Here’s to new, detailed disclosure rules

New policy amendments by the Canadian Securities Administrators are designed to ensure investors get meaningful information.

If I asked you how well your investments had done recently, could you tell me? What about how much your adviser charged you in the past year? If you are typical, you won’t have answers. That’s because few investment firms fully disclose such vital information to clients. But that’s about to change.

The Canadian Securities Administrators (CSA), the council of the securities regulators of Canada’s provinces and territories, plans to introduce significant changes in two years.

CSA’s mandate is to coordinate and harmonize regulation of the Canadian capital markets and its latest move is implementing amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. The amendments are designed to ensure investors get clear and meaningful information about their investments. There are two key components to the changes: cost disclosure and investment performance.

As of July 15, 2016, you will see what product and service costs you can expect to pay at account opening; transaction cost and any deferred costs at the time of transaction; and an annual summary in dollars of what you were charged and other fees such as trailing commissions and commissions on bond trades paid to your investment firm.

Let’s delve deeper into the last point. NI 31-103 section 14.17, (report on charges and other compensation), paragraph (1) (h) states that for all firms receiving trailing commissions related to securities owned by a client for the period covered by the report, the following (or similar) notification is required: "We received $[amount] in trailing commissions in respect of securities you owned during the 12-month period covered by this report. Investment funds pay investment fund managers a fee for managing their funds. The managers pay us ongoing trailing commissions for the services and advice we provide you. The amount of the trailing commission depends on the sales charge option you chose when you purchased the fund. You are not directly charged the trailing commission or the management fee. But, these fees affect you because they reduce the amount of the fund’s return to you. Information about management fees and other charges to your investment funds is included in the prospectus or fund facts document for each fund."

Hidden fees will be exposed, allowing investors to determine whether they have been getting value for the total fees paid.

You will also receive an annual investment performance report, including how much you have contributed and what it is worth as of the report date; deposits and withdrawals for the past year and since the account was opened; and percentage returns for your account over one, three, five and 10 years, and since the account was opened.

NI 31-103 section 14.19 (content of investment performance report), paragraph (1) (i) states that investment firms will be required to disclose "the amount of the annualized total percentage return for the client’s account calculated net of charges, using a money-weighted rate of return calculation method generally accepted in the securities industry."

Finally, you will get one of the most important figures you need to analyze your investments — your personal rate of return.

Which investment advisory firms do the amendments apply to? Every CSA member will be affected, including members of the two key self-regulatory organizations — the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). CSA has stated that "in due course, IIROC and the MFDA plan to make amendments to their rules and guidance notes, which are expected to materially conform with the CSA’s requirements."

CSA continues to review the Canadian mutual fund industry’s fee structure to see if more changes are warranted. In December 2012, it published a discussion paper that identified potential investor protection issues arising from the current mutual fund fee structure. If you own mutual funds, it is a must read. It clearly details how mutual fund fees work.

CSA also conducted stakeholder consultations. As a result, it issued an RFP for independent research to evaluate the extent, if any, to which sales and trailing commissions influence fund sales and if the use of fee-based versus commission-based compensation changes the nature of advice and investment outcomes over the long term. I’ll pass on the conclusions.

About the Author

David Trahair


David Trahair, CPA, CA, is a personal finance author and speaker (www.trahair.com). His latest book is The Procrastinator’s Guide to Retirement.

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