
TEXT OF PROPOSED RULES
Executive Summary
In Canada, individuals can invest a portion of their earnings in
tax-deferred retirement savings accounts (''Canadian retirement
accounts''), which operate in a manner similar to Individual Retirement
Accounts (``IRAs'') in the United States. Individuals themselves can
decide how to invest the assets held in the accounts, but contributions
and withdrawals are subject to strict limits. Individuals who have
established Canadian retirement accounts and later moved to the United
States (``Canadian/U.S. Participants'' or ``participants'') have
encountered obstacles to the continued management of their retirement
investments in those accounts. Most securities held in these accounts,
and the investment companies (``funds'') that issue many of those
securities, are not registered in the United States, and issuers
therefore cannot publicly offer and sell those securities to Canadian/
U.S. Participants. As a result, these participants have not been able
to make changes in their retirement accounts to carry out the financial
planning needed to meet their individual retirement goals.
The Commission is proposing two rules that would enable Canadian/
U.S. Participants to continue to manage the assets in their Canadian
retirement accounts. The proposed rules would provide relief from the
U.S. registration requirements, under certain conditions, for offers of
securities to these participants and sales to their accounts. Under the
proposals, (i) securities of foreign issuers, including securities of
foreign funds, could be offered to Canadian/U.S. Participants and sold
to their Canadian retirement accounts without being registered under
the Securities Act or the Exchange Act and (ii) foreign funds could
offer securities to Canadian/U.S. Participants and sell securities to
their Canadian retirement accounts without registering as investment
companies under the Investment Company Act. The offer and sale of these
securities, however, would remain fully subject to the antifraud
provisions of the U.S. securities laws.
I. Introduction
More than half of all Canadian households invest retirement savings
through some form of Canadian retirement account.\1\ Canadian
retirement accounts, like IRAs in the United States,\2\ encourage
retirement saving by permitting individuals to invest savings on a tax-
deferred basis.\3\
[[Page 14649]]
Similar to U.S. law, Canadian law restricts the amount of money that a
participant may contribute to a Canadian retirement account, and early
withdrawals by a participant are subject to immediate taxation.\4\
Unlike U.S. law, Canadian law also restricts the investments that may
be held in a Canadian retirement account to certain ``qualified
investments,'' which must consist primarily of Canadian securities.\5\
A participant who violates any of these restrictions may face
significant adverse tax consequences.\6\
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\1\ See, e.g., Royal Trust Seventh Annual RRSP Survey (1997),
available at <http://www.royalbank.com/rt-wealth/01survey/01fk.html>
(visited Dec. 22, 1998). Assets held in Canadian retirement accounts
represent a sizable portion of Canadian pension assets. See The
Conference Board of Canada, Maximizing Choice: Economic Impacts of
Increasing the Foreign Property Limit at Table 1 (Jan. 1998),
available at <http://www.ific.ca/eng/
frames.asp?l1=Regulation__and__Committees> (through the ``Current
Issues & Initiatives'' and the ``Impact of the Foreign Property
Rule'' hyperlinks) (visited Dec. 22, 1998). In addition, a 1998
survey reports that approximately half of Canadian retirement
account holders plan to invest the greatest proportion of their
annual contributions in mutual funds. See Royal Trust Eighth Annual
RRSP Survey (1998), available at <http://www.royalbank.com/rt-
wealth/01survey/01h3.html> (visited Dec. 28, 1998).
\2\ See 26 U.S.C. 408, 408A (providing for Individual Retirement
Accounts under U.S. tax law). Canadian retirement accounts are
established and governed by the Income Tax Act of Canada and the
regulations thereunder. See generally Income Tax Act, R.S.C. 1985,
ch. 1 (5th Supp.) (Can.) (as amended) (''Canadian Income Tax Act'');
Income Tax Regulations, C.R.C., ch. 945 (1997) (Can.) (``Canadian
Income Tax Regulations'').
\3\ Contributions to a Canadian retirement account and earnings
on those contributions are not subject to Canadian income tax until
withdrawn. A Canadian retirement account typically is structured as
a trust and must be registered with the Canadian Minister of
National Revenue and maintained with a qualified Canadian financial
institution, such as a trust company, insurance company, or bank.
See generally Canadian Income Tax Act Paras. 146(1), 146.3(1). The
most common types of Canadian retirement accounts are Registered
Retirement Savings Plans (``RRSPs'') and Registered Retirement
Income Funds (``RRIFs''). See Canadian Income Tax Act Paras. 146
(RRSPs), 146.3 (RRIFs). RRSPs and RRIFs may be ``self-directed,'' in
which the individual participant decides how to invest account
assets, or ``single vendor,'' in which a Canadian trustee or plan
manager invests the account assets. The rules proposed in this
release do not cover the offer or sale of securities to single
vendor and other types of Canadian retirement accounts whose assets
are managed exclusively in Canada. See infra note 26.
\4\ Contributions to an RRSP Canadian retirement account are
subject to an annual limit of 18 percent of an individual's ``earned
income'' (i.e., generally income from Canadian employment or self-
employment) for the previous year (up to a maximum of $13,500
(Can.)), less certain pension adjustments. See Canadian Income Tax
Act para. 146(1) (``earned income,'' ``RRSP deduction limit,''
``RRSP dollar limit''). Early withdrawals are subject to withholding
tax and must be included in taxable income in the year withdrawn.
See, e.g., id. Paras. 146(8) (benefits taxable), 153(1)(j)
(withholding).
\5\ Canadian Income Tax Act Paras. 146(1), 146.3(1) (defining
``qualified investment'' for RRSPs and RRIFs); Canadian Income Tax
Regulations Sec. 4900 (qualified investments). At least 80 percent
of the book value of a Canadian retirement account must be invested
in Canadian securities. See generally Foreign Property of Registered
Plans, Revenue Canada Bulletin No. IT-412R2 (Jan. 16, 1995).
\6\ For example, excess contributions to a Canadian retirement
account generally are subject to a penalty tax of one percent per
month of the excess contributions. See Contributions to Registered
Retirement Savings Plan, Revenue Canada Bulletin No. IT-124R6 (Jan.
31, 1995), at para. 30. Non-qualified investments held in a Canadian
retirement account are subject to a penalty tax of one percent per
month of the market value of the non-qualified investments, and
earnings on non-qualified investments are subject to Canadian income
tax. See, e.g., Canadian Income Tax Act Paras. 146(10.1), 207.1(1).
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Individuals who establish Canadian retirement accounts while living
and working in Canada and who later move to the United States often
continue to hold their retirement assets in their Canadian retirement
accounts rather than prematurely withdrawing (or ``cashing out'') those
assets, which would result in immediate taxation in Canada.\7\ Once in
the United States, however, these participants (i.e., Canadian/U.S.
Participants) may not be able to manage their Canadian retirement
account investments.\8\ Most securities and most funds that are
``qualified investments'' for Canadian retirement accounts are not
registered under the U.S. securities laws. Funds and other issuers
therefore generally cannot offer and sell those securities in the
United States without violating the registration requirements of the
Securities Act \9\ and, in the case of securities of an unregistered
fund, the Investment Company Act.\10\ As a result of these registration
requirements of the U.S. securities laws, Canadian/U.S. Participants
have not been able to purchase or exchange securities for their
Canadian retirement accounts as needed to meet their changing
investment goals or income needs.\11\
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\7\ See supra note 4.
\8\ The Commission believes that a significant number of
Canadian/U.S. Participants may face this predicament. At the end of
1995, approximately 660,000 U.S. residents were either Canadian
citizens or former Canadian citizens. Bureau of the Census, U.S.
Dep't of Commerce, March 1996 Current Population Survey. In
addition, U.S. citizens who live and work in Canada on a temporary
basis may be able to establish Canadian retirement accounts, and so
may face this predicament upon returning to the United States.
\9\ Absent an exemption, all securities offered or sold through
use of the U.S. mails or other means of interstate commerce must be
registered under the Securities Act. See section 5(a) of the
Securities Act (15 U.S.C. 77e(a)).
\10\ The Investment Company Act requires a foreign fund to
obtain an order from the Commission permitting it to register under
that Act before it uses the U.S. mails or any means of interstate
commerce in connection with a public offering of its securities. See
section 7(d) of the Investment Company Act (15 U.S.C. 80a-7(d)). The
Commission may issue this type of order only if it finds both that
registration of the foreign fund is consistent with the public
interest and protection of investors and that it is legally and
practically feasible to enforce the provisions of the Investment
Company Act against the fund. Id. Rule 7d-1 (17 CFR 270.7d-1)
specifies the conditions that a Canadian fund may meet to satisfy
the standards of section 7(d). Only one Canadian fund currently is
registered with the Commission.
