When travel and trading don’t mix

For example, regulatory exemptions exist in most parts of the U.S. that allow non U.S.-registered Canadian firms to do business with Canadian clients residing temporarily in those states. But the terms vary from state to state.

“With many Canadians non-resident for at least part of the year,” says Grant Vingoe, a partner and securities lawyer in the New York office of Arnold & Porter LLP, “there are a variety of regulatory issues an advi-sor should be aware of in dealing with clients while they are out of the country.”

A complicating factor is that many Canadians are travelling further afield than the U.S., often wintering in Mexico, Central America, South America, Asia or other parts of the globe. Ralf Hensel, legal counsel and director of policy at the Investment Funds Institute of Canada in Toronto, says it’s important for advisors to check with their firm’s compliance department to ensure that the firm is legally allowed to do business in these locations — and that the securities being sold also qualify under foreign rules.

“If the client is phoning from some exotic location, there could be rules that restrict the advisor’s ability to trade, and you must be in compliance with them,” Hensel says.” The last thing you want is a call from the regulator’s office in Mexico City saying you’ve sold a security illegally to a Canadian in Mexico. The sale of securities in another country is subject to the rules and laws of that country.”

The location of the client when contact is being made is the critical factor. In the U.S., the Securities and Exchange Commission employs an expansive definition of what constitutes brokerage activity and solicitation of business, so that even services that do not directly involve trading may be subject to its rules. Even the mailing of research reports or the sending of a trade confirmation could be sufficient to trigger a requirement for proper registration of your firm in a foreign country unless specific exemptions have been granted by foreign regulators.

The consequences of doing business without proper registration or appropriate exemptions could include an investigation by foreign regulators, which could lead to a larger review of various customer transactions during a prolonged period.

In addition, Vingoe says, there is the risk that clients who are unhappy with their investment performance might decide to rescind unprofitable trades on the grounds that your firm wasn’t properly registered to make them or did not meet the terms of the regulatory exemptions.

Since 2000, the SEC has helped out snowbirds by issuing a broad exemption from registration requirements for Canadian securities firms, which was later extended to mutual fund dealers. This exemption permits foreign securities firms and mutual fund dealers to conduct business with an individual who is a temporary resident of the U.S., staying fewer than 183 days (approximately six months), without U.S. registration. All firms must be members of a self-regulatory organization or stock exchange in Canada.

However, federal approval is not enough. Each U.S. state has its own securities regulations. Although some states allow foreign firms the same privileges, other states require various filings or fees.

“When it comes to cross-border trading in the U.S.,” says Paige Ward, director of policy and regulatory affairs for the Toronto-based Mutual Fund Dealers Association of Canada, “there is a complex matrix of exemptions, depending what state the Canadian resident is visiting. And firms must comply with the requirements of each state.”

The situation becomes more restrictive with any client who stays longer in the U.S. than 183 days and so is no longer considered “temporary.” A recommended “best practice” is to obtain written documentation from your clients regarding their temporary status in the U.S., where they are staying and for how long, and to request notification of any change.

“From a compliance standpoint,” says Vingoe, “there is a huge investment of time in keeping track of all the requirements that vary from state to state. And the time and costs involved can put small firms at a disadvantage.”

Vingoe says there are six states that require special registration for Canadian firms dealing with temporary Canadian residents: Oregon, Alaska, Iowa, New Hampshire, North Carolina and the District of Columbia. New York requires Canadian firms to file a special “no action” letter every year and pay about US$5,000 in fees. Florida requires a “notice filing” that involves the annual filing of various documents and a fee of US$200. California has no special filing requirements, but does require that your firm be a member of a Canadian SRO.

“Some states have a very narrow allowance as to what snowbirds can do, and the situation is complicated by the fact that there are 54 different regulators,” says Hensel. “Advisors need to be aware of a client’s residency status abroad, and should confirm with their firm’s compliance department that any necessary filings have been made.”

ANOTHER SNAG WHEN DEALING WITH SNOWBIRDS IS THE REQUIREMENT THAT CERTAIN DOCUMENTS NEED TO BE SENT TO CLIENTS IN A TIMELY MANNER. FOR EXAMPLE, CANADIAN SECURITIES RULES STATE THAT A CLIENT’S RIGHT OF WITHDRAWAL FROM AN AGREEMENT TO BUY MUTUAL FUNDS IS IN PLACE FOR TWO BUSINESS DAYS AFTER THE SIMPLIFIED PROSPECTUS IS RECEIVED. NORMALLY, IT IS SUFFICIENT TO SEND DOCUMENTS SUCH AS TRADE CONFIRMATIONS, PROSPECTUSES AND MONTHLY STATEMENTS TO YOUR CLIENT’S PERMANENT CANADIAN ADDRESS, VINGOE SAYS. THERE ARE NO U.S. REQUIREMENTS THAT THE DOCUMENTS BE SENT TO CANADIANS TEMPORARILY RESIDING IN THE U.S., HE SAYS, AND YOU MAY WANT TO AVOID ANY IMPLICATION THAT YOUR CLIENT IS A U.S. RESIDENT. HOWEVER, HE ADDS, IF THERE IS ANY “TIME SENSITIVITY,” DUPLICATE COPIES COULD BE SENT TO YOUR CLIENT’S FOREIGN ADDRESS. IE