[Federal Register Volume 65, Number 116 (Thursday, June 15, 2000)]
[Rules and Regulations]
[Pages 37672-37677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-15086]



[[Page 37671]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 230, 240, and 270



Offer and Sale of Securities to Canadian Tax-Deferred Retirement 
Accounts; Final Rule; and In the Matter of the Investment Dealers 
Association of Canada; Order Granting Exemption; Notice

  Federal Register / Vol. 65, No. 116 / Thursday, June 15, 2000 / Rules 
and Regulations  

[[Page 37672]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 240 and 270

[Release Nos. 33-7860, 34-42905, IC-24491; File No. S7-10-99 
International Series Release No.1226]
RIN 3235-AH32


Offer and Sale of Securities to Canadian Tax-Deferred Retirement 
Savings Accounts

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission is adopting 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 adopting 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 will 
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.

EFFECTIVE DATE: June 23, 2000.

FOR FURTHER INFORMATION CONTACT: Curtis A. Young, Senior Counsel, or C. 
Hunter Jones, Assistant Director, at (202) 942-0690, Office of 
Regulatory Policy, Division of Investment Management, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') today is adopting rule 237 [17 CFR 230.237] under the 
Securities Act of 1933 [15 U.S.C. 77a-aa] (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-
mm] (the ``Exchange Act'').

Table of Contents

Executive Summary

I. Discussion
    A. Rule 237 Under the Securities Act
    B. Rule 7d-2 Under the Investment Company Act
    C. Amendments to Rule 12g3-2 Under the Exchange Act
II. Effective Date
III. Cost Benefit Analysis
IV. Effects On Efficiency, Competition And Capital Formation
V. Paperwork Reduction Act
VI. Summary Of Final Regulatory Flexibility Analysis
VII. Statutory Authority
Text of 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 who have 
established Canadian retirement accounts and later moved to the United 
States (``Canadian/U.S. Participants'' or ``participants'') have been 
unable to make changes in their retirement accounts because the changes 
would involve the sale of unregistered securities and investment 
companies (``funds'') in violation of U.S. securities laws.
    The Commission is adopting two rules that are designed to enable 
Canadian/U.S. Participants to manage the assets in their Canadian 
retirement accounts. The new rules: (i) permit securities of foreign 
issuers, including securities of foreign funds, to 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) permit foreign funds to 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, will remain fully subject to the antifraud provisions of the 
U.S. securities laws. The Commission also is issuing an order exempting 
Canadian broker-dealers that maintain these retirement accounts for 
Canadian/U.S. Participants, from the registration requirements and 
certain related provisions of the Exchange Act.

I. Discussion

    The Commission has received complaints from many Canadian/U.S. 
Participants that the application of the U.S. securities laws to their 
retirement accounts has left them unable to manage their investments in 
those accounts. In response, we proposed rules last year to provide 
relief from the registration requirements of the federal securities 
laws for offers of securities to participants in Canadian retirement 
accounts, and sales to their accounts.\1\ We received 35 comment 
letters on the proposed rules, all of which supported the proposal.\2\ 
Today we are adopting the rules substantially as proposed, with 
modifications that reflect a number of technical changes suggested by 
commenters.\3\
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    \1\ See Offer and Sale of Securities to Canadian Tax-Deferred 
Retirement Savings Accounts, Securities Act Release No. 7656 (Mar. 
19, 1999) [64 FR 14648 (Mar. 26, 1999)] (``Proposing Release''). 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. However, 
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 and sales be registered under the Securities Act thus deters 
most foreign mutual funds from offering securities to Canadian/U.S. 
Participants.
    \2\ The commenters included sixteen financial institutions, 
eight professional and trade associations, seven investors, two 
government agencies, one elected official, and one consultant firm. 
The comment letters, and a summary of the comment letters received 
during the comment period, are available in the Commission's Public 
Reference Room, 450 Fifth Street, NW, Washington, DC (File No. S7-
10-99).
    \3\ We are also issuing an order that provides 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. See In the Matter of the Investment Dealers Association of 
Canada; Order Granting Exemption, Release No. 34-42906 (June 7, 
2000).
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A. Rule 237 Under the Securities Act \4\
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    \4\ The following discussion focuses on the scope and conditions 
of rule 237. The scope and conditions of rule 7d-2, as discussed 
below, are largely identical.
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    Rule 237 exempts from the registration requirements of the 
Securities 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.\5\ A ``participant'' includes an individual 
permanently or temporarily in the United States who contributes to or 
is (or will be) entitled to receive the assets from a Canadian 
retirement account.\6\ A

