U.S. rules block sound fund management

Canadians living in or visiting the U.S. and looking to take greater control of their investments have just received a huge boost from U.S. lawmakers. But they still face serious regulatory hurdles when it comes to making the most of their investment savings.

Previously, the greatest obstacles to good financial management facing Canadians down south existed in the form of some unlikely American government regulations. The Investment Company Act of 1940 states anyone selling securities to U.S. residents must be registered with U.S. regulators. And the U.S. Securities Act of 1933 stipulates securities being offered to residents must be registered.

Understandably, few Canadian securities or brokers have U.S. registrations so these archaic laws caught many Canadians by surprise.

Just how restrictive were these rules in practice? Consider this example: If you were a mutual fund investor, you couldn’t buy a new fund or even switch from one fund to another within the same fund family while in the U.S. without breaking the law.

Blocked planning

Trading restrictions applied no matter what your reason for crossing the border, so owbirds, students or workers stationed in the U.S. — even vacationers on extended visits — were all affected. As such, the rules formed a huge roadblock to sound financial planning.

But, after years of pressure from Canadian investors and industry groups, U.S. regulators have finally sanctioned cross-border trades in Canadian retirement accounts. As well, Canadian brokers are now exempted from the registration rules, as long as they’re taking orders from clients with whom they’ve established relationships prior to their entry to the U.S.

These rules are only a first step, as each state must create corresponding law. The snowbird destinations of Florida and South Carolina have already adopted the new rules. It’s expected most states will follow the federal lead.

Still frozen accounts

However, your account is at present still frozen if you live in, work in, or visit California, Arizona, Hawaii, Oregon or Washington DC.

While this development is a quantum leap, the new rules underline some of the problems still facing Canadians residing in the U.S. Outside of one’s retirement account, you’re still restricted in your trading activities.

So, what are your options? Many brokerage firms require that investment accounts be closed when clients emigrate from Canada. For some investors, this liquidation could mean a huge tax hit if the sell-off creates a capital gain.

And if you’re in the U.S. for an extended time – say, more than half a year — with no intention of becoming a permanent resident, things get a little murkier. Technically, you couldn’t call your non-U.S.-registered broker with trading instructions from south of the border, but who’s to say from where you’re calling if you don’t volunteer the information?

If you trade online, you’ll notice the form says something along the lines of "by making this trade, you affirm that you are currently in Canada."

If your broker does have U.S. registration, you still couldn’t buy a newly issued stock, a mutual fund that’s sold by offering memorandum, or any number of other securities that don’t meet the conditions.

Working with the rules

A discretionary account that gives full trading authority to your investment advisor is one option, but this works only if you trust your advisor implicitly. Similarly, you could give power of attorney to someone else in Canada you trust.

Otherwise, you could tend to your account periodically when you’re home, hope for the best from mutual-fund managers, or put all of your trust and assets into an asset allocation or balanced mutual fund for the time you’re away.

Clearly, none of these is the optimum solution. The American laws are meant to protect its residents and benefit its own securities industry. But they seem bizarre, given the proliferation of online trading, which gives us Internet access to our accounts from anywhere in the world.

Why is it so important that we be physically present? We should be able to deal with our money as we see fit… from wherever we happen to be.