The Canadian Securities Administrators (CSA) published new guidance on Thursday with just three months to go until the remaining requirements under the second phase of the client relationship model (CRM2) take effect to help firms comply with the new rules, which aim to improve transparency to investors.
Specifically, the new guidance aims to spell out what firms should do relating to the cost disclosure and performance reporting provisions, which will finally be in force on July 15. The notice indicates that this latest guidance supersedes previous versions of CSA guidance on the various elements of the rules and supplements guidance from the self-regulatory organizations (SRO) for firms that belong to an SRO.
The CSA’s notice clarifies issues such as when an investor ceases to be a client; the use of Fund Facts to satisfy certain CRM2 requirements; the use of benchmarks in client disclosure; valuing certain securities; determining position cost in various situations; the reporting of trailer fees, referral fees, rebated fees and other forms of compensation; and performance reporting requirements.
Although the guidance also acknowledges that the CRM2 requirements do not apply to instruments such as segregated funds, which are not technically considered securities, it recommends taking a similar approach with these products.
“We encourage registrants to provide their clients with information that meets the standards set in the CRM2 amendments in respect of all of their investments,” the CSA’s guidance says. “This will enable investors to better understand the relative costs of different investments and their performance.”
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The new guidance also targets exempt-market dealers (EMDs), which are under the direct oversight of the provincial regulators. For firms that are solely registered as EMDs, some of the CRM2 requirements will not apply, depending on whether the firm holds client assets and whether there’s an ongoing relationship between the EMD and the investor.
“Sole EMDs do not normally hold client assets and where that is the case, they can disregard provisions that only apply where client assets are held by a registered firm,” the CSA’s guidance notes.
However, EMDs that do hold client assets must deliver CRM2-compliant account statements and position cost information. In addition, the CSA’s guidance says that holding client assets is “a clear indication of an ongoing client relationship.” So, these EMDs also have to deliver annual reports on costs, compensation and investment performance under CRM2.
The CSA’s notice provides guidance to EMDs on whether they have an ongoing relationship with their clients, advising that firms “should consider carefully whether it is in an ongoing client relationship before concluding that any of the CRM2 amendments does not apply to it.”
For firms that belong to either the Investment Industry Regulatory Organization of Canada or the Mutual Fund Dealers Association of Canada, the CSA’s guidance says these firms should first refer to the guidance from their SRO. As long as SRO dealers are in compliance with the SRO rules in this area, they are exempt from the CSA requirements.
“SRO members should look first to guidance from their SRO if they have questions about the interpretation of CRM2 requirements, turning to CSA guidance only if a question is not addressed in guidance from their SRO,” the CSA’s guidance says, adding that it generally endorses the SROs’ guidance.
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