Among various decisions, the CSA's ruling on CRM2 deadlines is getting the most attention

By James Langton | Mid-February 2015

The regulatory landscape for the retail investment industry is quietly being reshaped by a flurry of recent decisions, pronouncements and signals from policy-makers.

Regulators have handed down a key decision on the deadlines for the final wave of the second phase of the client relationship model (CRM2) reforms. Regulators also have sent several signals about the future path of reform, including their intentions for upfront disclosure of Fund Facts.

The issue receiving the most attention is the Canadian Securities Administrators' (CSA) final decision on the deadlines for firms to adopt the remaining CRM2 requirements. Last year, the Investment Industry Association of Canada (IIAC) proposed that regulators grant the investment industry an extension on the requirements that are slated to take effect in July 2015 and July 2016. The IIAC sought to have the deadlines for these two final tranches of CRM2 reforms pushed back to the end their respective years.

The IIAC argues that receiving reporting that is based on a calendar yearend would be more logical for clients and that a short delay also would give the investment industry more time to prepare for the new requirements - particularly as the Investment Industry Regulatory Organization of Canada's (IIROC) CRM2 rules still weren't final at the time. (IIROC received CSA approval for its version of the CRM2 rules on Jan. 19.)

The IIAC's proposed extension generally was opposed by investor advocates, such as the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), who argued that the investment industry has had long enough to prepare for these reforms, which have been in the works for years and already are subject to an unusually long, three-year transition period. Given the importance of enhanced disclosure to investors, investor advocates have argued that a further delay is unjustified.

The CSA has come up with a compromise solution: the investment industry is getting an extension for the requirements that were due to take effect this July (including enhanced account statements) until the end of the year. However, the deadline remains unchanged for the requirements that are set to take effect in 2016. New annual investment cost and portfolio performance reports - which really are the meatiest, most meaningful aspect of the CRM2 reforms - still will be required as of July 2016.

In announcing the compromise, CSA chairman Bill Rice indicates that the regulators concluded that it reasonably addresses some of the investment industry's implementation concerns while also maintaining the goal of enhancing transparency to clients. IIROC and the Mutual Fund Dealers Association of Canada (MFDA) now will have to tweak their rules to reflect these new deadlines.

The final implementation of the CRM2 reforms isn't the only regulatory initiative that the retail investment business will be facing over the next 18 months. The long-awaited requirement that Fund Facts disclosure documents be given to investors before they buy units in a mutual fund is slated to take effect in the spring of 2016.

The requirement for point-of-sale disclosure has long been the missing piece of this initiative - the CSA finally announced its plan to require upfront delivery in mid-December - but one of the other outstanding issues concerns the content of these documents (specifically, the disclosure of risk).

Amid concerns from investor advocates about the credibility and comparability of risk measures used in Fund Facts, the CSA is proposing the introduction of a standardized methodology that fund firms should follow. Currently, mutual fund portfolio managers are free to choose their own methodology for measuring and reporting mutual fund risk.

In late January, the CSA issued a staff notice indicating that the regulators intend to propose rules to require the use of a standardized methodology at some point this year. The CSA also has signalled that the methodology is likely to be based on standard deviation - although that idea was met with some criticism when the CSA first floated the idea of standardized methodology. Still, this initiative is something to watch for in 2015.

One thing that the investment industry won't have to worry about is the prospect of new guidance from IIROC on appropriate compensation structures for retail accounts. IIROC, a self-regulatory organization (SRO), has decided not to proceed with that initiative, which was proposed initially in 2012 and would have introduced specific guidance for dealers on the factors they should consider when deciding whether to give a client an account that is commission-based or fee-based, and when switching clients from one type of account to the other.

"We currently have a full policy agenda," notes Lucy Becker, vice president of public affairs at IIROC. "Given the comments received and the policy agenda, we have chosen to defer the proposed guidance at this time."

The proposal received a great deal of pushback from the investment industry arguing that the proposal was premature, particularly given the forthcoming CRM2 requirements designed to bolster the transparency of cost and compensation. However, FAIR Canada is in favour of any move to make cost a bigger factor in overall suitability assessments.

IIROC still looks to have plenty on its plate for the year ahead. The SRO indicates in its latest compliance report that it will be examining investment dealers' adherence to the first wave of CRM reforms. This includes measures to bolster upfront disclosure, enhance suitability and improve conflict management and disclosure.

In addition, IIROC is planning a review of the industry's use of titles and professional designations, among a host of other compliance and policy priorities that will compete for the SRO's attention.

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