Canadians told to trade at home|
Jonathan Chevreau • The National Post • November 2, 2000
Regulatory crackdown: Investors lose access to cheaper U.S. discount brokers
U.S. discount brokers are refusing to serve Canadian customers any more, following pressure believed to come from the Ontario Securities Commission.
This past week, Canadian customers of T.D. Waterhouse in the U.S. have been receiving a letter from executive vice-president Michael Curcio giving them 30 days to move their account to TD Waterhouse Canada or find an alternative.
The letter seems to lay the blame squarely on the feet of Canadian regulators, although the OSC is not singled out.
The notice reads: "We have been advised by the Canadian securities regulatory authorities that we, as well as other U.S. registered broker-dealers, must refrain from providing any investment services to residents of Canada. Accordingly ... we will no longer be able to meet your investing needs through TD Waterhouse in the U.S."
The use by Canadians of cheaper U.S. based discount brokers has been a regulatory grey area but since the practice received extensive publicity in this and other papers last February, regulators now seem determined to end it.
However, the OSC declined to comment yesterday, referring calls to TD Waterhouse U.S.
"It appears they [the OSC and other provincial regulators] are trying to regularize it within the family," said Joe Oliver, president of the Investment Dealers Association of Canada.
The Ontario Securities Act requires that foreign investment dealers wishing to sell securities to Canadian residents be registered in Canada, Mr. Oliver said.
Other discount giants with operations on both sides of the border, such as Schwab and E*Trade, did not permit Canadians to open accounts with their U.S. version. Many of the Canadian clients of TD Waterhouse U.S. had been customers before the acquisition by TD Waterhouse Canada, observers say.
Heavy users of TD Waterhouse U.S. are furious. George Luste, a University of Toronto physics professor, says "it makes no sense. This is an ill-considered implementation of a pointless and paternalistic rule that seems to be against competition in the brokerage business. Perhaps it's a turf war by the OSC, with the poor consumer the loser."
Another Canadian user going by the name Terry says it will cost him almost $20,000 a year in higher commissions. TD Waterhouse Canada charges $29 a trade, he said, compared to just US$12 a trade through the U.S. unit. He does about 60 trades a month. He says the OSC told him the reason for the change was to "protect" Canadian investors. After Bre-X and other debacles, he replied that "I had more confidence in U.S. regulators' " ability to protect investors."
Private investor Norbert Schlenker of Toronto says it's also "potentially a disaster" for Canadian residents with U.S. registered retirement savings vehicles. The worst case scenario, he says, is "Waterhouse Canada refuses the account, Waterhouse U.S. collapses the IRA (individual retirement account), and I pay full marginal rates plus a 10% penalty tax.
"I cannot understand how regulators can be so stupid. For years, snowbirds in the U.S. had trouble with Canadian brokerages holding RRSPs, but only in that they were restricted in the trading that they could do. There was never any threat that the RRSPs would actually have to be collapsed."
Trading cheaply, the American way
It's no surprise discount brokerage investors are angry about being bumped from U.S. to Canadian accounts. The difference in the cost of trades is astounding.
Buy 100 shares of a $40 stock online at TD Waterhouse Canada and the commission will be $29. The same order through an account at TD Waterhouse U.S. will cost you US$12, which is still only $18 after you translate it into anemic Canadian dollars.
Buy 5,000 shares of the same stock in your Canadian account at TD Waterhouse, and you will pay a whopping $150 in commissions. The U.S. firm's charge? It's still about $18.
With a financial incentive as big as that, it's little wonder that some enterprising Canadian investors opened online accounts with U.S. brokers willing to accept them.
Now, though, Canadian securities regulators are moving to make this much more difficult.
Canadian residents with accounts at TD Waterhouse U.S. have got letters telling them they have 30 days to accept a transfer to TD Waterhouse Canada or to another brokerage firm in Canada.
TD Waterhouse U.S. has "only a few hundred" accounts with Canadian residents, according to John See, TD Waterhouse's Canadian vice-chairman. He said the warning came via the U.S. Securities & Exchange Commission "but it was just passing on the Canadian regulators' message."
"We certainly didn't initiate it [the warning]," See says. "Our U.S. people believed they were operating within the rules when they accepted unsolicited Canadian-resident accounts. We weren't soliciting them."
The Canadian regulators' move appears to be working. A quick check of leading online U.S. brokers reveals that none of them now accept Canadian-resident accounts, although some did in the past. The Datek Online site still says it will open accounts for international customers but a customer-service representative said that no longer applies to Canadian residents. A representative at Ameritrade said "we can't open a Canadian account now, unfortunately". A DLJDirect customer service representative gave a similar reply.
Before Charles Schwab U.S. acquired a Canadian arm, it did accept Canadian accounts. "We did have a handful, but we put a moratorium on opening accounts for Canadians after Charles Schwab Canada was set up," says Paul Bates, head of the Canadian operation.
Canadian regulators argue that investing through a U.S. broker means you are no longer protected by Canadian securities rules. This hardly matters, though, when U.S. rules are at least as demanding and may provide more protection.
Then there is the glaring issue of the difference in trading costs. One reason given by Canadian online brokers for their much higher commissions was the so-called suitability rule. Unlike in the U.S., this required the firms to manually check each online order against the previously stated investment objectives of the client. This delayed trading executions and cost money.
But this rule is now on the way out in Canada. "We may have room to see an adjustment in commissions when this transition is over," See says.
Bates says many U.S. brokers such as E*Trade sell their order flow -- that is, they direct online orders to market-making firms that pay for them and not necessarily where the client gets the best available price. "That's not working in a transparent way," he complains, emphasizing that Canadian firms don't do that.
Still, there are prominent exceptions among U.S. brokers that don't sell their order flow -- most notably, Datek.
It sure is a different world down there.