Mr. Jonathan G. Katz

Secretary

Securities and Exchange Commission

450 5^th Street N.W.

Washington, D.C.

U.S.A. 20549-0609

Dear Mr. Katz:

We are writing to you in response to your request for comments relating to the Commission’s proposed rule for Offer and Sale of Securities to Canadian Tax-Deferred Retirement Savings Accounts. We support the goal of allowing U.S. residents to continue to manage pre-existing Canadian investments via the general changes contained in the proposed rule. However, we are concerned that the proposal does not deal with the full range of tax-deferred retirement savings accounts available to Canadian consumers. As a result, we believe that the proposals may not adequately address the concerns of Canadian retirees and others who may reside, or be temporarily resident, in the United States.

If adopted in its present form, the proposal could significantly disadvantage many consumers who have long-standing tax-deferred retirement savings account contracts with Canadian life insurers, banks and other institutions, and favour individuals who chose to invest in comparable tax-deferred products via trusteed arrangements. In particular, we believe that the proposed rule discriminates against holders of contracts that provide significant investment management control to the holder and may therefore be subject to U.S. securities law, but are not considered to be "self-directed" plans. In addition, the proposed rule could prevent all U.S. participants – even those who are only temporarily resident in the United States – from managing their accounts within Canadian defined-contribution pension plans.

We believe that the Commission neither intends nor wants to discriminate among products that are functionally similar. As well, we doubt that the Commission wishes to deny consumers the ability to effectively and prudently manage their retirement accounts and subsequent income flows. We believe that the discrimination that would result from the current proposal is inappropriate and that it can be readily eliminated by

The Canadian Life and Health Insurance Association Inc. ("CLHIA") is the oldest association operating in the insurance industry in North America. We speak for over eighty life and health insurance companies who provide about ninety per cent of the personal life and health insurance in force in Canada. Life Insurers operating in Canada serve approximately twenty-two million policyholders across Canada and an additional ten million around the world. As of December 31, 1997, they managed assets of $209 billion in Canada and $397 billion worldwide (all amounts are in Canadian currency). They fund approximately sixty-five per cent of the pension plans in this country. And they employ about 60,300 Canadians full-time.

Our members manufacture and market retirement savings products that are directly comparable to and in competition with those offered by other financial institutions in Canada. Because of the differing legislation governing various types of financial institutions and their respective operations, functionally equivalent products may have significantly different legal forms. For instance, while footnote number 3 to the Commission’s release identifies "Canadian Retirement Accounts" as being either of "self-directed" or "single vendor" form, many products offered as "single vendor" plans provide consumers with virtually identical flexibility in managing investments as plans that are described as "self-directed". This distinction is one of legal form, and does not address the underlying nature of investments held by the plan, the ability of the consumer to manage those investments or the potential application of U.S. securities law. The proposed rule speaks to the form of the plan, rather than the substance of the plan, and the actual functional control exerted by the consumer.

Similarly, the proposed definitions of "Canadian Retirement Account" reflect a narrow view of the Canadian marketplace that ignores pension arrangements sponsored by an employer and made available to a group of employees. Many group pension arrangements resemble a collection of individual plans, under which each individual employee has the ability to manage the investment of their account separate from decisions made by other participants in the arrangement. We believe that the current definitions focus on individual plans, and may not adequately address arrangements that provide independently accountable benefits to more than one individual.

Finally, we are concerned that the restriction of the proposed rule to tax-deferred arrangements creates unreasonable logical hurdles for consumers. Consider, for instance, a Canadian resident with an annual earned income of approximately $100,000. If this individual participates in a defined-benefit pension plan, the Income Tax Act (Canada) ("ITA") effectively prevents this person from contributing to a personal tax-deferred retirement savings account. For individuals with volatile income levels, the permitted contribution level can also fluctuate greatly. As a result, retirement arrangements are often structured with both tax-deferred and non-tax-deferred components, so that the non-tax-deferred portion can act as an "overflow" or "spill" option for the tax-deferred account.

