BULLETIN #0649-P

View and Download English PDF


Aamir Mirza

Senior Legal and Policy Counsel

(416) 945-5128

amirza@mfda.ca

BULLETIN #0649-P

June 29, 2015

Approval of Housekeeping Amendments to MFDA Rule 5.3 (Client Reporting) and MFDA Policy No. 7 (Performance Reporting)

On May 21, 2015, the MFDA issued Bulletin #0640 (CSA Staff Notice 31-341 – Omnibus/Blanket Orders Exempting Registrants from Certain CRM2 Provisions of NI 31-103).  The Bulletin advised Members that, in response to concerns and related requests for relief formally raised by industry participants, all CSA members issued parallel orders providing relief from certain provisions of NI 31-103 Registrant Requirements, Exemptions and Ongoing Registrant Obligations. The Bulletin also noted that MFDA staff would be bringing forward certain changes (as set out in the Bulletin) to the MFDA Board of Directors at their meeting on June 4, 2015 to ensure that MFDA requirements are consistent with the relief granted under the CSA Relief Orders.

At their meeting on June 4, 2015, the MFDA Board of Directors approved housekeeping amendments to MFDA Rule 5.3 (Client Reporting) and MFDA Policy No.7 (Performance Reporting) and an extension of the transition period applicable to new account statement requirements under Rule 5.3. On June 25, 2015, the Recognizing Regulators published a Notice in which they approved / did not object to these housekeeping amendments. The amendments are now effective.

Summary of Changes

Extension of Transition Period

On June 4, 2015, the MFDA Board of Directors provided an extension in respect of the transition period applicable to new requirements pertaining to account statements, as set out under MFDA Rule 5.3 (Client Reporting). New requirements pertaining to account statements may be met by delivering statements for the period ending December 31, 2015 (i.e. including transactions from October – December, 2015) instead of the period that includes July 15, 2015. 

Housekeeping Amendments

Definitions – Rule 5.3(1)

Under the amendments to Rule 5.3(1)(c)(i) and (ii), date changes and other minor changes have been be made in respect of requirements that address the determination of cost for each investment position in the account. The CSA Relief Orders include a definition of “similar clients”.  This definition has been directly adopted under proposed new Rule 5.3(1)(j). 

Performance Reporting – Policy No.7

Requirements in respect of performance reporting come into effect on July 15, 2016.  The CSA Relief Orders provide performance reporting relief to non-SRO registrants in respect of requirements related to the provision of market value and annualized total percentage return information.  Specifically, non-SRO registrants reporting on a calendar year basis in 2016, will not be required to include comparative data from 2015 (i.e. the first performance report may be based on 2016 data alone).  The relevant terms of this relief have been directly adopted under a new section to MFDA Policy No.7.

Attached as Appendix “A” are proposed housekeeping amendments to MFDA Rule 5.3 and Policy No. 7.  The current versions of the Rule and Policy have been blacklined to show changes introduced by the proposed amendments.


