It's time to open the border to a free flow of securities and financial products.

There was a certain degree of irony in it all. In early April, during the same week when the U.S. government announced that everybody is going to have to carry a passport to get into the country, including its own citizens, the new president of the TSX Group was in New York trying to sell the idea of wide-open borders for financial products.

Richard Nesbitt told a meeting of the Harvard Club that measures should be taken to move forward quickly with the implementation of North American free trade in financial securities, a principle endorsed at the recent summit meeting in Texas between President George Bush, Prime Minister Martin, and Mexican President Vincente Fox.

“Historically, Canadians and Americans alike have viewed our securities markets as contained within national boundaries,” he pointed out. “These boundaries, however, are more and more an artificial and ineffective impediment to people investing their money where they want. Electrons can go anywhere. Surely it is time to get rid of these artificial impediments, to free our financial markets so that we can make our full contribution to North America becoming more prosperous than the sum of its parts.”

Obviously, there’s a lot in it for the TSX if continent-wide free trade in securities and other financial products should ever materialize. But many frustrated American investors would also be at the forefront of the celebrants.

That’s because Canadian income trusts have become a hot financial commodity in the States, but buying them can be a real pain in the posterior. When I gave a seminar on income trusts at the World Money Show in Orlando in February, the room was filled to overflowing and they had to turn people away at the door. Only a handful of the audience was Canadian. Since then, I have received telephone calls and e-mails from all over the U.S. from people wanting more information on income trusts and asking how to buy them.

As I said, it is not easy. The TSX has been actively working for several years to try to facilitate cross-border securities trading, with minimal success. I won’t bore you with all the details but the bottom line is that the securities commission in every state, all 50 of them, must pass a resolution that allows their residents to acquire securities directly on the TSX through their brokers. To date, only a dozen have done so, only three of which are biggies: New York, New Jersey, and Pennsylvania.

Americans who live anywhere else can only acquire Canadian trusts in two ways. One is to purchase shares that are inter-listed on a U.S. exchange. There are only a handful of these, including Pengrowth, PrimeWest, and Fording Coal. In the case of Pengrowth, U.S. investors must pay a big premium to acquire shares. Last year, the Calgary-based trust split its units into two classes. The A shares (TSX: PGF.A, NYSE: PGH) are designed for non-residents. They recently closed at $24.62 on Toronto. The B shares (TSX: PGF.B) are restricted to Canadian residents. They closed on the same day at $16.50. So Americans had to pay a premium of almost 50% to buy in. Since the distributions on both classes are the same, their yield is only 11.2% on monthly distributions of 23c a unit ($2.76 a year), compared to the yield of 16.7% that Canadians are receiving. On top of that, Americans are assessed a 15% withholding tax by the Canadian government. It’s not a satisfactory situation.

The other option available to residents of non-free trade states is to buy Canadian trusts over-the-counter through a trading system known as the Pink Sheets. Many trusts are listed here but by no means all of them, which is another source of frustration for Americans. For example, in my Orlando seminar I mentioned the new Lawrence Payout Ratio Trust (TSX: LPR.UN) as a lower-risk choice in a heated trust market. I received several calls about it from U.S. residents who wanted to buy it through the Pink Sheets and found there was no listing. That has since been remedied (the symbol is LPYUF) but it took several weeks. Another problem with Pink Sheets trading is that low volumes on a particular security may produce wide divergences from the actual trading price on the TSX.

The income trusts mess is currently the most high-profile example of the effect of cross-border barriers to securities trading, but there are many others. For instance, allowing Americans to invest directly in Canadian mid-cap and junior companies that don’t have U.S. listings could result in significant new capital inflows. Those might be offset by mutual fund investors snapping up low-MER American funds, but that’s all part of the risks and opportunities such a move would create.

Of course, it won’t happen overnight. But good on Richard Nesbitt for bringing it to centre stage. Let’s hope he keeps it there and that the political will to do something becomes something more tangible than polite generalities.