\11\ The registration requirements of the Securities Act
generally would not preclude Canadian/U.S. Participants from
purchasing some types of securities for their Canadian retirement
accounts in secondary market transactions on stock exchanges or in
other markets. As discussed below, however, Canadian broker-dealers
that effect transactions, including secondary market transactions
(i.e., those involving securities that are not required to be
registered under the Securities Act), for Canadian/U.S. Participants
are subject to the broker-dealer registration requirements of the
Exchange Act, absent an exemption. See infra note 24. In addition,
there are generally no secondary markets for the securities of open-
end management funds (or ``mutual funds''), which continuously
publicly offer and redeem securities. The requirement that public
offers be registered under the Securities Act thus deters most
foreign mutual funds from offering securities to Canadian/U.S.
Participants.
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The Commission and its staff have interpreted section 7(d) to
generally prohibit a foreign fund from making a U.S. private offering
if that offering would cause the securities of the fund to be
beneficially owned by more than 100 U.S. residents. See Resale of
Restricted Securities, Securities Act Release No. 6862 (Apr. 23, 1990)
[55 FR 17933 (Apr. 30, 1990)] at text following n.64; Investment Funds
Institute of Canada, SEC No-Action Letter (Mar. 4, 1996); Touche
Remnant & Co., SEC No-Action Letter (Aug. 27, 1984). Given the large
number of Canadian/U.S. Participants, it is unlikely that a Canadian
fund could sell securities to Canadian retirement accounts of Canadian/
U.S. Participants without exceeding the limit of 100 U.S. beneficial
owners.
The Commission and its staff have received numerous inquiries from
Canadian/U.S. Participants concerned about their inability to manage
retirement assets held in their Canadian retirement accounts. In
addition, the Investment Funds Institute of Canada (``IFIC''), an
association representing Canadian mutual funds, has filed a petition
for rulemaking requesting that the Commission adopt rules to permit
Canadian mutual funds to offer securities to Canadian/U.S. Participants
and sell securities to their accounts, without registering those
securities under the Securities Act or registering as investment
companies under the Investment Company Act (``IFIC Petition'').\12\
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\12\ The IFIC Petition is available for inspection and copying
in the Commission's Public Reference Room in File No. 4-407 and File
No. S7-10-99. The proposed rules respond to the issues raised in
that petition.
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II. Discussion
The Securities Act's registration and disclosure requirements are
premised on the notion that investors in a public offering are best
protected if they are provided with full and fair disclosure of
material information needed for an informed investment decision.\13\
Securities offered publicly in the United States generally must be
registered with the Commission, and a prospectus must be delivered to
investors.\14\ Congress recently amended the Securities Act to
authorize the Commission to adapt its regulations, including its
registration requirements, to the changing circumstances in which
securities are offered and traded.\15\ Under these
[[Page 14650]]
amendments, the Commission may exempt persons, securities or
transactions from any provision of the Securities Act, if necessary or
appropriate in the public interest and consistent with the protection
of investors.\16\ Congress intended the Commission to use this
authority to address, among other things, developments in the
securities markets that ``do not fit neatly into the existing
regulatory framework.''\17\
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\13\ See Securities Act Concepts and Their Effects on Capital
Formation, Securities Act Release No. 7314 (July 25, 1996) (61 FR
40044 (July 31, 1996)) at text accompanying n.13; SEC v. Ralston
Purina Co., 346 U.S. 119, 124 (1953).
\14\ Section 5 of the Securities Act (15 U.S.C. 77e).
\15\ Section 28 of the Securities Act (15 U.S.C. 77z-3) (enacted
as part of the National Securities Markets Improvement Act of 1996,
Pub. L. 104-290, 110 Stat. 3416).
\16\ Id.
\17\ S. Rep. No. 293, 104th Cong., 2d Sess. 15 (1996).
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The growth of self-directed Canadian retirement accounts, the
migration of participants to the United States, and the need of these
participants to manage their retirement investments by buying and
selling Canadian and other foreign securities for their accounts,
appear to be developments that do not fit neatly into the existing
regulatory framework of the Securities Act. According to some Canadian/
U.S. Participants, the registration requirements of the Securities Act
have operated to impede rather than promote their interests. These
participants have purchased securities in Canada pursuant to a Canadian
retirement program and, as a result, have the protections of the
Canadian securities laws and regulatory system with respect to those
investments. In light of the need for these investors to be able to
manage their Canadian retirement account assets,\18\ and the existence
of a well-developed legal system in Canada, the Commission believes
that it may be in the public interest and consistent with the
protection of investors to exempt from the registration requirements of
the Securities Act offers of foreign securities to Canadian/U.S.
Participants and sales to their retirement accounts. The Commission
therefore is proposing new rule 237 under the Securities Act to exempt
these transactions from Securities Act registration, under certain
conditions discussed below.\19\
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\18\ Financial planning experts stress the importance of
periodically reallocating retirement investments to reflect the
investor's changing age and income needs. See, e.g., Laird H. Shuart
& Michael E. Ruhlman, Planning for Retirement in the 21st Century--A
New Approach 77-78 (1991); Timothy E. Johnson, Investment Principles
452-53 (1978). Some analysts also have suggested that, due to
increasing life expectancies and health care costs, the careful
management of individual retirement investments may be more
important than ever. See, e.g., Employee Benefit Research Institute,
Fundamentals of Employee Benefit Programs 179, 196 (5th ed. 1997).
\19\ See infra Part II.A.2. The Commission anticipates that this
proposed exemption from the Securities Act's registration
requirements would be used primarily in connection with offers and
sales of securities of Canadian mutual funds, although other foreign
issuers may use the exemption for offers and sales to Canadian/U.S.
Participants in connection with public offerings.
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The registration requirement of the Investment Company Act is an
additional regulatory provision that can prevent Canadian/U.S.
Participants from purchasing securities of foreign funds in the course
of managing their Canadian retirement accounts. A foreign fund that
publicly offers securities in the United States not only must register
its securities under the Securities Act, but also must obtain an order
permitting it to register as an investment company under the Investment
Company Act.\20\ Because most Canadian funds have not obtained such an
order (and cannot be expected to do so \21\), Canadian/U.S.
Participants have not been able to purchase securities of Canadian
funds for their Canadian retirement accounts. As a result, participants
who hold securities of Canadian funds through their Canadian retirement
accounts cannot exchange those securities for other Canadian fund
securities as, for example, they age and their financial needs
change.\22\ In order to allow Canadian/U.S. Participants to manage
their Canadian retirement accounts, the Commission is proposing new
rule 7d-2 under the Investment Company Act, which would permit a
foreign fund to make offers to these participants and sales to their
retirement accounts without registering as an investment company under
the Investment Company Act.\23\
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\20\ As noted above, section 7(d) of the Investment Company Act
requires a foreign fund to obtain an order from the Commission
permitting it to register under that Act before it uses the U.S.
mails or any means of interstate commerce in connection with a
public offering of its securities. See supra note 10. The
requirement that a foreign fund register under the Investment
Company Act before making a public offering in the United States is
intended to subject foreign funds that access the U.S. markets to
the same type and degree of regulation as domestic funds. See S.
Rep. No. 1775, 76th Cong., 3d Sess. 13 (1940); H.R. Rep. No. 2639,
76th Cong., 3d Sess. 13 (1940).
\21\ According to IFIC, a Canadian fund that satisfies the
conditions necessary to obtain such an order likely would not be
able to continue to operate as a registered mutual fund under
Canadian law. See IFIC Petition, supra note 12, at n.34.
\22\ This is true even for Canadian/U.S. Participants who
already own securities of the other funds in their retirement
accounts.
\23\ Proposed rule 7d-2 would deem a foreign fund's offer of
securities to Canadian/U.S. Participants, and the sale of securities
to their Canadian retirement accounts, not to be a ``public
offering'' for purposes of section 7(d) of the Investment Company
Act, under the conditions discussed below. As noted earlier, the
Commission and its staff have interpreted section 7(d) to generally
prohibit a foreign fund from making a U.S. private offering if that
offering would cause the securities of the fund to be beneficially
owned by more than 100 U.S. residents. See supra note 10. Ownership
by Canadian/U.S. Participants of foreign fund shares through their
Canadian retirement accounts, however, would not count toward the
100 U.S. investors under this interpretation of section 7(d).
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The provisions of proposed rules 237 and 7d-2 are substantially the
same. They are designed to permit offers of foreign securities to
Canadian/U.S. Participants and sales to their accounts, and to permit
participants to receive prospectuses and other informational materials
necessary for managing their investments, without permitting the types
of additional sales or communications that could result in a more
generalized public offering of securities in circumvention of the
registration requirements of the U.S. securities laws.\24\ The proposed
rules would strictly limit the activities of persons making offers or
sales in reliance on the rules, and would in no way limit the
application of the antifraud provisions of the U.S. securities laws or
the provisions of any state laws that may govern the offer or sale of
securities to Canadian retirement accounts.
