Investing in Canada
for Americans

Dateline: 08/16/99

There is a great interest in Canadian stocks from Americans these days. Indeed, some analysts argue that Canadian stocks are undervalued compared to their American cousins as the Canadian stock markets have underperformed the U.S. ones over the last few years.

But investing in Canadian stocks is not as easy for Americans as it is for Canadians to invest in U.S. stocks. If I want to buy an American stock, I just call my broker or surf in to my account on the Net and place a buy order. In fact, virtually all Canadian brokers will buy American stocks for their clients.

But Americans first have to find a broker that will handle Canadian stocks. And even then, it can be tricky. The reason - American securities laws are far stricter than Canadian ones. And the laws vary from state to state. So many American brokerages shy away from handling Canadian or other foreign stocks.

Here is the lowdown on buying Canadian stocks for Americans as related to me by two brokers who I thank very much for their generous assistance - Leanne Bishop at Canaccord Capital in Vancouver and Steve Taylor with the Taylor Group, brokers at National Securities in Seattle, Washington.

American Law Restricts Trading in Foreign Stocks

Most any American brokerage can buy Canadian or foreign stocks for their clients, says Ms. Bishop. "It all depends on whether they want to or not." Because of the more restrictive American laws, however, she has found that "only the large national firms do so."

This is because there is considerable expense involved in setting up for foreign trading. There must be "a big enough demand for them to set in place the required systems in their back office.  For any firm (in any country) to deal outside their own country they must create the proper department." 

What are these restrictions? Oddly enough, they are not about buying or selling foreign foreign securities. They are about advising customers on foreign securities. "U.S. security law is phenomenally restrictive," says Ms. Bishop. " It states that an investor (with some exceptions) can only get advice from a broker that is registered in the state in which the investor resides. And then, the stock must meet certain blue-sky and penny stock qualifications, for that state. As far as I know, there are no other countries that have these blue-sky or penny-stock restrictions."

Steve Taylor concurs. "The individual states have an enormous amount of power over the brokers and the firms registered with the state and which securities can or cannot be sold there," he writes. Because of this, "very few Canadian brokerage firms are legally registered to do business in the United States." In fact, he notes that the SEC and the B.C. Securities Commission are currently pursuing a case against a Vancouver brokerage for "conducting business without registration in
the US," a case, he says, that "holds immense ramifications for cross-border finance."

Canaccord Capital, writes Ms. Bishop, dealt with U.S. securities regulations by forming a subsidiary, NorAm Investment Services, which is affiliated with Southwest Securities of Dallas, Texas. Canadian brokers wanting to deal with American clients "must take the U.S. exam and register as U.S. brokers." She, in fact, has taken the exams and is registered in several U.S. states. "In essence," she says, "I am a U.S. broker when conducting business with my American clients; and their account resides in Dallas, Texas. They can phone me and put an order in on any stock in the world, but I can only give advice to them (US clients, that is) on companies that meet all U.S. requirements."

The Penny Stock Rules are set by the federal Securities and Exchange Commission. But Steve Taylor writes that "even if a stock does meet the Penny Stock Rule, it still may not meet state requirements. Each of the 50 US States (plus DC and the Commonwealths) have their own Securities Commissions which regulate brokers and securities. Each state has their own registration requirements for securities."

"Speaking from personal experience," says Taylor, "most of the stocks listed on the VSE and ASE and even many on the TSE or MSE do not meet" the SEC's Penny Stock Rules requirements. But, he adds, "in many cases the companies have made no effort to comply. Many Canadian companies could potentially open up their shares to American investors if they only understood the rules better and filed the correct paperwork."

Most NASDAQ and U.S. Exchange stocks are exempt from extra state registration, he notes, but not in all cases. Though it is rare, "more than once when running routine checks on NASDAQ small-cap stocks I want to recommend to my clients," he writes, "I have found them to be unregistered in certain states because they thought their listing exempted them - it doesn't."

The rules vary from state to state. Some jurisdictions require no registration at all. Some "exempt those stocks which obtain an informational listing in certain financial publications, in particular the Moody's or Standard & Poor's Corporation Records."

So those Canadian Internet stocks listed on my Yankee Index (Canadian Internet stocks trading exclusively on American exchanges) may not meet all requirements even though listed on a U.S. exchange.

"Overall," Taylor concludes, "U.S. regulation is a crazy quilt of overlapping and sometimes seemingly contradictory rules and laws that must be followed by brokers and public companies alike."

Leanne Bishop adds this disclaimer - "I cannot vouch that everything said above is 100% true. It's my personal opinion, based on 20 years as a broker, and the information is not guaranteed. If an investor wants 100% guaranteed information they should contact the Securities and Exchange Commission." Mr. Taylor adds that it may be worthwhile contacting your State Securities Office as well. Sound advice!

A Word on Mutual Funds

Let's conclude by reiterating what we mentioned in a previous article - Americans cannot buy Canadian mutual funds under any circumstances at present. Nor can Canadians buy American mutual funds. In fact some mutual funds are even more restricted. For example, only residents of British Columbia can buy the Multiple Opportunities Fund. As Leanne Bishop tells me, "It has to do with the registration of mutual funds."

But both the Canadian and American governments are discussing changing the regulations, so the mutual funds on each side of the border may be available to residents of the other country in the future.

Contacts

For readers interested in buying Canadian stocks, both of the brokers helping with this article are registered to do so. They can be reached as follows:

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Other Links of Interest

Info for Non-residents - a collection of Net Links on information for ex-patriate Canadians and foreigners wanting to invest in Canadian stocks. Most of the info is geared towards U.S. residents.

U.S. Securities and Exchange Commission - the regulatory body for American securities trading.

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As subscribers to the newsletter know, I'm on vacation right now and writing sporadically.There will be no column for a week and a half until August 25 or 26. That will likely be a belated Mutual Funds Analysis. Until then, enjoy the summer!

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