[[Page 37673]]

Canadian retirement account includes a Registered Retirement Savings 
Plan (``RRSP''), Registered Retirement Income Fund (``RRIF''), and 
similar retirement accounts established under Canadian law to provide 
tax-deferred retirement benefits. The accounts covered by the rule are 
limited to those that are managed by the participants, i.e., are plans 
for which the participant selects or controls the securities in the 
account.\7\
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    \5\ The rule exempts 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. Commenters confirmed our understanding 
that most Canadian/U.S. Participants will not 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 employed in the United States ordinarily would not have. 
See Proposing Release, supra note 1, at n.4.
    \6\ See rule 237(a)(6). The proposed definition of 
``participant'' would have included only individuals who are 
entitled to receive the income and assets from a Canadian retirement 
account (i.e., beneficiaries). We revised the definition, at the 
suggestion of commenters, to include individuals who contribute to a 
Canadian retirement account but are not beneficiaries, and those who 
are beneficiaries but have yet to reach the age when they may 
receive income and assets from the plan.
    \7\ See rule 237(a)(2). The proposed rule used the term ``self-
directed,'' which we have not included in the final rule. Commenters 
expressed concern that the term might not be understood in Canada to 
include certain plans in which the participant selects or controls 
the investments.
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    The exemption provided by rule 237 would be available for offers 
and sales of securities of foreign issuers, if the securities are 
available for purchase by Canadian investors other than Canadian/U.S. 
Participants. The requirement that the issuer be a ``foreign issuer'' 
is designed to prevent a U.S. issuer from using the rule to sell 
unregistered securities to persons in the United States.\8\
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    \8\ A ``foreign issuer'' includes foreign governments and 
political subdivisions, foreign nationals, and foreign private 
issuers as defined under Securities Act rule 405 [17 CFR 230.405].
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    An issuer or other person who relies on rule 237 must comply with 
two conditions. First, all written offering materials for eligible 
securities (including advertisements and newsletters) delivered to a 
participant must prominently disclose that the securities are not 
registered with the U.S. Securities and Exchange Commission.\9\ Second, 
a person relying on the rule must not disclaim the applicability of 
Canadian law or jurisdiction \10\ in any proceeding involving eligible 
securities.\11\
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    \9\ A ``prominent'' statement under the rule would be one that 
is designed to attract the reader's attention. See, e.g., Securities 
Act rule 421 [17 CFR 230.421] (guidelines on presenting information 
in a prospectus in a clear, concise, and understandable manner); 
U.S. Securities and Exchange Commission, Office of Investor 
Education and Assistance, A Plain English Handbook: How to Create 
Clear SEC Disclosure Documents 43-54 (1998) (providing suggestions 
for emphasizing information, such as extra white space, bold type, 
shading, boxes, and sidebars).
    \10\ The rule defines Canadian law as the federal, provincial, 
or territorial laws and regulations of Canada, as well as the rules 
and regulations of any Canadian self-regulatory authority. See rule 
237(a)(1). Unlike the proposed rule, the rule as adopted does not 
prevent a person relying on the rule from asserting that the law or 
jurisdiction of a particular Canadian province or territory should 
apply in a legal action rather than the law or jurisdiction of 
another Canadian province or territory.
    \11\ See rule 237(b)(2). We are not adopting the proposed 
condition that a person relying on the rule not disclaim the 
applicability of U.S. law or the jurisdiction of U.S. courts, in any 
proceeding involving eligible securities. Rule 237 is premised on 
the availability of investor protections afforded by Canadian law 
for Canadian retirement account investments. Because the rule is 
premised on the availability of Canadian remedies, we believe, on 
further reflection, that conditioning the rule on not disclaiming 
U.S. remedies is unnecessary.
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    We have eliminated a number of restrictions included in proposed 
rule 237 that on further reflection we believe are unnecessary. First, 
the proposed rule would have specified the activities in which persons 
relying on the rule would be permitted to engage with respect to 
participants, such as paying dividends on investments and sending 
updated offering materials. One commenter pointed out the difficulty in 
identifying all permitted activities and expressed concern that the 
rule could prohibit activities that are consistent with the purpose of 
the rule. We share this concern and have revised the rule to exclude 
any description of permitted activities.
    Second, proposed rule 237 would have permitted a person relying on 
the rule to solicit a Canadian/U.S. Participant only if the person was 
an authorized agent of the participant before the solicitation. That 
condition was designed to prevent the exemption from being used as an 
avenue for a distribution of securities in the United States beyond the 
rule's limited purposes. In the order we are issuing today, we are 
requiring that, as a condition for exemptive relief from the broker-
dealer registration requirements of the Exchange Act, the broker-dealer 
must have had a bona fide, pre-existing relationship with the 
participant before he or she entered the United States.\12\ We believe 
this condition of the exemptive order is sufficient and therefore have 
not included the condition in the rule.
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    \12\ See In the Matter of the Investment Dealers Association of 
Canada; Order Granting Exemption, Release No. 34-42906 (June 7, 
2000). Under the order, a broker-dealer also may not solicit 
individuals in the United States for new Canadian retirement 
accounts.
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    Finally, proposed rule 237 would have prohibited persons relying on 
the rule from engaging in activities that would condition the U.S. 
market for the securities (such as advertising the securities in the 
United States) or that would facilitate secondary trading in the 
securities. We believe this provision also is unnecessary. As one 
commenter noted, such marketing activities would almost certainly 
result in a ``public offering'' to U.S. persons other than Canadian/
U.S. Participants, and thus would not be exempted under the rule from 
the registration requirements of the Securities Act.