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\24\ Purchases or sales of securities held through Canadian
retirement accounts generally are effected through Canadian
securities dealers. Absent an exemption, however, Canadian broker-
dealers that effect securities transactions for Canadian/U.S.
Participants with respect to their Canadian retirement accounts are
subject to the broker-dealer registration requirements of section 15
of the Exchange Act (15 U.S.C. 78o). Although rule 15a-6 under the
Exchange Act (17 CFR 240.15a-6) provides several conditional
exemptions from this registration requirement for foreign broker-
dealers, additional relief may be required to permit Canadian
broker-dealers to engage in activities generally necessary to
maintain participants' Canadian retirement accounts without
registration under the Exchange Act. The Commission has received a
request for exemptive relief from the broker-dealer registration
requirements of the Exchange Act for certain Canadian broker-dealers
that effect transactions for Canadian/U.S. Participants with respect
to their Canadian retirement accounts. Letter from Susan E. Pravda,
Epstein, Becker & Green, to Jonathan G. Katz, Secretary, U.S.
Securities and Exchange Commission (Jan. 7, 1999). The Commission
will be considering this request for exemptive relief.
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A. Proposed Securities Act Rule \25\
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\25\ The following discussion focuses on the scope and
conditions of proposed rule 237. The scope and conditions of
proposed rule 7d-2, as noted above, are largely identical. See infra
note 47 and accompanying text.
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1. Scope of the Rule
Proposed rule 237 under the Securities Act would exempt from the
registration requirements of that Act the offer of a foreign issuer's
securities to a ``participant'' and the sale of those securities to his
or her Canadian retirement account.\26\ The rule would
[[Page 14651]]
define a ``participant'' as any individual in the United States who is
entitled to receive the income and assets from a Canadian retirement
account.\27\ Typically, a participant would be an individual who
established a Canadian retirement account while living and working in
Canada and has moved to the United States either permanently or
temporarily.\28\ The exemption would be available for offers and sales
of securities of any type of issuer.\29\ To qualify for the exemption,
however, the securities must be eligible for investment by Canadian
retirement accounts, and they also must be available for purchase by
Canadian investors other than participants.\30\
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\26\ The 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. Proposed rule 237(a)(2). The definition would exclude
Canadian retirement accounts that are not self-directed, because
those accounts are managed entirely in Canada and generally would
not entail U.S. registration requirements. The proposed definition
therefore does not include Registered Pension Plans (Canadian Income
Tax Act para. 147.1), Deferred Profit Sharing Plans (Canadian Income
Tax Act para. 147), single vendor RRSPs and RRIFs, and other
Canadian tax-advantaged plans whose investments are managed by
trustees or other fiduciaries in Canada.
\27\ Proposed rule 237(a)(6). Participants, for example, would
include individuals who have established Canadian retirement
accounts with Canadian earned income and are in the United States
(i) permanently, (ii) as a result of being stationed or transferred
by an employer, or (iii) only during the winter months. An
individual's status as a participant would not depend on the length
of his or her stay in the United States. A participant would be an
``annuitant'' of a Canadian retirement account as provided by
Canadian law. See Canadian Income Tax Act Paras. 146(1), 146.3(1)
(defining ``annuitant'' as the individual, or a spouse in certain
cases, for whom a RRSP or RRIF will provide retirement income).
\28\ Certain ``deemed'' Canadian residents (i.e., Canadian
government and military personnel) may be able to establish Canadian
retirement accounts with income earned while living and working in
the United States. See infra note 31.
\29\ Persons relying on the exemption would be persons that
engage in transactions not otherwise exempt from the registration
requirements of section 5 of the Securities Act (i.e., issuers,
underwriters or dealers under U.S. law). See, e.g., section 4(1) of
the Securities Act (15 U.S.C. 77d(1)).
\30\ The types of securities that are qualified investments for
Canadian retirement accounts are identified in the Canadian Income
Tax Act and the Canadian Income Tax Regulations. See supra note 5
and accompanying text. The proposed rule would be available only for
``eligible securities'' issued by a ``qualified company.'' Eligible
securities would be securities issued by a qualified company that
(i) are offered to participants or sold to their Canadian retirement
accounts in reliance on the proposed rule and (ii) may also be
purchased by Canadians other than participants. Proposed rule
237(a)(3)(i), (ii). The rule would define a qualified company as a
foreign issuer whose securities are qualified for investment on a
tax-deferred basis by a Canadian retirement account under Canadian
law. Proposed rule 237(a)(7). A ``foreign issuer'' would include any
issuer that is a foreign government, a national of any foreign
country or a corporation or other organization incorporated or
organized under the laws of any foreign country, except for an
issuer that has a substantial presence in the United States as
described in the rule. Proposed rule 237(a)(5). This definition is
modeled on the definitions of ``foreign issuer'' and ``foreign
private issuer'' in rule 405 under the Securities Act (17 CFR
230.405).
As noted above, the proposed exemption would be available only
for offers and sales of eligible securities of qualified companies.
No condition of the rule, however, would require that a
participant's Canadian retirement account comply with the other
requirements of Canadian tax law, such as the limitations on
contributions. See generally supra notes 4--5 and accompanying text
(discussing certain restrictions on Canadian retirement account
contributions and investments).
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The proposed rule would 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 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.\31\ The Commission requests
comment whether this view of Canadian tax law is accurate. If
participants generally would be able to make significant additional
contributions to their Canadian retirement accounts, should the
proposed exemption exclude additional purchases? If additional
purchases are excluded, would persons relying on the exemption be able
to adequately monitor whether purchase requests from participants, or
their broker-dealers, represent the exchange or re-allocation of
previous Canadian retirement account investments, rather than
additional acquisitions with new contributions?
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\31\ See Canadian Income Tax Act para. 146(1) (defining ``earned
income''). See also supra notes 4, 6 (describing restrictions on
Canadian retirement account contributions and certain penalties on
excess contributions). Taxation in Canada generally depends on an
individual's residence in Canada. Whether a Canadian/U.S.
Participant's income is subject to Canadian tax or U.S. tax
typically would depend on several factors, including (i) the
permanence and purpose of the stay in the United States, (ii)
residential ties to Canada, (iii) residential ties to the United
States, and (iv) regularity and length of return visits to Canada.
See generally Determination of an Individual's Residence Status,
Revenue Canada Bulletin No. IT-221R2 (Feb. 25, 1983). Under the
United States-Canada Tax Treaty and Canadian law, Canadian
government employees, diplomats, and military personnel stationed in
the United States are ``deemed'' to be Canadian residents, and their
income remains subject to Canadian tax, despite their residence in
the United States. See Convention with Respect to Taxes on Income
and on Capital, Sept. 26, 1980, U.S.-Can., art. IV, para. 5,
T.I.A.S. No. 11,087 (as amended by protocols); Canadian Income Tax
Act para. 250(1) (deemed residents of Canada). Because most
Canadian/U.S. Participants, other than deemed Canadian residents,
who relocate to, maintain primary residence in, or spend most of
their time in, the United States would no longer be residents of
Canada for tax purposes, the Commission believes that they would not
be able to contribute significant additional income to their
Canadian retirement accounts. For individuals who are deemed
residents of Canada, however, additional contributions to a Canadian
retirement account may be the only mechanism for making a Canadian
tax-advantaged retirement investment while in the United States.
