On March 28, 2013, the Canadian Securities Administrators (“CSA”) published Client Relationship Model Phase 2 (“CRM2”) amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) and the Companion Policy to the Instrument. The CRM2 amendments introduce requirements under NI 31-103 in the areas of client statements, charges and compensation disclosure and performance reporting. These amendments came into force on July 15, 2013. Client statement requirements under NI 31-103 are effective on July 15, 2015. Requirements in respect of charges and compensation disclosure and performance reporting are effective on July 15, 2016. Conforming amendments with the same effective dates were made to MFDA Rules to adopt requirements established under the CRM2 amendments to NI 31-103.
Some registered firms have indicated they may experience difficulty implementing certain CRM2 requirements by the effective dates. Further, technical issues have also been identified relating to the delivery of information prescribed by the CRM2 requirements. In response, CSA jurisdictions plan to issue conditional exemptive relief from certain of the requirements, including allowing more time to deliver certain new reporting. CSA jurisdictions plan to publish proposals to amend NI 31-103 to make some of the relief permanent. The MFDA will be making harmonizing amendments to MFDA Rules.
Frequently Asked Questions (FAQs)
We have received questions from Members respecting the implementation of client reporting requirements adopted under MFDA Rules as a result of the CRM2 amendments. The purpose of this Bulletin is to provide additional guidance and clarification to Members in respect of such requirements and related matters. Set out below are some of the more frequently asked questions and the responses of MFDA staff.
Determining Cost (Rule 5.3)
- In certain circumstances, a client may make purchases of an investment and subsequently transfer in more units of the same position. Where market value is used for the transferred in positions, would the new book cost of the position be an average of book cost for purchases and the market value as at date of transfer for positions transferred in?
Members should first make a reasonable effort to obtain information respecting the book cost of investment positions transferred in. For investment funds, this may involve the Member obtaining the information from the fund company. Where such information cannot be obtained, Members may use the market value of the investment position as at the date of the position’s transfer. Where the cost of a client’s position in an investment is arrived at by using an average of both book cost and market value, Members must provide clients with general disclosure in respect of this matter. Such disclosure may be located in the notes to the account statement and, as appropriate, should set out that an estimated book cost has been used and that this cost was arrived at by combining and averaging the book cost of positions purchased and market value of positions transferred in, as at the date of transfer.
- For new accounts, a client’s position in an investment may be associated with multiple transfer in dates. Rule 5.3(1)(c)(ii) states that cost may be determined using the market value of the investment position as at the date of the position’s transfer. How should Members comply with the requirements of Rule 5.3(1)(c)(ii) where there are multiple transfer in dates associated with an investment position?
As noted above, for investment funds, Members should first make a reasonable effort to obtain, from the fund company, information respecting the book cost of investment positions transferred in. Where such information cannot be obtained, and the Member has determined in accordance with Rule 5.3(1)(c)(ii), that it is appropriate to use market value, the Member may use the market value of the investment position as at the date of each respective transfer in. Rule 5.3(1)(c)(ii) does not require that the date of each transfer in be disclosed. However, in accordance with the requirements of the Rule, the account statement must include general disclosure that it is the market value as of the transfer date(s), not the cost of the investment position(s) that are being disclosed.
- In certain circumstances, the transfer in of an investment position is a taxable event (e.g. deregistration from a registered account with a transfer to a non-registered account). In such circumstances, the book cost is generally reset to the transfer in price. Are Members required to provide some form of disclosure to the client noting that, in these specific circumstances, the book cost is the market value of the investment position as at the date of the position’s transfer?
Yes. In such circumstances, the book cost would be the market value of the investment position, plus any applicable transaction charges, as at the date of the position’s transfer. The Member would also be required to disclose that book cost has been reset to the date of the transfer in, as a result of deregistration of the position.
Account Statements (Rule 5.3.1 – 5.3.2)
Reporting Period Covered by First Account Statement
We understand that the CSA will be issuing conditional exemptive relief from certain CRM2 requirements under NI 31-103, including more time to deliver certain new client reporting. Having regard to the foregoing, and assuming a calendar year basis of reporting, what quarterly period would be covered by the first account statement that incorporates these new requirements, as adopted under MFDA Rule 5.3 (i.e. would the first quarterly statement issued under the new requirements be for the October – December, 2015 period or the January – March, 2016 period)?
Assuming a calendar year basis of reporting, the first quarterly account statement incorporating the new requirements would be the December 31, 2015 statement (i.e. reflecting transactions from October – December, 2015).