B. Rule 7d-2 Under the Investment Company Act

    Rule 7d-2 under the Investment Company Act provides that a foreign 
fund's offer of securities to Canadian/U.S. Participants, and a sale to 
their accounts, are not ``public offerings'' that would require the 
fund to register as an investment company under that Act.\13\ The scope 
of this rule, and the conditions that must be met by a foreign fund 
relying on the rule, are substantially the same as the scope and 
conditions of rule 237 under the Securities Act.\14\
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    \13\ See rule 7d-2(b).
    \14\ See supra Part I.A (discussion of the scope and conditions 
of proposed rule 237). The one difference is that rule 7d-2 requires 
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. Rule 7d-2(b)(1).
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C. Amendments to Rule 12g3-2 Under the Exchange Act

    The Commission is adopting as proposed amendments to rule 12g3-2, 
which exempts securities of a foreign private issuer from the 
registration requirements of the Securities Exchange Act if the issuer 
has fewer than 300 shareholders resident in the United States. The 
amendments provide that Canadian/U.S. Participants who hold shares of a 
foreign private issuer only through their Canadian retirement accounts 
do not count towards the 300 shareholders in the United States.\15\
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    \15\ See rule 12g3-2(a)(2).
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II. Effective Date

    The effective date will be June 23, 2000. This effective date is 
less than 30 days after publication so that Canadian/U.S. Participants, 
issuers, and others may benefit sooner from the relief provided by the 
rule changes.\16\
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    \16\ See 5 U.S.C. 553(d)(1) (permitting exemptive rules to 
become effective less than 30 days after publication).
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III. Cost Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules.

[[Page 37674]]

The rules 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.\17\ 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. \18\ Rules 237 and 7d-2 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 rules thus will benefit these investors by making it 
possible for them to manage their Canadian retirement account 
investments.
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    \17\ See Proposing Release, supra note 1, at text accompanying 
nn. 9-10.
    \18\ The U.S. securities laws do not directly prohibit 
participants from managing their accounts, but offers and sales to 
participants and their accounts necessitate registration in the 
United States.
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    Rules 237 and 7d-2 also will benefit foreign issuers (including 
foreign funds) and persons that sell securities of foreign issuers to 
Canadian retirement accounts in two ways. First, absent the rules, 
these persons likely could not offer foreign securities to Canadian/
U.S. Participants or sell foreign securities to their accounts. Second, 
absent the rules, they could be exposed to substantial liability if 
they sold securities of foreign issuers to participants accidentally.
    Foreign issuers and other persons may incur costs when relying on 
the rules to offer or sell securities. The 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 the 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. The associated costs are likely to be 
minimal and are justified by the benefits of the relief provided by the 
new rules, which are, of course, not mandatory.
    Rules 237 and 7d-2 also may 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 comments 
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. It therefore appears that the rules will 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 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 rules primarily will affect foreign issuers and 
other foreign persons, it appears that the rules also will not cause 
any other costs or benefits for U.S. issuers.
    The amendments to rule 12g3-2(a) 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 amendments will 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 amendments also will 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 appear to be no significant costs to foreign 
issuers, domestic issuers, or investors associated with these 
amendments.

