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

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).

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

tions 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 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\

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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axation.\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

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

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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ra. 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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n 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

eign 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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ly 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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questing 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

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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he 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

rities 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

1); 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

nadian/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

ns 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

e 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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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

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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arily.\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)

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)

nts 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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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?

---------------------------------------------------------------------------

nal

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

ed 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

written offering materials upon the request of a participant,\35\ and

o 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

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

nadian

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)

9, 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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ule 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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ecurities 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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d

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.

---------------------------------------------------------------------------

\43\ Proposed rule 237(b)(5).

---------------------------------------------------------------------------

ot

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

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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posed 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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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\

-

s 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

at 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

ained 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

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.

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\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

ublicly 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

sociated 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

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

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

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

he 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

--------------

\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.

---------------------------------------------------------------------------

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,

nadian 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,

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.

---------------------------------------------------------------------------

r

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).

---------------------------------------------------------------------------

equired 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.

---------------------------------------------------------------------------

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

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

ct 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

quirements 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

st 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

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.

---------------------------------------------------------------------------

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

uld 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.

---------------------------------------------------------------------------

\64\ See 13 CFR 121.105 (defining ``business concern'' for

purposes of the Small Business Administration's definition of

``small business'').

---------------------------------------------------------------------------

oposals are unlikely to have a significant

economic impact on a substantial number of small entities.

---------------------------------------------------------------------------

\64\ See 13 CFR 121.105 (defining ``business concern'' for

purposes of the Small Business Administration's definition of

``small business'').

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

ts 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.

---------------------------------------------------------------------------

\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

dian 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

-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.

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)).

ng 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:

ory 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.

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.

fied 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:

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

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.

f 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:

t 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.

plied 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.

fied 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