Cross Border Trading

Can a U.S. resident, living in Connecticut and having an RRSP account in Canada, legally change or switch funds in his RRSP account?

from Neville D'Silva

Yes, it is now possible to buy and switch funds in some states, but, unfortunately, the answer appears to be "no" for Connecticut at the moment.

In June 2000 the U.S. Securities and Exchange Commission (SEC) announced that Canadians living south of the border would be allowed to actively manage their Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). In a backgrounder released at the time of the proposed rule, the Investment Funds Institute of Canada (IFIC) indicated that the issue may affect over half a million Canadians who have moved south for work or retirement, but who maintained their retirement accounts.

Prior to this change, the 1933 Securities Act and the 1940 Investment Company Act restricted the investment activities of Canadians living in the US. The former Act required any securities sold to US residents to be registered with U.S. regulators, and the latter required any fund company selling funds to U.S. residents to be registered as a U.S. fund company. Canadian "snowbird" investors were therefore unable to buy or even trade funds in a fund family. Unable to adjust their asset allocation from abroad, Canadians who live half the year in the U.S. would still have to physically come to Canada to make transactions.

As the backgrounder from the Investment Funds Institute of Canada (IFIC) points out, the SEC was only the first step; each state has to have a corresponding rule, and Connecticut does not figure on the survey in the public section of the IFIC Web site at www.ific.ca. (The following states currently have some legislative exemptions in place allowing Canadian broker/dealers or agents who meet certain conditions to transact business with their Canadian clients residing in these states: Alabama, Alaska, Arkansas, Colorado, Delaware, Florida, Hawaii, Indiana, Iowa, Maine, Massachusetts, Michigan, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Pennsylvania, Rhode Island, South Carolina, Utah, Washington, Wyoming.

The states of Arizona, California, Montana, and Ohio have published for comment draft rules permitting limited registration for Canadian dealers and salespersons.) (look under Regulation & Committees, Current Issues & Initiatives, Cross-Border Trading). The backgrounder also makes a few suggestions about what your client can, and cannot, do as follows:

What can investors do in states that do not have the proper legislation?

Canadians living in a U.S. state that does not allow cross border trading, or those who are considering a move to one of these states, have three choices:

• They can leave the money in the funds under the current asset allocation regime regardless of changing financial objectives.
• They can collapse the plan, suffering through a very significant tax hit.
• They can move the funds into a balanced fund or asset allocation service before becoming a U.S. resident.

What can they not do?

Canadians living in a U.S. state that does not yet allow cross border trading:

• Cannot trade over the Internet. It is illegal. If you are physically present in the U.S. you must abide by their laws.
• Cannot give a power of attorney to someone in Canada and still relay trade directions to them. The only power of attorney that would legally work would be one granted by the investor to his or her investment advisor (or other person) wherein full discretionary trading authority is granted to the attorney. The key is that if the investment-making decision is really made in the U.S., and the investor gives instructions to the person with the power of attorney in Canada, this would not be acceptable and would be a breach of U.S. federal securities laws.
• Mutual fund dealers should bear in mind that their registration does not permit them to engage in discretionary trading. It is also important to note that the use of powers of attorney in these circumstances is still subject to the general anti-avoidance provisions under U.S. securities laws.

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