APPENDIX A

5.3 CLIENT REPORTING

  1. Definitions. For the purpose of client reporting requirements under Rule 5.3
    1. “book cost” means the total amount paid to purchase an investment, including any transaction charges related to the purchase, adjusted for reinvested distributions, returns of capital and corporate reorganizations;
    2. “connected issuer” has the same meaning as in section 1.1 of National Instrument 33-105 Underwriting Conflicts;
    3. “cost” for each investment position in the account means either “book cost” or “original cost”, provided that only one cost calculation methodology, either “book cost’ or “original cost,” is used for all positions;
      1. Investment Positions Opened before December 31July 15, 2015. For investment positions opened before December 31July 15, 2015, cost, as determined in accordance with subsection 5.3(1)(c), above; or the market value of the investment position as at December 31July 15, 2015 or an earlier date, if the same date and value are used for all similar clients of the Member holding that investment and it is also disclosed in the account statement that it is the market value as of that date, not the cost of the investment position, that is being
      2. Investment Positions Transferred In. For investment positions transferred into an account at the Member, cost as determined in accordance with subsection 5.3(1)(c), above; or the market value of the investment position as at the date of the position’s transfer if it is also disclosed in the account statement that it is the market value as of the transfer date, not the cost of the investment position, that is being disclosed.
      3. Where Cost Not Determinable. Where a Member reasonably believes that it cannot determine cost in respect of an investment position, the Member must provide disclosure of that fact in the
    4. “investment” means any asset, excluding cash, held or transacted in an account of the Member;
    5. “marketplace” has the same meaning as in section 1.1 of National Instrument 21- 101 Marketplace Operation;
    6. “market value”  of a  security has the  meaning given  to  it under  MFDA Form 1 Financial Questionnaire and Report;
    7. “operating charge” means any amount charged to a client by a Member in respect of the operation, transfer or termination of a client’s account and includes any federal, provincial or territorial sales taxes paid on that amount;
    8. “original cost” means the total amount paid to purchase an investment, including any transaction charges related to the purchase;
    9. “related issuer” has the same meaning as in section 1.1 of National Instrument 33- 105 Underwriting Conflicts;
    10. (i)(j) “similar clients” means any of the following: (i) clients whose accounts or investment positions were transferred together to a Member; (ii) clients whose accounts or investment positions are on the same reporting system, if a Member has more than one reporting system; or (iii) other clients whose accounts or investment positions would appear to a reasonable person to be similar in a way that relates to the recording or calculation of market value or position cost;
    11. (j)(k) total percentage return means the cumulative realized and unrealized capital gains and losses of an investment, plus income from the investment, over a specified period of time, expressed as a percentage;
    12. (k)(l) “trailing commission” means any payment related to a client’s ownership of a security that is part of a continuing series of payments to a Member or Approved Person by any party;
    13. (l)(m) “transaction charge” means any amount charged to a client by a Member and includes any federal, provincial or territorial sales taxes paid on that amount.

DM# 427245


MFDA POLICY NO. 7
PERFORMANCE REPORTING

Purpose

Under Rule 5.3.4 (Performance Report), Members are required to deliver a performance report to a client. The purpose of this Policy is to set out additional requirements that Members must comply with when meeting requirements under MFDA Rules respecting the performance report.

General Requirements

  1. The performance report required under Rule 5.3.4 must be delivered in a separate report for each account of the client;
  1. Notwithstanding subsection (1), a Member may provide a performance report that consolidates, into a single report, the required information for more than one of a client’s accounts if:
    1. the client has consented in writing; and
    2. the consolidated report specifies which accounts it
  1. Where a consolidated performance report is sent to a client, pursuant to subsection (2), above and a consolidated report on charges and other compensation is sent to the client pursuant to Rule 5.3.3(3), both consolidated reports must consolidate information for the same
  1. The requirement to provide a performance report, as prescribed under Rule 5.3.4, does not apply to a client account that has existed for less than a 12-month
  1. If a Member reasonably believes there are no investments of a client for which a market value can be determined, the Member is not required to deliver a report to the client for the period.

Content of Performance Report

  1. A performance report required to be delivered under Rule 5.3.4 must include all of the following in respect of investments reported on the account statement required to be delivered under Rule 3.1:
    1. the market value of all cash and investments in the client’s account as at the beginning of the 12-month period covered by the report;
    2. the market value of all cash and investments in the client’s account as at the end of the 12-month period covered by the report;
    3. the market value of all deposits and transfers of cash and investments into the client’s account, and the market value of all withdrawals and transfers of cash and investments out of the account, in the 12-month period covered by the report;
    4. subject to paragraph 1(e), the market value of all deposits and transfers of cash and investments into the client’s account, and the market value of all withdrawals and transfers of cash and investments out of the account, since opening the account;
    5. if the client’s account was opened before July 15, 2015 and the Member reasonably believes market values are not available for all deposits, withdrawals and transfers since the account was opened, the following:
      1. the market value of all cash and investments in the client’s account as at July 15, 2015;
      2. the market value of all deposits and transfers of cash and investments into the account and the market value of all withdrawals and transfers of cash and investments out of the account, since July 15, 2015;
      3. notwithstanding the provisions of (1)(e)(i) and (ii) above, an earlier date may be used to comply with requirements under (1)(e), if the same date and value are used for all similar clients of the Member holding that investment and it is also disclosed in the performance report that it is the market value as of that date, not the cost of the security position, that is being disclosed.
Annual Change in Market Value
    1. the annual change in the market value of the client’s account for the 12-month period covered by the performance report, determined using the following formula:
      1. A – B – C + D

where

A = the market value of all cash and investments in the account as at the end of the 12- month period covered by the performance report;

B = the market value of all cash and investments in the account at the beginning of that 12-month period;

C = the market value of all deposits and transfers of cash and  investments  into the account in that 12-month period; and

D = the market value of all withdrawals and transfers of cash and investments out of the account in that 12-month period.