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2. Conditions of the Rule
a. Limitations on Marketing Activities. Proposed rule 237 includes
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. Thus, a person relying on the rule would be permitted
to solicit a Canadian/U.S. Participant only if that person is an
authorized agent of the participant.\32\ Persons relying on the rule
would be limited to (i) processing transaction requests from
participants,\33\ (ii) paying dividends and distribution on securities
held in a Canadian retirement account,\34\ (iii) delivering
[[Page 14652]]
written offering materials upon the request of a participant,\35\ and
(iv) delivering updated offering materials, proxy statements, account
statements and other materials typically provided to other security
holders regarding securities held in a Canadian retirement account.\36\
Persons relying on the rule could not engage in activities that would
condition the U.S. market for the securities, such as advertising the
securities in the United States,\37\ or that would facilitate secondary
trading in the securities, such as arranging for dealers to make a
secondary market in the United States when there was no pre-existing
U.S. market.\38\
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\32\ Proposed rule 237(b)(3). Generally, a ``solicitation''
would include any contact (i.e., telephone calls, mailings,
facsimile transmissions, electronic mail or similar communications)
with a participant that is intended to generate interest in, or
induce the purchase of, eligible securities. The exception for
solicitations by authorized agents is intended to permit Canadian
broker-dealers relying on the rule to continue to provide investment
advice to their Canadian/U.S. Participant customers. For example, a
broker-dealer relying on the rule would not be prohibited from
providing investment advice, prospectuses or other similar materials
to an existing client who is a participant about possible
investments in the participant's Canadian retirement account. Of
course, to the extent persons relying on the rule are engaged in
broker-dealer activity in the United States, they would be required
to register as broker-dealers under section 15 of the Exchange Act,
absent an available exemption. See supra note 24.
\33\ Proposed rule 237(b)(1)(i). A person relying on the rule
also would be permitted to effect routine transactions in securities
held in a participant's Canadian retirement account. Id. Routine
transactions would include routine or mechanical transfers of
securities held in the account, such as transfers caused by a
participant's death or divorce, and rollovers or other transfers of
assets among Canadian retirement accounts as required or allowed
under Canadian law. The Commission believes that generally these
types of transfers would not entail registration under the
Securities Act in any event.
\34\ Proposed rule 237(b)(1)(ii). The payment of dividends would
include the issuance of securities under a dividend reinvestment
plan. For guidance on whether registration of securities issued
pursuant to a dividend reinvestment plan would be required absent
the proposed exemption, see, e.g., Securities Act Release No. 929
(July 29, 1936) (11 FR 10957 (1936)); Investment Company Act Release
No. 6480 (May 10, 1971) (36 FR 9627 (May 1971)); Interpretation of
the Division of Corporation Finance Relating to Dividend
Reinvestment and Similar Plans, Securities Act Release No. 5515
(July 22, 1974) (39 FR 28520 (Aug. 8, 1974)).
\35\ Proposed rule 237(b)(1)(iii).
\36\ Proposed rule 237(b)(1)(iv).
\37\ Proposed rule 237(b)(4). Activities with respect to an
eligible security that constitute ``directed selling efforts'' for
purposes of Regulation S under the Securities Act (17 CFR
230.901-.905) generally would be considered to ``condition'' the
U.S. market for purposes of proposed rule 237. See 17 CFR
230.902(c); Offshore Offers and Sales, Securities Act Release No.
6863 (Apr. 24, 1990) (55 FR 18306 (May 2, 1990)), at nn.47-72 and
accompanying text.
\38\ Proposed rule 237(b)(4).
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As noted above, under the rule the only updated written offering
materials or other informational 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.\39\ The
Commission requests comment 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. If so, should rule 237 specifically permit persons
relying on the rule to deliver updated joint prospectuses and other
joint materials that concern both securities that are held in a
participant's retirement account and securities that are not held in
the account?
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\39\ See supra note 36 and accompanying text.
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Under the proposed rule, offering materials for eligible securities
must 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.\40\ 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. Comment is requested on this disclosure requirement.
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\40\ Proposed rule 237(b)(2).
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The Commission also requests comment whether the rule should
prohibit resales in the United States of securities offered and sold in
reliance on the proposed exemption.\41\ Is a restriction on resales
necessary to ensure that unregistered securities sold to Canadian
retirement accounts in reliance on the proposed exemption are not later
transferred to persons in the United States who are not Canadian/U.S.
Participants?
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\41\ For example, the rule could provide that securities offered
and sold in reliance on the exemption may not be eligible for resale
other than in accordance with the requirements of Regulation S under
the Securities Act, which generally excludes from Securities Act
registration offers and sales of securities that occur in offshore
transactions and do not involve U.S. marketing activities. A
Canadian/U.S. Participant who desires to sell eligible securities
thus might be required either to sell the securities in the Canadian
or other foreign markets or, with respect to securities of a
Canadian mutual fund, to tender the securities to the fund for
redemption.
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b. Restriction on Disclaiming Canadian or U.S. Law or Jurisdiction.
Proposed rule 237 is premised on, among other things, the availability
of the investor protections afforded by Canadian law for Canadian
retirement account investments. We believe that, because these accounts
were opened and remain in Canada, Canadian law would be applicable and
Canadian courts would have jurisdiction. Nonetheless, we are proposing
to include in the rule the condition that a person relying on the rule
not disclaim the applicability of Canadian law or jurisdiction in any
proceeding involving eligible securities.\42\ The Commission requests
comment on this proposed condition.
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\42\ Proposed rule 237(b)(5). The rule would define ``Canadian
law'' to include the federal laws of Canada, the laws of any
province or territory of Canada, and the rules of any Canadian
federal or provincial regulator or self-regulatory authority,
depending upon the applicability of each. Proposed rule 237(a)(1).
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As noted above, offers and sales of securities made in reliance on
the proposed rule would remain fully subject to the antifraud
provisions of the U.S. securities laws. The proposed rule therefore
also would include the condition that a person relying on the rule not
disclaim the applicability of U.S. law, or the jurisdiction of the
courts of the United States, in any proceeding involving eligible
securities.\43\ Comment is requested on this proposed condition of the
rule.
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\43\ Proposed rule 237(b)(5).
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The Commission also requests comment whether it would be unduly
burdensome for rule 237 to require any person that relies on the rule
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.\44\ This type of provision could
facilitate the Commission's ability to investigate allegations of
fraud. In the alternative, should the rule require any person relying
on the rule to designate an agent for service of process in the United
States? \45\ Finally, comment is requested whether persons relying on
rule 237 should be required to obtain from each participant who desires
to purchase securities offered and sold in reliance on the rule a
written acknowledgment that those securities are not subject to the
registration provisions of the U.S. securities laws.
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\44\ For example, persons relying on the rule could be required
to provide the Commission with the types of information, documents,
testimony, and assistance described in rule 15a-6(a)(3)(i)(B) under
the Exchange Act [17 CFR 240.15a-6(a)(3)(i)(B)], with respect to
offers and sales of securities made in reliance on the rule.
\45\ For example, rule 237 could require issuers, underwriters
and other persons that rely on the rule to file a form similar to
Form F-X under the Securities Act [17 CFR 239.42] identifying a U.S.
agent for service of process. Designating an agent for service of
process also might facilitate the ability of Canadian/U.S.
Participants to pursue antifraud remedies in the United States.
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B. Proposed Investment Company Act Rule
Proposed rule 7d-2 under the Investment Company Act would deem a
foreign fund's offer of securities to Canadian/U.S. Participants and
sale to their accounts not to be a ``public offering'' that would
require the fund to register as an investment company under that
Act.\46\ The scope of this proposed rule, and the conditions that must
be met by a foreign fund relying on the rule, would be substantially
the same as the proposed scope and conditions of rule 237 under the
Securities Act.\47\ The Commission requests comment whether any
specific provisions of proposed rule 7d-2 should differ from those of
rule 237. Are any provisions of proposed rule 7d-2 broader than
necessary to achieve the intended purpose of permitting Canadian/U.S.
Participants to manage their Canadian retirement account investments?
Comment also is requested whether rule 7d-2 should address the other
issues on which comment was solicited in the discussion of proposed
rule 237.\48\
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\46\ See generally supra notes 20-23 and accompanying text.
\47\ See supra Part II.A (discussion of the scope and conditions
of proposed rule 237). The one substantive difference is that
proposed rule 7d-2 would require written offering materials for
eligible securities to disclose prominently not only that the
securities are not registered with the Commission, but also that the
foreign fund that issued those securities is not registered with the
Commission. Proposed rule 7d-2(b)(2).
\48\ See supra Part II.A.