IV. Effects On Efficiency, Competition and Capital Formation

    Section 23(a) \19\ of the Exchange Act requires the Commission, in 
adopting rules under the Exchange Act, to consider the competitive 
effects of such rules, if any, and to refrain from adopting a rule that 
would impose a burden on competition not necessary or appropriate in 
furthering the purposes of the Exchange Act. In addition, section 2(b) 
of the Securities Act, section 2(c) of the Investment Company Act, and 
section 3(f) of the Exchange Act provide that when the Commission is 
engaged in rulemaking and is required to consider whether an action is 
necessary or appropriate in the public interest, it must consider, in 
addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation.\20\
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    \19\ 15 U.S.C. 78w(a).
    \20\ 15 U.S.C. 77b(b), 80a-2(c), and 78c(f).
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    The Commission does not believe rule 237, rule 7d-2, and the 
amendment to rule 12g3-2 will impose any burden on competition. Based 
on the reasons stated in the cost-benefit analysis above, the 
Commission believes that the rules will promote efficiency, 
competition, and capital formation. Two commenters stated that the 
rules would promote efficiency by removing the regulatory barrier that 
hinders the ability of participants to manage their Canadian retirement 
accounts. One of these commenters also stated that the rules would 
promote competition among the issuers of eligible securities because 
participants represent a significant market segment in terms of dollar 
value of assets held in their Canadian retirement accounts.
    As discussed above, we anticipate that the rules will not result in 
any major increase in costs to funds or fund investors.

V. Paperwork Reduction Act

    Certain provisions of the rules constitute a ``collection of 
information'' requirement within the meaning of the Paperwork Reduction 
Act of 1995 [44 U.S.C. 3501-3520]. The Commission solicited, but did 
not receive, comments on the collection of information requirements in 
the Proposing Release.\21\ The Commission submitted the proposed rules 
to the Office of Management and Budget (``OMB'') pursuant to 44 U.S. 
3507(d) and received approval of the rules' collection of information 
requirements (OMB control number 3235-0527). An agency may not conduct 
or sponsor, and

[[Page 37675]]

a person is not required to respond to, a collection of information 
unless it displays a currently valid control number.
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    \21\ As stated in the Proposing Release, the Commission 
estimates that the annual reporting and recordkeeping burden for the 
rule 237 disclosure requirement will be approximately 17.5 hours. 
See Proposing Release, supra note 1, at Part IV.B. The Commission 
estimates that the annual reporting and recordkeeping burden for the 
rule 7d-2 disclosure requirement will be approximately 32.5 hours. 
See id. at Part IV.A.
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VI. Summary Of Final Regulatory Flexibility Analysis

    The Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA'') in accordance with 5 U.S.C. 604 regarding rules 237 and 7d-
2, and the proposed amendments to rule 12g3-2. A summary of the Initial 
Regulatory Flexibility Analysis (``IRFA''), which was prepared in 
accordance with 5 U.S.C. 603, was published in the Proposing Release. 
We received no comments on the IRFA.

A. Need for the Rules and Rule Amendments

    As discussed more fully in the FRFA, the rules and rule amendments 
are intended to give participants the ability to manage the assets in 
their tax-deferred retirement savings accounts. To permit this, the 
Commission is adopting two new rules that 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. Rule 237 under the Securities Act permits securities of 
foreign issuers, including securities of foreign funds, to be offered 
to Canadian/U.S. Participants and sold to their Canadian retirement 
accounts without being registered under the Securities Act. Rule 7d-2 
under the Investment Company Act permits foreign funds to 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 FRFA notes that to ensure that the securities registration 
requirements of the Exchange Act do not deter foreign issuers from 
relying on rules 237 and 7d-2 to sell their securities to Canadian 
retirement accounts of Canadian/U.S. Participants, the Commission also 
is amending rule 12g3-2 under the Exchange Act. Section 12(g)(1) of the 
Exchange Act [15 U.S.C. 78l(g)(1)] 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.\22\ 
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 it has fewer than 
300 shareholders resident in 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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    \22\ Rule 12g-1 under the Exchange 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.
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B. Small Entities Subject to the Rules and Rule Amendments