Cumulative Change in Market Value
    1. subject to paragraph (h), the cumulative change in the market value of the account since the account was opened, determined using the following formula:
      1. A – E + F

where

A = the market value of all cash and investments in the account as at the end of the 12- month period covered by the performance report;

E = the market value of all deposits and transfers of cash and investments into the account since account opening; and

F = the market value of all withdrawals and transfers of cash and investments out of the account since account opening.

    1. if the Member reasonably believes the market value of all deposits and transfers of cash and investments into the account since the account was opened or the market value of all withdrawals and transfers of cash and investments out of the account since the account was opened, as required in paragraph (g), is not available to the Member, the cumulative change in the market value of the account determined using the following formula:
      1. A – G – H + I

where

A = the market value of all cash and investments in the account as at the end of the 12- month period covered by the performance report;

G = the market value of all cash and investments in the account as at July 15, 2015 or an earlier date used for all similar clients;

H = the market value of all deposits and transfers of cash and  investments  into the account since the date used for G; and

I = the market value of all withdrawals and transfers of cash and investments out of the account since the date used for G.

Annualized Total Percentage Return

    1. 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;
    1. the definition of “total percentage return” set out under Rule 5.3(1) and a notification indicating the following:
      1. that the total percentage return in the performance report was calculated net of charges;
      2. the calculation method used; and
      3. a general explanation in plain language of what the calculation method takes into

Annualized Total Percentage Return – Reporting Periods

  1. The information delivered for the purposes of paragraph (1)(i) must be provided for each of the following periods:
    1. the 12-month period covered by the performance report;
    2. the 3-year period preceding the end of the 12-month period covered by the report;
    3. the 5-year period preceding the end of the 12-month period covered by the report;
    4. the 10-year period preceding the end of the 12-month period covered by the report;
    5. the period since the client’s account was opened if the account has been open for more than one year before the date of the report or, if the account was opened before July 15, 2015 and the Member reasonably believes the annualized total percentage return for the period before July 15, 2015 is not available, the period since July 15, 2015 or an earlier date used for all similar clients.
  1. Despite subsection (2), if any portion of a period referred to in paragraphs (2)(b), (c) or (d) was before July 15, 2015, the Member is not required to report the annualized total percentage return for that period.

Presentation

  1. The information required to be delivered under Rule 5.3.4 must be presented using text, tables and charts and must be accompanied by notes in the performance report explaining:
    1. the content of the report and how a client can use the information to assess the performance of the client’s investments; and
    2. the changing value of the client’s investments as reflected in the information in the
  1. If a Member delivers information required under Rule 5.3.4 in a report to a client for a period of less than one year, the Member must not calculate the disclosed information on an annualized
  1. If a Member reasonably believes the market value cannot be determined for an investment position, the market value must be assigned a value of zero in the calculation of the information required to be delivered under Rule 5.3.4 and the fact that its market value could not be determined must be disclosed to the

Exemptions Respecting First Performance Report

Notwithstanding the requirements noted above, the following exemptions apply in respect of the first performance report sent by Members to their clients:

Content of Performance Report

  1. A Member is exempt from the requirements under paragraphs 1(e) and (h), respecting the provision of market value information as at and since July 15, 2015 if instead a performance report is delivered that provides the information for the 12 month period ending December 31, 2016 and the included market value information is as at and since:
    1. January 1, 2016; or
    2. a date earlier than January 1, 2016, if the same date is used for all similar

Annualized Total Percentage Return – Reporting Periods

  1. A Member is exempt from the requirement under paragraph 2(e), respecting the provision of annualized total percentage return information, if, instead, an investment performance report is delivered that provides the information for the 12 month period ending December 31,

434046