Disclosure of Positions Valued at Book Cost and Positions Valued at Market Value
A Member may decide generally to use book cost but, in certain circumstances, book cost of an investment position may not be available. As a result, it may become necessary to value such positions using market value. Account statements will, accordingly, reflect positions valued at book cost and positions valued at market value. In such circumstances, is it acceptable to provide general disclosure noting that certain positions have been valued at market value because book cost was unavailable? Alternatively, would more specific disclosure be required?
General disclosure would not be sufficient. The account statement must identify which positions have been valued at book cost and which positions have been valued using the market value of the investment position as at the date of its transfer.
Use of Trade vs. Settlement Date
- Are references to “date”, as set out under Rule 5.3.2 (Content of Account Statement), intended to refer to trade date or settlement date?
Trade date is to be used for the purpose of meeting client reporting requirements under Rule 5.3, including those in respect of account statement content, as prescribed under Rule 5.3.2.
- For the purpose of determining transactions to be included in the account statement, is trade or settlement date to be used as the cutoff?
Trade date is to be used. For example, a quarterly account statement covering the period from January – March, should include all transactions with trade dates from January 1st to March 31st.
Charges and Compensation Disclosure (Rule 5.3.3)
- If a referral fee is received in respect of an investor who is no longer a client of the Member, is that fee required to be included on the Report on Charges and Other Compensation?
No. Where an individual is no longer a client of the Member, the Member is not required to send a Report on Charges and Other Compensation.
- If a client has several accounts and only one of those accounts is referred to another party, how should disclosure in respect of referral fees be provided to the client? Would it be appropriate to provide such disclosure for one account or for all accounts?
A client may have multiple accounts with different beneficial owners. As a result, privacy concerns could arise if blanket disclosure of referral fees was provided across all accounts. In addition, the Report on Charges and Other Compensation addresses charges and compensation related to the operation of a specific account, whereas referral fees relate to the client. It could be misleading to clients to provide them with disclosure that combines charges and compensation earned with respect to the account at the Member with charges related to client assets that are no longer being administered by the Member.
To address these matters, Members may provide clients with a Report on Charges and Other Compensation that separately discloses referral fees from other amounts required to be disclosed on the Report (e.g. referral fees may be disclosed in an addendum to the Report on Charges and Other Compensation).
- In certain situations, a client may have an account with an introducing dealer that is carried by another dealer. If, in such circumstances, the introducing dealer receives referral fees in respect of the client and the carrying dealer has no information regarding such fees, how can the carrying dealer comply with its obligation to prepare a complete Report on Charges and Other Compensation?
The introducing dealer will either need to develop systems/processes to share the information with its carrying dealer or will need to send a supplemental Report on Charges and Other Compensation to the client that discloses the referral fees earned.
- Where sales taxes are applied in respect of an amount charged to a client, are such taxes required to be included on the Report on Charges and Other Compensation?
Yes. Amounts reflected on the Report on Charges and Other Compensation include, “operating charges” and “transaction charges”. The definitions of these terms, as set out under Rule 5.3, note that they include any federal, provincial or territorial sales taxes paid on such amounts. Where amounts other than operating or transaction charges are reportable on the Report on Charges and Other Compensation, sales taxes applied in respect of such other amounts would also be required to be reported.
Fees/Charges Represented as Transactions on Account Statement
- If a fee/charge is represented as a transaction on the account statement, is that amount still required to be reported on the Report on Charges and Other Compensation?
Yes, where the amount was paid to the Member. Disclosure on the Report on Charges and Other Compensation would not be required in respect of transactions reflecting fees and/or charges paid to parties other than the Member (e.g. redemption charges paid to the fund company). However, in the interests of providing consistent reporting to clients, Members may decide to include such third party charges and compensation in the Report.
- If a fee is charged to a client but rebated (i.e. paid by the advisor), may such an amount be represented as a reduced or eliminated fee on the Report on Charges and Other Compensation?
Yes. However, the gross amount of the fee and rebate should be shown separately.
Performance Reporting (Rule 5.3.4 / Policy No.7)
Selection of Performance Reporting Inception Date
- Is a Member permitted to choose any performance reporting inception date?
Where a Member selects a performance reporting inception date that is other than the inception date of the account or December 31, 2015, assuming a calendar year basis of reporting, the Member should have a reasonable basis for their selection. For example, there may have been a system conversion at the Member and information dating back to the inception date of the account may not be available. Members may not select an earlier performance reporting inception date, for example January 1, 2010, solely on the basis that use of that date would allow the Member to present better returns. MFDA staff would consider any such selection to be inappropriate and contrary to the obligation of the Member to deal fairly, honestly and in good faith with its clients.