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[[Page 14653]]
C. Proposed Amendments to Exchange Act Rule 12g3-2
Section 12(g)(1) of the Exchange Act provides that an issuer whose
securities are traded by any means of interstate commerce must register
its equity securities with the Commission under the Exchange Act if it
has more than 500 shareholders and total assets over $1 million.\49\
The Exchange Act authorizes the Commission to exempt securities of
foreign issuers from this registration requirement.\50\ Under this
authority, the Commission has adopted rule 12g3-2(a), which exempts
securities of a foreign private issuer from the registration
requirement if fewer than 300 shareholders reside in the United
States.\51\ Rule 12g3-2(b) exempts securities of a foreign private
issuer that has 300 or more shareholders resident in the United States
if the issuer notifies the Commission that it is electing to be exempt
under that rule, furnishes certain information to the Commission that
it provides to shareholders in its home country, and meets certain
other requirements.\52\
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\49\ 15 U.S.C. 78l(g)(1). Rule 12g-1 under the Act (17 CFR
240.12g-1) exempts an issuer from this section 12(g)(1) registration
requirement if its total assets at fiscal year end do not exceed $10
million and, with respect to a foreign private issuer, the
securities were not quoted in an automated inter-dealer quotation
system.
\50\ Section 12(g)(3) of the Exchange Act (15 U.S.C. 78l(g)(3))
provides that the Commission may exempt any security of a foreign
issuer from this registration requirement if the Commission finds
that an exemption is in the public interest and consistent with the
protection of investors.
\51\ Exchange Act rule 12g3-2(a) (17 CFR 240.12g3-2(a)).
\52\ See Exchange Act rule 12g3-2(b) (17 CFR 240.12g3-2(b)).
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The registration requirements under the Exchange Act were designed
to assure that U.S. investors would have available adequate information
about publicly held issuers. In the case of Canadian retirement
accounts, participants already have a source of information through the
administrators of their retirement accounts. Thus, it appears that
counting Canadian/U.S. Participants toward the 300 shareholder limit of
rule 12g3-2(a) is not necessary with respect to Canadian/U.S.
Participants.\53\ The Commission therefore is proposing to amend rule
12g3-2 to provide that participants who hold shares of a foreign
private issuer only through their Canadian retirement accounts should
not be counted for purposes of determining whether the issuer has fewer
than 300 shareholders who reside in the United States.\54\
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\53\ In fact, counting these shareholders toward the 300
shareholder limit may hinder foreign issuers or broker-dealers from
selling foreign securities to Canadian/U.S. Participants' retirement
accounts out of concern that the issuer might not have complied with
the requirements of section 12(g).
\54\ Proposed rule 12g3-2(a)(2).
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D. General Request for Comments
The Commission requests comment on the proposed rules and rule
amendments that are the subject of this Release, suggestions for
additional provisions or changes to existing rules or forms, and
comments on other matters that might have an effect on the proposals
contained in this Release. The Commission also requests comment whether
the proposals, if adopted, would promote efficiency, competition and
capital formation. Comments will be considered by the Commission in
satisfying its responsibilities under section 2(b) of the Securities
Act and section 3(f) of the Exchange Act.\55\ The Commission encourages
commenters to provide data to support their views. For purposes of the
Small Business Regulatory Enforcement Fairness Act of 1996,\56\ the
Commission also requests information regarding the potential impact of
the proposals on the economy on an annual basis. Commenters are
requested to provide empirical data to support their views.
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\55\ Section 2(b) of the Securities Act (15 U.S.C. 77b(b)) and
section 3(f) of the Exchange Act (15 U.S.C. 78c(f)) require the
Commission, when it engages in rulemaking and is required to
consider whether an action is consistent with the public interest,
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation.
\56\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
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III. Cost-Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules. The proposals would provide substantial benefits to
Canadian/U.S. Participants. Because most securities that are held in
Canadian retirement accounts, and the Canadian funds that issue many of
those securities, are not registered under the U.S. securities laws,
those securities generally cannot be sold by issuers to persons in the
United States without violating the registration requirements of the
Securities Act and, in the case of securities of an unregistered fund,
the Investment Company Act.\57\ As a consequence, Canadian/U.S.
Participants have not been able to purchase or exchange securities for
their Canadian retirement accounts as needed to meet their changing
investment goals or income needs. Proposed rules 237 and 7d-2 would
permit offers of a foreign issuer's securities to a Canadian/U.S.
Participant and sales to his or her account, under certain conditions
consistent with the protection of investors. The proposals thus would
benefit these investors by making it possible for them to manage their
Canadian retirement account investments.
---------------------------------------------------------------------------
\57\ See supra notes 9-11.
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Proposed rules 237 and 7d-2 also would benefit foreign issuers and
other persons that offer securities of foreign issuers (including
securities of foreign funds) to Canadian/U.S. Participants and sell
those securities to Canadian retirement accounts. Absent the proposals,
these persons likely would forego offering foreign securities to
Canadian/U.S. Participants and selling foreign securities to their
accounts, because securities that are not registered under the U.S.
securities laws may not be publicly offered or sold in the United
States. Under the proposed rules, these persons would be able to sell
those securities to participants' Canadian retirement accounts, because
the proposals would permit (i) foreign securities, including securities
of foreign funds, to be offered to Canadian/U.S. Participants and sold
to their accounts without being registered under the Securities Act and
(ii) foreign funds to offer securities to Canadian/U.S. Participants
and sell securities to their accounts without registering as investment
companies under the Investment Company Act.
Foreign issuers and other persons may incur costs when relying on
the proposed rules to offer or sell securities. The proposed rules
require that any written offering materials delivered to a Canadian/
U.S. Participant in reliance on the rules include a prominent statement
that the securities are not registered with the Commission and, in the
case of securities issued by a foreign fund, that the fund also is not
registered with the Commission. To meet these requirements, the foreign
issuer, underwriter or broker-dealer may redraft an existing prospectus
or other written offering material to add this disclosure statement, or
may draft a sticker or supplement containing this disclosure to be
added to existing offering materials. It appears that the associated
costs likely would be minimal and are justified by the benefits of the
relief provided by the proposed new rules. Comment is requested on the
costs associated with these proposed disclosure requirements.
Proposed rules 237 and 7d-2 also could result in some U.S. issuers,
including some U.S. funds, incurring costs in the form of lost new
business from Canadian/U.S. Participants who, absent the proposals,
might cash out their Canadian retirement accounts and invest those
assets in securities that are registered in the United States. Based on
[[Page 14654]]
inquiries that the Commission has received from Canadian/U.S.
Participants, however, it appears that many currently do not choose
this investment strategy because of the adverse tax consequences that
likely would result from such action. It therefore appears that the
proposals would not significantly affect the number of participants
that may cash out their Canadian retirement accounts in order to invest
their retirement assets in U.S.-registered securities. The proposed
rules thus should not result in significant costs for U.S. issuers,
including U.S. funds, in the form of lost new business. Because the
proposed rules primarily will affect foreign issuers and other foreign
persons, it appears that the proposals also would not cause any other
costs or benefits for U.S. issuers. Comment is requested on these
assumptions, and in particular whether the proposals would result in
significant costs, in the form of lost new business or otherwise, for
U.S. issuers.
The proposed amendments to rule 12g3-2(a) would provide that a
foreign issuer need not count the Canadian/U.S. Participants who hold
its securities only through their Canadian retirement accounts for
purposes of determining whether the issuer has fewer than 300
shareholders resident in the United States and thus qualifies for the
exemption from Exchange Act registration afforded by the rule. These
proposed amendments would benefit any foreign issuer whose securities
might not qualify for the rule 12g3-2(a) exemption from Exchange Act
registration if it were required to count participants who hold its
securities in Canadian retirement accounts for purposes of determining
whether it has fewer than 300 U.S. shareholders. The proposed
amendments also may benefit Canadian/U.S. Participants, because without
the amendments foreign issuers and broker-dealers might be reluctant to
sell foreign securities to participants' Canadian retirement accounts
out of concern that those sales might make the foreign securities
subject to registration under section 12(g). There would appear to be
no significant costs to foreign issuers, domestic issuers, or investors
associated with these proposed amendments.
The Commission requests comment on the potential costs and benefits
of the proposals and any suggested alternatives to the proposals.
Specific comment is requested on the potential costs or benefits of
these proposals to U.S. issuers, including U.S. funds. Data is
requested concerning these costs and benefits.
IV. Paperwork Reduction Act
Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501-3520), and the Commission has
submitted the proposed rules to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d). The titles
for the collections of information are: ``Exemption for offers and
sales to certain Canadian tax-deferred retirement savings accounts''
and ``Definition of `public offering' as used in section 7(d) of the
Act with respect to certain tax-deferred retirement savings accounts.''
An agency may not sponsor, conduct, or require response to an
information collection unless a currently valid OMB control number is
displayed.
