Second Phase of the CRM Project: Additional Disclosure of Charges and Performance Reports

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The Canadian Securities Administrators (the “CSA”) published a notice on March 28, 2013 outlining the amendments made to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”). These amendments will come into force on July 15, 2013 and will usher in the second phase of the Client Relationship Model (“CRM”) Project.

Background

The first phase of the CRM Project, whose principal requirements have been in force since March 26, 2013, aimed to increase the communication between the client and his dealer or adviser. An informational document describing the terms of the client-adviser relationship must now be provided to all new clients. Dealers have a period of one year to send this document to their existing clients.

The second phase of the CRM Project, introduced by the amendments to NI 31-103, aims to provide clients with clear and comprehensive information on all applicable fees and remuneration paid to registrants. In addition, performance reports must be provided to clients on an annual basis.

Amendments to NI 31-103

Several amendments were made to NI 31-103, including the addition of definitions for various fees and charges. Certain amendments have a greater impact for dealers and advisers.

Dealers and advisers, before accepting instructions for the purchase or sale of a security, will be required to inform their clients of the charges that the latter would pay for such a purchase or sale, or provide a reasonable estimate of these costs. This requirement does not apply in the context of managed accounts.

Information about the cost of each security in the account must appear on account statements. This information should allow clients to compare the original cost or accounting cost with the market value of the security.

A summary of all charges (operating expenses, transaction costs) and a summary of the forms of compensation received by the dealer or adviser must be provided to clients every year. This includes trailing commissions, client referral fees, any margin on sales or purchases as well as service charges applied.

Thus, together with investment fund managers, dealers and advisers must establish and disclose deferred acquisition costs and other expenses deducted from the net asset value of securities and trailing commissions that are paid.

Dealers and advisers will also have to send an annual report of investment performance for each account. Upon written consent of the client, a single consolidated report for all client accounts may be sent. This report must include the market value of deposits and withdrawals made as well as the rate of return for periods of one year, three years, five years, ten years and as of the date the account was opened. The total annualized rate of return of the account must be calculated using the weighting method based on the dollar value.

Implementation Period of Amendments

Although the amendments to NI 31-103 will come into force on July 15, 2013, the CSA intend to implement them gradually over a period of three years.

During the first year, dealers and advisers must ensure that they provide clients with relevant information regarding applicable charges before the sale or purchase of a security. Information regarding the annual performance of debt securities, as well as expenses incurred by the purchase of such securities, including commissions, service charges or margins on the sale or purchase thereof, must also be provided.

A transition period of two years was provided to implement the changes regarding the costs of securities held in accounts.

Finally, mechanisms for sending the various reports on the performance and charges and other compensation, including deferred acquisition costs and trailing commissions from investment funds, must be put in place during the third year, as of July 15, 2016.

Impact of Amendments

This second phase of the CRM Project will impact securities dealers differently, depending on the current status of their disclosure of charges and performance reporting. Regardless, the new disclosure requirements will certainly lead to many questions from clients. It would be appropriate to provide adequate training for advisers, in order to ensure that they can respond to such questions.

These changes should lead to the establishment of equivalent rules by the relevant self-regulatory organizations, namely the Investment Industry Regulatory Organization of Securities Trading (“IIROC”) and the Mutual Fund Dealers Association of Canada (the “MFDA”).

Moreover, the asymmetry in the obligations of the various stakeholders in the financial sector is likely to increase and lead to disparity in the information provided to clients on investment products. Given that certain products do not fall under the control of the CSA, disclosure under the second phase of the CRM Project will not apply to these products. This issue of equity between the various stakeholders in the financial sector is currently being discussed by relevant government departments and agencies.

You may consult the CSA notice here. Do not hesitate to contact our Litigation - Securities and Financial Services team with any questions.

Topics:  Amended Regulation, Annual Reports, Canada, Canadian Securities Administration, Client Services, Disclosure Requirements, Fees, Securities

Published In: Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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