The proposed rule would allow a Canadian temporarily in the United States (perhaps on a limited-term work assignment with an affiliate of his Canadian employer) to manage his tax-deferred account, but would prevent him from managing his non-tax-deferred account. Yet the investment options and strategies applicable to the two accounts would, in many cases, be identical. From a consumer perspective, restricting management of a non-tax-deferred account under such circumstances is difficult to understand.

The following comments will provide additional information relating to the different types of Tax-Deferred Retirement Savings Accounts available in Canada, their legal and functional form and recommend simple and effective solutions that resolve the current problems.

Canada’s retirement income system consists of four tiers:

1. Government plans, which have two components:

1. Old Age Security (OAS). This is a universal benefit that provides a flat-rate pension for those aged 65 or over (though it is taxed back for high-income individuals). This program is funded by general federal government revenues. OAS is supplemented by an income-tested Guaranteed Income Supplement (GIS).
1. Canada/Quebec Pension Plans. These are employment-related plans funded by employee and employer contributions. Participation is mandatory. Both benefits and contributions are earnings-related.

At year-end 1997, RRSP assets totaled $235 billion. Due to declining yields on interest-bearing deposits held in such plans and the increasing sophistication of Canadian investors, reinvestments and new RRSP contributions have shifted to products with greater exposure to both the Canadian and international equities markets. For most consumers, this shift has been manifested in an interest in mutual funds and segregated funds. At year-end 1997, the proportion of RRSP assets administered by mutual funds had risen to 42 percent, primarily at the expense of trust and mortgage loan companies. RRSP assets invested in insurance contracts totaled approximately 17 percent of total RRSP assets.

The rationale for allowing U.S. residents to be able to manage their Canadian Tax-Deferred Retirement Savings Accounts without the current restrictions has been well presented in the petition submitted to the Commission by The Investment Funds Institute of Canada ("the IFIC petition"). That rationale is equally applicable to legal structures governing products offered by CLHIA members, and will not be reiterated in these comments.

Consistent with the IFIC petition and the proposed rule, our comments use the term "Tax-Deferred Retirement Savings Account" to include all plans described under 2) and 3) above. We believe that this is a more general term than "Canadian Retirement Account" as defined in the proposed rule, and includes "Deferred Profit Sharing Plans" and Registered Pension Plans", to the extent that such plans may allow individual participants to manage the invested assets related to those individual participants.

Not all Tax-Deferred Retirement Savings Accounts are structured as trusteed or fiduciary arrangements. While the range of structures varies depending on the specific legislation governing each arrangement, the structures permitted under Registered Retirement Savings Plans are typical.

The ITA provides four distinct legal forms of Registered Retirement Savings Plans, as follows:

"retirement savings plan" means

1. a contract between an individual and a person licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an annuities business, under which, in consideration of payment by the individual or the individual's spouse of any periodic or other amount as consideration under the contract, a retirement income commencing at maturity is to be provided for the individual, or

Of these four structures, those described in subparagraphs (b)(i) and (b)(ii) are often referred to as "self-directed". This term is not used in the governing legislation. Such plans allow individual consumers to invest in a wide range of "qualified investments", as noted in the IFIC petition. Trusts that allow an individual to invest in units of a potentially restricted number of mutual funds represent one form of "self-directed" RRSP, but do not encompass all "self-directed" RRSPs. Products offered by our members would normally be described under paragraph (a) above, and would not be described as "self-directed" plans, as that term is generally understood in the Canadian market. However, our members’ products provide consumers with the same investment flexibility as those plans that are referred to in Canada as being "self-directed". The term "single vendor", which is used in both the IFIC petition and the proposing release, is not generally used in the Canadian market.

Correspondingly, the legal structure of Registered Retirement Income Funds relies on definitions of "carrier" and "retirement income fund", and does not require a trusteed arrangement; Deferred Profit Sharing Plans are trusteed, but may invest in insurance products. In fact, the legislation governing DPSPs includes a specific formal definition of "licensed annuities provider".