Proposed rule 237 would permit securities of foreign issuers,
including securities of foreign funds, to be offered to Canadian/U.S.
Participants and sold to their accounts without being registered under
the Securities Act. The rule would require written offering materials
for securities offered or sold in reliance on the rule to disclose
prominently 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. Proposed rule 7d-2 under the Investment
Company Act would permit foreign funds to offer securities to Canadian/
U.S. Participants and sell securities to their accounts without
registering as investment companies under the Investment Company Act.
The rule would require written offering materials for securities
offered or sold in reliance on the rule to make the same disclosure
concerning those securities as required by proposed rule 237, and in
addition to disclose prominently that the foreign fund that issued
those securities is not registered with the Commission. The purpose of
these disclosure requirements is to ensure that participants are aware
that those securities are not subject to the protections afforded by
registration under the U.S. securities laws.
The burden under either rule associated with adding this disclosure
to written offering materials should be minimal and is non-recurring.
The foreign issuer, underwriter or broker-dealer may redraft an
existing prospectus or other written offering material to add this
disclosure statement, or may draft a sticker or supplement containing
this disclosure to be added to existing offering materials. In either
case, based on discussions with representatives of the Canadian fund
industry, the staff estimates that it would take an average of 10
minutes per document to draft the requisite disclosure statement. The
staff estimates the annual burden as a result of the disclosure
requirements of proposed rules 7d-2 and 237 as follows.
A. Proposed Rule 7d-2
The staff understands that there are approximately 1,300 publicly
offered Canadian funds that potentially may rely on proposed rule 7d-2
to offer securities to Canadian/U.S. Participants and sell securities
to their accounts without registering under the Investment Company Act.
The staff estimates that during the first year that proposed rule 7d-2
is in effect, approximately 910 (70 percent) of these Canadian funds
are likely to rely on the rule. The staff further estimates that each
of those 910 Canadian funds, on average, distributes 3 different
written offering documents concerning those securities, for a total of
2,730 offering documents.\58\
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\58\ Because Canadian tax law effectively precludes non-Canadian
funds from being held in a Canadian retirement account, it is
unlikely that any funds from countries other than Canada will rely
on proposed rule 7d-2 to sell their shares to the Canadian
retirement accounts of Canadian/U.S. Participants.
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The staff therefore estimates that during the first year that
proposed rule 7d-2 is in effect, approximately 910 respondents \59\
would be required to make 2,730 responses by adding the new disclosure
statements to approximately 2,730 written offering documents. Thus, the
staff estimates that the total annual burden associated with this
disclosure requirement in the first year after rule 7d-2 becomes
effective would be approximately 455 hours (2,730 offering documents
x 10 minutes per document).
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\59\ This estimate of respondents assumes that all respondents
are Canadian funds that redraft existing offering documents to add
the required disclosure. The number of respondents may be greater if
foreign underwriters or broker-dealers draft a sticker or supplement
to add the required disclosure to an existing offering document.
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In each year following the first year that proposed rule 7d-2 is in
effect, the staff estimates that approximately 65 (5 percent)
additional Canadian funds may rely on the rule to offer securities to
Canadian/U.S. Participants and sell securities to their accounts, and
that each of those funds, on average, distributes 3 different written
offering documents concerning those securities, for a total of 195
offering documents. The staff therefore estimates that in each year
after the first year that proposed rule 7d-2 becomes effective,
[[Page 14655]]
approximately 65 respondents \60\ would make 195 responses by adding
the new disclosure statement to approximately 195 written offering
documents. The staff therefore estimates that after the first year, the
annual burden associated with the rule 7d-2 proposed disclosure
requirement would be approximately 32.5 hours (195 offering documents
x 10 minutes per document).
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\60\ See supra note 59.
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B. Proposed Rule 237
Canadian issuers other than Canadian funds. The Commission
understands that there are approximately 3,500 Canadian issuers other
than funds that potentially may rely on proposed rule 237 to make an
initial public offering of their securities to Canadian/U.S.
Participants.\61\ The staff estimates that in any given year
approximately 35 (or 1 percent) of those issuers are likely to rely on
proposed rule 237 to make a public offering of their securities to
participants, and that each of those 35 issuers, on average,
distributes 3 different written offering documents concerning those
securities, for a total of 105 offering documents.
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\61\ Canadian funds would rely on both proposed rule 7d-2 and
proposed rule 237 to offer securities to participants and sell
securities to their Canadian retirement accounts without violating
the registration requirements of the Investment Company Act or the
Securities Act. Proposed rule 237, however, would not require any
disclosure in addition to that required by proposed rule 7d-2. Thus,
the disclosure requirements of proposed rule 237 would not impose
any burden on Canadian funds in addition to the burden imposed by
the disclosure requirements of rule 7d-2. To avoid double-counting
this burden, the staff has excluded Canadian funds from the estimate
of the hourly burden associated with proposed rule 237.
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The staff therefore estimates that during each year that proposed
rule 237 is in effect, approximately 35 respondents \62\ would be
required to make 105 responses by adding the new disclosure statements
to approximately 105 written offering documents. Thus, the staff
estimates that the total annual burden associated with the proposed
rule 237 disclosure requirement would be approximately 17.5 hours (105
offering documents x 10 minutes per document).
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\62\ This estimate of respondents assumes that all respondents
are foreign issuers that redraft existing offering documents to add
the required disclosure. The number of respondents may be greater if
foreign underwriters or broker-dealers draft a sticker or supplement
to add the required disclosure to an existing offering document.
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Other foreign issuers. In addition, issuers from foreign countries
other than Canada could rely on proposed rule 237 to offer securities
to Canadian/U.S. Participants and sell securities to their accounts
without becoming subject to the registration requirements of the
Securities Act. Because Canadian law strictly limits the amount of
foreign investments that may be held in a Canadian retirement account,
however, the staff believes that the number of issuers from other
countries that might rely on proposed rule 237, and that therefore
would be required to comply with the proposed offering document
disclosure requirements, would be negligible.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments in order to: (i) Evaluate whether the proposed collections of
information are necessary for the proper performance of the function of
the Commission, including whether the information will have practical
utility; (ii) evaluate the accuracy of the staff's estimate of the
burden of the proposed collections of information; (iii) enhance the
quality, utility and clarity of the information to be collected; and
(iv) minimize the burden of collection of information on those who are
to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information
requirements of the proposed rules should direct them to the following
persons: (i) Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 3208, New Executive Office Building, Washington, DC 20503;
and (ii) Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 5th Street NW, Washington, DC 20549-0609, with
reference to File No. S7-10-99. OMB is required to make a decision
concerning the collection of information between 30 and 60 days after
publication; therefore, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days after publication of this
Release.
V. Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding proposed
rules 237 and 7d-2, and the proposed amendments to rule 12g3-2. The
following summarizes the IRFA.
A. Reasons for the Proposed Action
In Canada, individuals can invest a portion of their earnings in
tax-deferred Canadian retirement accounts, which operate in a manner
similar to IRAs in the United States. Individuals who establish
Canadian retirement accounts while living and working in Canada and who
later move to the United States (``Canadian/U.S. Participants'' or
``participants''), however, have encountered difficulties managing
their Canadian retirement account investments. Most securities and most
funds that are ``qualified investments'' for Canadian retirement
accounts are not registered under the U.S. securities laws. Issuers,
therefore, cannot publicly offer and sell those securities in the
United States without violating the registration requirements of the
Securities Act and, in the case of securities of an unregistered fund,
the Investment Company Act. As a result of these registration
requirements of the U.S. securities laws, Canadian/U.S. Participants
have not been able to purchase or exchange securities for their
Canadian retirement accounts as needed to meet their changing
investment goals or income needs.
B. Objectives
To enable Canadian/U.S. Participants to manage the assets in their
Canadian retirement accounts, the Commission is proposing two new rules
that would provide relief from the U.S. registration requirements,
under certain conditions, for offers of foreign securities to Canadian/
U.S. Participants and sales to their accounts. Proposed rule 237 under
the Securities Act would permit securities of foreign issuers,
including securities of foreign funds, to be offered to Canadian/U.S.
Participants and sold to their accounts without being registered under
the Securities Act. Proposed rule 7d-2 under the Investment Company Act
would permit foreign funds to offer securities to Canadian/U.S.
Participants and sell securities to their accounts without registering
as investment companies under the Investment Company Act.