Reporting Cash Positions
- May cash positions be excluded from the rate of return calculation?
No. Cash positions may not be excluded from the rate of return calculation.
Reporting for Periods of Less than One Year
- If the rate of return is for less than a one year period, should it be presented on an annualized or non-annualized basis?
As set out under Policy No.7, there is no requirement to present a rate of return for a period of less than one year. However, where Members choose to provide such information, it must be presented on a non-annualized basis (i.e. only for the period covered by the report).
Valuation of Non-Security Investment Products
- For investments such as GICs (compounding and non-compounding), annuities and mortgages, clarification is sought with respect to pricing and potential disclosure requirements, as there is no active market for these types of products.
Valuation of GICs
Members currently report the value of GICs as the principal amount plus accrued interest, earned as at the end of the account statement period. This method of reporting will continue to be permitted. For market-linked GICs, Member reporting would include an estimate of the accrued interest, along with an explanation that sets out the basis for the estimate.
Valuation of Investments Generally
Changes have been made to MFDA Form 1, Part 5 (Market Value of a Security). These changes include requirements prescribed under NI 31-103 respecting the determination of market value. Form 1, Part 5, as amended, is based on the International Financial Reporting Standards (“IFRS”) hierarchy approach to assessing the fair value of financial instruments. Accordingly, when determining the market value of investments, including GICs, annuities and mortgages, Members should consider both IFRS fair value standards and the “market value of a security” definition set out under Form 1, as revised.
Where Members require additional guidance and clarification respecting the valuation of any investment product, for the purpose of meeting reporting requirements under MFDA Rules, we would encourage Members to discuss such matters with MFDA staff.
The valuation of all investments transacted through the Member or held in an account at the Member, including non-security investment products, such as annuities and GICs, are subject to the requirements of MFDA Rule 5.3. Accordingly, Members must provide appropriate disclosure of any assumptions, as specified under the Rule (e.g. where market value has been estimated or the Member has determined, after applying the valuation approaches noted above, that market value is not determinable).
- For segregated funds, where the value of the fund has dropped below the guarantee amount, are Members required to disclose the net asset value (i.e. market value) of the fund or the amount of the guarantee?
Members are required to disclose the net asset value (i.e. the market value) of the fund. Members, at their option, may also provide additional note disclosure respecting the guarantee amount.
Trade Confirmations (Rule 5.4)
Reliance on Fund Company
May Members still rely on fund companies to produce and mail trade confirmations on their behalf?
Yes. Such reliance will continue to be permitted under MFDA Rule 5.4.1 (Delivery of Confirmations), provided that: the written confirmation sent by the fund manager contains the information required to be sent under Rule 5.4.3; and the Member has a reasonable basis to believe that such confirmations are being sent by the fund manager.
Other Related Matters
Scope of Reporting
- When are segregated funds required to be included on account statements under Rule 5.3.2?
Under Rule 5.3.2, account statements must include prescribed information in respect of all securities and other investment products transacted through, or transferred into, the Member. Under Rule 5.3.4, performance reporting is required to be provided in respect of all investments required to be reported on the account statement.
- Are charges and compensation related to segregated funds required to be disclosed on the Report on Charges and Other Compensation?
No, charges and compensation disclosure, as required under Rule 5.3.3, must be provided in respect of transactions in securities.
In the interests of providing more fulsome reporting to clients, and where reliable data is available, we would encourage Members to provide disclosure on the Report on Charges and Other Compensation in respect of non-securities investment products. Such disclosure will further assist investor decision-making and is consistent with the obligation of Members to deal fairly, honestly and in good faith with their clients.
Application of Client Reporting Requirements to Intermediary Arrangements
- Are intermediary accounts required to be reported on Member account statements? If so, which party has the reporting obligation?
There are two types of intermediaries: those who are carrying dealers and MFDA Members; and intermediaries who are not MFDA Members.
Where a Member is using the services of a carrying dealer that is also an MFDA Member, the carrying dealer is responsible for sending all client reporting required under MFDA Rule 5.3 (i.e. account statements, the Report on Charges and Other Compensation and Performance Report). We will be amending Rule 1.1.6 (Introducing and Carrying Arrangement) to clarify the obligations of MFDA carrying dealers in such circumstances. However, where the intermediary is not an MFDA Member, the Member using their services has the obligation to develop and send all client reporting required under Rule 5.3.