    As discussed more fully in the FRFA, the rules will affect foreign 
issuers and other persons that offer foreign securities to Canadian/
U.S. Participants and sell those securities to Canadian retirement 
accounts. Foreign businesses, however, are not small entities for 
purposes of the Regulatory Flexibility Act.\23\ Therefore, these rules 
are unlikely to have a significant economic impact on a substantial 
number of small entities.
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    \23\ See 13 CFR 121.105 (defining ``business concern'' for 
purposes of the Small Business Administration's definition of 
``small business'').
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    The FRFA notes that it is possible that, as a result of the rules, 
some domestic issuers may incur costs in the form of lost new business 
from Canadian/U.S. Participants who, absent the rules, might choose to 
cash out their Canadian retirement accounts and invest those assets in 
securities registered under the U.S. securities laws. However, it 
appears that many Canadian/U.S. Participants currently do not choose 
this investment strategy. Moreover, even if absent the rules some 
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.\24\ Therefore, it appears that these 
rules are unlikely to have a significant economic impact on a 
substantial number of domestic issuers that are small entities.
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    \24\ For purposes of the 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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    As discussed more fully in the FRFA, because foreign businesses are 
not small entities for purposes of the Regulatory Flexibility Act,\25\ 
it appears that the amendments to rule 12g3-2 will not have a 
significant economic impact on a substantial number of small entities.
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    \25\ See supra note 23 and accompanying text.
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C. Reporting, Recordkeeping, and Other Compliance Requirements

    The FRFA notes that rule 237 and rule 7d-2 would require written 
offering materials relating to securities that are offered and sold in 
reliance on the rules to disclose prominently that those securities are 
not registered with the Commission and that the securities are being 
offered or sold in the United States under an exemption from 
registration. Rule 7d-2 would require that written offering materials 
also disclose that the foreign fund that issued the securities is not 
registered with the Commission. Rule 237 and rule 7d-2 are available 
only for offers and sales of securities of foreign issuers. This 
compliance requirement thus would have no impact on small entities, 
because foreign businesses are not small entities for purposes of the 
Regulatory Flexibility Act.\26\ Rules 237 and 7d-2, and the amendments 
to rule 12g3-2, do not involve any other reporting, recordkeeping, or 
compliance requirements.
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    \26\ See id.
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D. Alternatives to Minimize Effect on Small Entities

    As discussed more fully in the FRFA, the Commission considered 
various alternatives that might minimize any significant economic 
impact of the rules on small entities. These include (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 rules. The FRFA concludes 
that alternative requirements or simplification or consolidation of the 
requirements is unnecessary because the amendments are designed to 
reduce the compliance burdens for all funds, including small entities. 
In addition, an exemption from any of the requirements for small 
entities would increase their regulatory burden rather than decrease 
it.
    A copy of the FRFA may be obtained by contacting Curtis A. Young, 
Division of Investment Management, Securities and Exchange Commission, 
450 Fifth

[[Page 37676]]

Street, NW, Washington, DC 20549-0506.

VII. Statutory Authority

    The Commission is adopting rule 237 under the authority in sections 
19(a) and 28 of the Securities Act [15 U.S.C. 77s(a); 77z-3], rule 7d-2 
under the authority in section 38(a) of the Investment Company Act [15 
U.S.C. 80a-37(a)], and the amendments to rule 12g3-2 under the 
authority 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 Rules

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is 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, 
77z-3, 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 managed by the Participant and:
    (i) Operated 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 who 
contributes to, or is or will be 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) 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 the Eligible Security is being 
offered or sold in the United States under an exemption from 
registration.
    (2) Has not asserted that Canadian law, or the jurisdiction of the 
courts of Canada, 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) (15 U.S.C. 78l(g)) of the Act if the 
class has fewer than 300 holders resident in the United States. This 
exemption shall continue until the next 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)), shall not be counted as holders resident in the United 
States.
* * * * *

[[Page 37677]]

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 managed by the Participant and:
    (i) Operated 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 who 
contributes to, or is or will be 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) 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 and 
the Qualified Company are relying on exemptions from registration.
    (2) Has not asserted that Canadian law, or the jurisdiction of the 
courts of Canada, does not apply in a proceeding involving an Eligible 
Security.

    Dated: June 7, 2000.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-15086 Filed 6-14-00; 8:45 am]
BILLING CODE 8010-01-U