The Commission also is proposing to amend rule 12g3-2 under the
Exchange Act. Section 12(g)(1) of the Exchange Act provides that an
issuer whose securities are traded by any means of interstate commerce
must register its equity securities with the Commission under the
Exchange Act if it has more than 500 shareholders and total assets over
$1 million.\63\ The Commission is authorized to exempt securities of
foreign issuers from this registration requirement, and has adopted
rule 12g3-2 to exempt (i) securities of a foreign private issuer if the
issuer has fewer than 300 shareholders resident in
[[Page 14656]]
the United States (rule 12g3-2(a)); and (ii) securities of a foreign
private issuer with 300 or more shareholders resident in the United
States if the issuer furnishes certain information to the Commission
that it provides to shareholders in its home country, and meets certain
other requirements (rule 12g3-2(b)).
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\63\ Rule 12g-1 under the Act exempts an issuer from this
section 12(g)(1) registration requirement if its total assets at
fiscal year end do not exceed $10 million and, with respect to a
foreign private issuer, the securities were not quoted in an
automated inter-dealer quotation system.
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The registration requirements under the Exchange Act were designed
to assure that U.S. investors would have available adequate information
about publicly held issuers. In the case of Canadian retirement
accounts, however, Canadian/U.S. Participants already have a source of
information through the administrators of their retirement accounts.
Because it appears that counting Canadian/U.S. Participants toward the
300 shareholder limit of rule 12g3-2(a) would serve little purpose with
respect to Canadian/U.S. Participants, the Commission is proposing to
amend rule 12g3-2(a) to provide that participants who hold shares of a
foreign private issuer only through their Canadian retirement accounts
need not be counted for purposes of determining whether the foreign
issuer has fewer than 300 shareholders resident in the United States.
C. Legal Basis
The Commission is proposing rule 237 pursuant to the authority set
forth in sections 19(a) and 28 of the Securities Act (15 U.S.C. 77s(a);
77z-3) and is proposing rule 7d-2 pursuant to section 38(a) of the
Investment Company Act (15 U.S.C. 37(a)). Rule 12g3-2 is proposed to be
amended pursuant to the authority set forth in section 19(a) of the
Securities Act and section 12(g)(3) of the Exchange Act (15 U.S.C.
78l(g)(3)).
D. Small Entities Subject to the Rules
Proposed rules 237 and 7d-2 primarily will affect foreign issuers
and other persons that offer securities to participants and sell
securities to their retirement accounts. Foreign businesses, however,
are not small entities for purposes of the Regulatory Flexibility
Act.\64\ Therefore, these proposals are unlikely to have a significant
economic impact on a substantial number of small entities.
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\64\ See 13 CFR 121.105 (defining ``business concern'' for
purposes of the Small Business Administration's definition of
``small business'').
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It is possible, however, that some domestic issuers could be
affected by proposed rules 237 and 7d-2, because they may lose
potential new business from Canadian/U.S. Participants who, absent the
proposals, might choose to cash out their Canadian retirement accounts
and invest those assets in securities registered under the U.S.
securities laws. Based on inquiries that the Commission has received
from Canadian/U.S. Participants, however, it appears that many
participants currently do not choose this investment strategy because
of the adverse tax consequences that likely would result from such
action. It is likely, therefore, that the proposals would not
significantly affect the number of participants that may cash out their
Canadian retirement accounts, and thus that the proposals should not
have any significant affect on U.S. issuers, including U.S. funds, in
the form of lost new business. Moreover, even if absent the proposals
some Canadian/U.S. Participants would cash out their Canadian
retirement accounts and invest those assets in domestic issuers,
including domestic funds, we have no basis for predicting whether they
would invest in domestic issuers that are small entities.\65\
Therefore, it appears that these proposals are unlikely to have a
significant economic impact on a substantial number of domestic issuers
that are small entities.
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\65\ For purposes of the proposed rules, a domestic issuer
(other than an investment company) that has total assets of $5
million or less and that is engaged or proposes to engage in small
business financing is considered a small entity. 17 CFR 230.157. A
domestic investment company that, together with other investment
companies in the same group of related investment companies, has net
assets of $50 million or less is considered a small entity. 17 CFR
270.0-10.
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The proposed amendments to rule 12g3-2 would affect only foreign
private issuers whose securities might not qualify for the exemption
from Exchange Act registration afforded by rule 12g3-2(a) if the
issuers are required to count Canadian/U.S. Participants who hold their
securities in Canadian retirement accounts for purposes of determining
whether they have fewer than 300 U.S. shareholders. Because foreign
businesses are not small entities for purposes of the Regulatory
Flexibility Act, it appears that these proposed amendments will not
have a significant economic impact on a substantial number of small
entities.
E. Reporting, Recordkeeping, and Other Compliance Requirements
Proposed rules 237 and 7d-2 each would require written offering
documents relating to securities that are offered and sold in reliance
on the rule to disclose prominently that those securities are not
registered with the Commission and, in the case of securities of a non-
U.S. fund, that the fund also is not registered with the Commission.
These proposed rules, however, are only available for offers and sales
of securities of foreign issuers. Because foreign businesses are not
small entities for purposes of the Regulatory Flexibility Act, this
compliance requirement would have no impact on small entities. Proposed
rules 237 and 7d-2, and the proposed amendments to rule 12g3-2, do not
involve any other reporting, recordkeeping, or compliance requirements.
The Commission has not identified any overlapping or conflicting rules
or forms.
F. Significant Alternatives
The Regulatory Flexibility Act directs the Commission to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant economic impact on small entities.
Virtually all of the entities that would be affected by proposed rules
237 and 7d-2, and the proposed amendments to rule 12g3-2, however, are
foreign, and foreign businesses are not considered small entities for
purposes of the Regulatory Flexibility Act. As noted above, it appears
that the only potential impact that any of the proposals may have on
U.S. issuers, including those that are small entities, is the potential
loss of new business from Canadian/U.S. Participants as a result of
proposed rules 237 and 7d-2. As explained above, it appears that any
such impact would not be significant. Therefore, alternatives to the
proposed rules, including (i) establishing different compliance or
reporting standards that take into account the resources available to
small entities; (ii) clarifying, consolidating or simplifying the
compliance requirements for small entities; (iii) using performance
rather than design standards; or (iv) exempting small entities from
coverage of all or part of the rule, would not minimize any impact that
the proposals may have on small entities.
The Commission encourages the submission of comments on matters
discussed in the IRFA. Comment specifically is requested on the number
of small entities that would be affected by the proposals and the
impact of the proposals on small entities. Commenters are asked to
describe the nature of any impact and provide empirical data supporting
the extent of the impact. These comments will be placed in the same
public comment file as comments on the proposals. A copy of the IRFA
may be obtained by contacting Cynthia Gurnee Pugh, Securities and
Exchange Commission, 450 5th Street, NW., Washington, DC 20549-0506.
[[Page 14657]]
VI. Statutory Authority
The Commission is proposing rule 237 pursuant to authority set
forth in sections 19(a) and 28 of the Securities Act (15 U.S.C. 77s(a);
77z-3), rule 7d-2 pursuant to authority set forth in section 38(a) of
the Investment Company Act (15 U.S.C. 37(a)), and the amendments to
rule 12g3-2 pursuant to authority set forth in section 19(a) of the
Securities Act and section 12(g)(3) of the Exchange Act (15 U.S.C.
78l(g)(3)).
List of Subjects
17 CFR Parts 230 and 270
Investment companies, Reporting and recordkeeping requirements,
Securities.
17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of Proposed Rules
For the reasons set out in the preamble, title 17, chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for part 230 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss,
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-
28, 80a-29, 80a-30 and 80a-37, unless otherwise noted.
* * * * *
2. Section 230.237 is added to read as follows:
Sec. 230.237 Exemption for offers and sales to certain Canadian tax-
deferred retirement savings accounts.
(a) Definitions. As used in this section:
(1) Canadian law means the federal laws of Canada, the laws of any
province or territory of Canada, and the rules or regulations of any
federal, provincial, or territorial regulatory authority, or any self-
regulatory authority, of Canada.
(2) Canadian Retirement Account means a trust or other arrangement,
including, but not limited to, a ``Registered Retirement Savings Plan''
or ``Registered Retirement Income Fund'' administered under Canadian
law, that is self-directed and:
(i) Operated exclusively to provide retirement benefits to a
Participant; and
(ii) Established in Canada, administered under Canadian law, and
qualified for tax-deferred treatment under Canadian law.
(3) Eligible Security means a security issued by a Qualified
Company that:
(i) Is offered to a Participant, or sold to his or her Canadian
Retirement Account, in reliance on this section; and
(ii) May also be purchased by Canadians other than Participants.
