The road to better transparency for retail investors – via the second phase of the client relationship model (CRM2) – is taking a bit of a detour this year, but the end goal for regulators remains unchanged. They want to see more-informed investors who are better equipped to make sound investing decisions.

While the investment industry is enjoying a short reprieve from CRM2 implementation chores this summer, with this year’s July deadline pushed to the end of the year (see sidebar), the project still is very much a going concern. Regulators are grappling with the task of ensuring compliance with the changes that have been made to date while preparing for the work ahead regarding the implementation of the remaining reforms slated for the end of 2015 and the summer of 2016.

The first tranche of CRM2 reforms, which took effect in July 2014, includes changes to the client/advisor relationship disclosure requirements, along with a couple of new cost disclosure requirements. For the most part, these changes were fairly minor. But they have not been without their hiccups.

According to Wendy Rudd, senior vice president, market regulation and policy, with the Investment Industry Regulatory Organization of Canada (IIROC), investment dealers have “experienced implementation challenges” with certain aspects of the 2014 requirements. These include, in particular, the new obligation to provide pre-trade cost disclosure for all securities transactions.

With that in mind, IIROC reports that its business conduct compliance team is focusing on this area by carrying out targeted reviews of dealers’ implementation of the CRM2 reforms. This year, IIROC examiners are concentrating on dealers’ policies and procedures regarding both pre-trade cost disclosure and the new requirement for disclosure of costs on trade confirmations for debt securities.

IIROC’s teams also are reviewing audit trail records to confirm that the required disclosures are being provided to clients. Rudd notes that the results of these reviews will be published in IIROC’s next annual consolidated compliance report.

Focused reviews

It’s much the same story on the mutual fund dealer side of the industry. Karen McGuinness, senior vice president, member regulation, compliance, with the Mutual Fund Dealers Association of Canada (MFDA), says the MFDA has not identified any significant issues with firms complying with the changes to the relationship disclosure requirements that were introduced as part of the 2014 reforms. Although, she notes, the changes related to pre-trade disclosure are “incremental for our members rather than being an entirely new concept,” given that the MFDA already had a rule dealing with pre-trade disclosure, this is nevertheless the area in which the MFDA is targeting its compliance efforts.

These focused reviews of fund dealers’ practices regarding pre-trade cost disclosure have revealed that some firms that haven’t updated their internal policies and procedures to reflect the CRM2-related revisions to these rules. The full results of the MFDA’s review, and further guidance for fund dealers in complying with the requirements, will be issued later this year, McGuinness says.

At this stage of the CRM2 process, regulators are focusing on helping firms navigate the new rules and ensure compliance with them rather than seeking to punish firms’ shortcomings. To that end, Rudd notes, IIROC has produced a couple of “Frequently asked questions” documents (FAQs), outlining the regulator’s advice regarding common implementation issues for dealers. The FAQs cover 10 questions involving the new pre-trade disclosure requirements, along with one question regarding the new requirements for trade confirmations following debt transactions.

McGuinness says the MFDA will be providing further guidance to fund dealers to address any issues the MFDA uncovers regarding the pre-trade disclosure rules. This guidance will incorporate the fact that new requirements requiring pre-trade delivery of the Fund Facts disclosure are slated to take effect at the end of May 2016. (See page 22.)

In the current round of compliance reviews, the MFDA is “assessing the extent to which members are currently using the Fund Facts document to comply with [rules on pre-trade disclosure],” McGuinness notes. And, she adds: “Given the obvious overlap [of the CRM2 and the Fund Facts rules], we intend to provide practical guidance to assist [MFDA] members in complying [with both sets of rules].”

Although the self-regulatory organizations – i.e., IIROC and the MFDA – are very much on the front lines of CRM2 implementation, with responsibility for the two most important segments of the retail investment industry, the provincial securities regulators also have been doing their part to ease implementation by providing additional guidance to the industry.

The Canadian Securities Administrators (CSA) has published its own set of FAQs regarding certain implementation issues and has furnished firms’ chief compliance officers with a set of tips designed to aid compliance. In addition, the CSA’s staff has been providing interpretations of the rules and guidance to firms directly and through industry trade groups, such as the Investment Industry Association of Canada and the Investment Funds Institute of Canada. The CSA also has held outreach sessions regarding CRM2 and CSA staff have appeared at industry conferences to explain the CSA’s expectations further.

In addition to all of these efforts aimed at ensuring compliance with the aspects of the CRM2 reforms that already have been adopted, the regulators also have an eye on the final stages of the reform project. These elements come into force next year and include some of the most challenging aspects of the new regime: two new annual reports that firms will have to produce that deal with the costs of investing and assessments of investment performance. These measures, often referred to as “cost and performance” reports, are expected to be the most significant changes introduced under CRM2.

See: Putting it on the table; Client statements: The redesign

Fundamental challenges

McGuinness anticipates there will be some challenges with the forthcoming 2015 requirements, but adds that the 2016 reforms will pose greater issues.

“This wasn’t a surprise, though, given the creation of two new reporting documents containing data that firms historically have not been required to maintain,” she says. “Data collection and cleanup have been significant undertakings for firms.”

The fundamental challenge with all of these new disclosure requirements revolves around the work required to develop the information technology systems needed to collect and process the sort of information that firms need in order to enhance their reporting to clients. (See page 18.)

And although achieving that goal is taking a long time, the regulators believe pursuing that goal is worth it. They continue to expect that at the end of the day, both investors and the industry will be better off after the implementation of the CRM2 regime.

“CRM2 is about more than just compliance with the black letter of the law,” says Debra Foubert, director of compliance and registrant regulation at the Ontario Securities Commission. “Clear and meaningful client communications are a win for both advisors and clients. More informed investors allow advisors to demonstrate the value of advice.”

While getting bogged down in the minutiae of the CRM2 reforms is easy, the overarching goal is to generate more substantive conversations between advisors and clients about their relationship. The ultimate aim is to create more empowered investors, which hopefully will lead to a better match between client expectations and reality – and fewer conflicts among advisors, their firms and their clients.

Deadline changes: Hits and misses

The investment industry is getting a bit of a break from the chore of implementing Phase 2 of the client relationship model (CRM2) reforms this year, thanks to a Solomonic decision by regulators earlier this year.

When the CRM2 reforms originally were finalized, the Canadian Securities Administrators (CSA) dictated that the new requirements would be phased in over a three-year period, with the deadlines for each year’s set of new measures falling on the same date each year, on July 15. The first wave of CRM2 requirements took effect on July 15, 2014. And, in theory, the second tranche of the CRM2 reforms should have kicked in on that date this year.

However, in response to the investment industry lobbying for more time, the CSA agreed to give firms until the end of this year to get their 2015 changes in place. As a result, the required changes for this year, which include the introduction of position cost reporting, the obligation to report the market value of clients’ holdings and the requirement to report certain off-book holdings, don’t kick in until Dec. 31.

For such a detailed and technical set of reforms, the added implementation time certainly was welcomed by many firms. However, the CSA decided not to give the industry any breaks on next year’s changes, which are expected to be the most significant components of the entire package of reforms.

So, the requirements to provide two new reports – one that sets out clients’ annual costs in terms of dealer compensation; the other detailing clients’ portfolio performance – still will take effect on July 15, 2016, as planned initially.

Any hope that the regulators might give the investment industry until the end of 2016 before this cost and performance reporting must begin was opposed by investor advocates. And, so far, the deadline for 2016 remains unchanged and the regulators don’t seem likely to change their minds on the timing of those requirements.

The good news for the investment industry is that firms now have certainty about just when the rest of the new rules will take effect.

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