Since 1961, life insurance companies in Canada have been permitted to establish "segregated funds". Each such fund is analogous to a life insurer’s "separate account" in the United States. A segregated fund consists of assets of the insurer that are separate ("segregated") from the insurer’s other assets. Policy values are determined by reference to the value of the segregated fund(s), but the policyholder does not actually own units of the fund, as he would if investing via a mutual fund. A policyholder is deemed to have an interest in the segregated fund itself for tax purposes, with the segregated fund deemed to be an inter-vivos trust, and the insurer is deemed to be the trustee of that trust.

Historically, segregated funds were used primarily for the investment of employer-sponsored pension plan contributions on a group annuity basis. This remains an important market segment, but such plans do not appear to have been addressed in the IFIC petition.

More recently, segregated funds have been increasingly used as investment vehicles for retirement savings accounts within individual contracts, rather than via group arrangements. Such personal segregated fund-based contracts, known as "individual variable insurance contracts (IVICs)", are typically deferred annuities, although a small number of contracts are structured as immediate annuities or life insurance policies. Group contracts continue to be based exclusively on annuities, and might be described as "group variable annuity contracts (GVACs").

While the majority of IVICs and GVACs are issued as RRSPs or other Tax-Deferred Retirement Savings Accounts, such policies are also available on a "non-registered" basis, in which case fund income and realized capital gains or losses are allocated annually, and reported as income in the hands of the participants holding "non-registered" interests. Some individuals may purchase variable deferred annuities, on either a registered or non-registered basis, under an employer-sponsored plan; where registered, such group arrangements offer employers a low cost alternative to a traditional employment pension plan.

As noted previously, non-registered plans are often structured as "spill vehicles", designed to accept contributions that, due to low or fluctuating contribution limits, cannot be directed to a Tax-Deferred Retirement Savings Account at the time of the deposit. In many cases, amounts from such spill vehicles will be transferred to tax-deferred plans at the first subsequent permissible date, and the spill vehicle functions as a "collector" plan. Depending on the provisions of specific arrangements, consumers may have extensive flexibility in allocating deposits to specific investment types within an IVIC or GVAC. A typical product structure is described below under "Investment Features of IVICs and GVACs".

IVICs and GVACs allow consumers to direct premiums to a range of segregated funds, reflecting the insurer’s equity, bond, money market and balanced investments. A large number of funds focus on underlying Canadian instruments, although equity funds in particular may target European, Far East, U.S. or global markets. In addition to funds that are managed by the insurer, some companies offer policies that capitalize on brand recognition associated with large mutual funds; in these situations, a segregated fund may invest solely in units of a mutual fund provided on a "wholesale" basis by a third party vendor. Regardless of how specific segregated funds are structured, consumers are contractually permitted to move amounts from one segregated fund option to another without restriction, although surrender and transfer costs may apply.

When issued as an RRSP, an IVIC or GVAC qualifies under paragraph (a) of the definition of "retirement savings plan" found in subsection 146(1), ITA, as noted above. As such, it is not a "self-directed" plan. Yet the plan clearly includes the same degree of client selection and control as offered in a "mutual fund RRSP" registered under subparagraph (b)(i) of the same definition of "retirement savings plan". Similar formal differences apply to other tax-deferred arrangements.

Application of each of the Securities Act of 1933, the Investment Company Act of 1940, and the Securities Exchange Act should be independent of the "self-directed" status of a Canadian Retirement Account.

Individuals who save for retirement via group arrangements and who are contractually entitled to manage those savings should not be disadvantaged in terms of their ability to manage those savings relative to individuals who save for retirement via individual arrangements.

Non-tax-deferred savings form an integral part of retirement planning for many Canadians, and such savings are routinely administered in concert with Tax-Deferred Retirement Savings Accounts. Consumers should be permitted to manage existing forms of both accounts in accordance with pre-existing Canadian contracts and exempt from regulation under U.S. law, insofar as no new contributions are deposited to non-tax-deferred accounts while resident in the United States.

Thus, we recommend that the proposed rules be amended as follows:

Yours sincerely,

Ronald C. Sanderson,

Director, Policyholder Taxation