(4) Foreign Government means the government of any foreign country
or of any political subdivision of a foreign country.
(5) Foreign Issuer means any issuer that is a Foreign Government, a
national of any foreign country or a corporation or other organization
incorporated or organized under the laws of any foreign country, except
an issuer meeting the following conditions:
(i) More than 50 percent of the outstanding voting securities of
the issuer are held of record either directly or through voting trust
certificates or depositary receipts by residents of the United States;
and
(ii) Any of the following:
(A) The majority of the executive officers or directors are United
States citizens or residents;
(B) More than 50 percent of the assets of the issuer are located in
the United States; or
(C) The business of the issuer is administered principally in the
United States.
(iii) For purposes of this definition, the term resident, as
applied to security holders, means any person whose address appears on
the records of the issuer, the voting trustee, or the depositary as
being located in the United States.
(6) Participant means a natural person who is a resident of the
United States, or is temporarily present in the United States, and
currently is entitled to receive the income and assets from a Canadian
Retirement Account.
(7) Qualified Company means a Foreign Issuer whose securities are
qualified for investment on a tax-deferred basis by a Canadian
Retirement Account under Canadian law.
(8) United States means the United States of America, its
territories and possessions, any State of the United States, and the
District of Columbia.
(b) Exemption. The offer to a Participant, or the sale to his or
her Canadian Retirement Account, of Eligible Securities by any person
is exempt from section 5 of the Act (15 U.S.C. 77e) if the person:
(1) Limits its activities with respect to Participants and their
Canadian Retirement Accounts to the following:
(i) Processing requests from a Participant (or his or her
authorized agent) for the purchase, sale, exchange, or redemption of an
Eligible Security, and effecting other routine transactions under
Canadian law;
(ii) Paying dividends and distributions on securities of a
Qualified Company held in a Canadian Retirement Account;
(iii) Delivering, upon request, written offering materials or other
informational materials concerning an Eligible Security; and
(iv) Delivering updated written offering materials, shareholder
reports, account statements, proxy statements, or other materials
concerning securities of a Qualified Company held in a Canadian
Retirement Account.
(2) Includes in any written offering materials delivered to a
Participant, or to his or her Canadian Retirement Account, a prominent
statement that the Eligible Security is not registered with the U.S.
Securities and Exchange Commission and may not be offered or sold in
the United States or to any person in the United States unless
registered, or an exemption from registration is available.
(3) Has not directly or indirectly solicited the Participant
concerning the Eligible Security, unless the person was an authorized
agent of the Participant at the time of the solicitation.
(4) Has not directly or indirectly engaged in activities that are
intended or could reasonably be expected to condition the market in the
United States or to facilitate secondary market trading in the United
States with respect to an Eligible Security.
(5) Has not asserted that Canadian or U.S. law, or the jurisdiction
of the courts of Canada (or a province or territory of Canada) or of
the United States, does not apply in a proceeding involving an Eligible
Security.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
3. The authority citation for part 240 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
* * * * *
4. Section 240.12g3-2 is amended by revising paragraph (a) to read
as follows:
Sec. 240.12g3-2 Exemptions for American depositary receipts and
certain foreign securities.
(a) Securities of any class issued by any foreign private issuer
shall be exempt from section 12(g) of the Act if the class has fewer
than 300 holders resident in the United States. This exemption shall
continue until the next
[[Page 14658]]
fiscal year end at which the issuer has a class of equity securities
held by 300 or more persons resident in the United States. For the
purpose of determining whether a security is exempt pursuant to this
paragraph:
(1) Securities held of record by persons resident in the United
States shall be determined as provided in Sec. 240.12g5-1 except that
securities held of record by a broker, dealer, bank or nominee for any
of them for the accounts of customers resident in the United States
shall be counted as held in the United States by the number of separate
accounts for which the securities are held. The issuer may rely in good
faith on information as to the number of such separate accounts
supplied by all owners of the class of its securities which are
brokers, dealers, or banks or a nominee for any of them.
(2) Persons in the United States who hold the security only through
a Canadian Retirement Account (as that term is defined in rule
237(a)(2) under the Securities Act of 1933 (Sec. 230.237(a)(2) of this
chapter)), may not be counted as holders resident in the United States.
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
5. The general authority citation for part 270 continues to read in
part as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39
unless otherwise noted:
6. Section 270.7d-2 is added to read as follows:
Sec. 270.7d-2 Definition of ``public offering'' as used in section
7(d) of the Act with respect to certain Canadian tax-deferred
retirement savings accounts.
(a) Definitions. As used in this section:
(1) Canadian law means the federal laws of Canada, the laws of any
province or territory of Canada, and the rules or regulations of any
federal, provincial, or territorial regulatory authority, or any self-
regulatory authority, of Canada.
(2) Canadian Retirement Account means a trust or other arrangement,
including, but not limited to, a ``Registered Retirement Savings Plan''
or ``Registered Retirement Income Fund'' administered under Canadian
law, that is self-directed and:
(i) Operated exclusively to provide retirement benefits to a
Participant; and
(ii) Established in Canada, administered under Canadian law, and
qualified for tax-deferred treatment under Canadian law.
(3) Eligible Security means a security issued by a Qualified
Company that:
(i) Is offered to a Participant, or sold to his or her Canadian
Retirement Account, in reliance on this section; and
(ii) May also be purchased by Canadians other than Participants.
(4) Foreign Government means the government of any foreign country
or of any political subdivision of a foreign country.
(5) Foreign Issuer means any issuer that is a Foreign Government, a
national of any foreign country or a corporation or other organization
incorporated or organized under the laws of any foreign country, except
an issuer meeting the following conditions:
(i) More than 50 percent of the outstanding voting securities of
the issuer are held of record either directly or through voting trust
certificates or depositary receipts by residents of the United States;
and
(ii) Any of the following:
(A) The majority of the executive officers or directors are United
States citizens or residents;
(B) More than 50 percent of the assets of the issuer are located in
the United States; or
(C) The business of the issuer is administered principally in the
United States.
(iii) For purposes of this definition, the term resident, as
applied to security holders, means any person whose address appears on
the records of the issuer, the voting trustee, or the depositary as
being located in the United States.
(6) Participant means a natural person who is a resident of the
United States, or is temporarily present in the United States, and
currently is entitled to receive the income and assets from a Canadian
Retirement Account.
(7) Qualified Company means a Foreign Issuer whose securities are
qualified for investment on a tax-deferred basis by a Canadian
Retirement Account under Canadian law.
(8) United States means the United States of America, its
territories and possessions, any State of the United States, and the
District of Columbia.
(b) Public Offering. For purposes of section 7(d) of the Act (15
U.S.C. 80a-7(d)), the term ``public offering'' does not include the
offer to a Participant, or the sale to his or her Canadian Retirement
Account, of Eligible Securities issued by a Qualified Company, if the
Qualified Company:
(1) Limits its activities with respect to Participants and their
Canadian Retirement Accounts to the following:
(i) Processing requests from a Participant (or his or her
authorized agent) for the purchase, sale, exchange, or redemption of an
Eligible Security, and effecting other routine transactions under
Canadian law;
(ii) Paying dividends and distributions on securities of a
Qualified Company held in a Canadian Retirement Account;
(iii) Delivering, upon request, written offering materials or other
informational materials concerning an Eligible Security; and
(iv) Delivering updated written offering materials, shareholder
reports, account statements, proxy statements, or other materials
concerning securities of a Qualified Company held in a Canadian
Retirement Account.
(2) Includes in any written offering materials delivered to a
Participant, or to his or her Canadian Retirement Account, a prominent
statement that the Eligible Security, and the Qualified Company that
issued the Eligible Security, are not registered with the U.S.
Securities and Exchange Commission, and that the Eligible Security may
not be offered or sold in the United States or to any person in the
United States unless the security and the Qualified Company are
registered, or exemptions from registration are available.
(3) Has not directly or indirectly solicited the Participant
concerning the Eligible Security, unless the person was an authorized
agent of the Participant at the time of the solicitation.
(4) Has not directly or indirectly engaged in activities that are
intended or could reasonably be expected to condition the market in the
United States or to facilitate secondary market trading in the United
States with respect to an Eligible Security.
(5) Has not asserted that Canadian or U.S. law, or the jurisdiction
of the courts of Canada (or a province or territory of Canada) or of
the United States, does not apply in a proceeding involving an Eligible
Security.
Dated: March 19, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7237 Filed 3-24-99; 8:45 am]
BILLING CODE 8010-01-P