The Client Relationship Model (CRM) got its start as a way to improve self-regulation in the financial services industry and ease the way for some controversial reforms. At this point, however, the actions of the self-regulatory organizations (SROs) may be complicating the CRM initiative for the very industry the SROs regulate, rather than simplifying them.
Securities regulators took years to nail down the details of the rules that have become known as CRM. Even now, the so-called CRM 2 rules (which focus on investment cost disclosure and fund performance reporting to clients) still aren’t final for most firms that deal with retail investors because the self-regulatory versions of CRM 2 — designed to harmonize with the rules of securities regulators — are still being finalized.
The Canadian Securities Administrators (CSA) issued their final CRM 2 rules in March 2013, and the requirements these rules impose are being phased in, starting in July of last year, and running through July 2016. The simplest changes, such as pre-trade disclosure of charges, are to be implemented first. The most complex ones, including annual reporting of total investment costs and compensation, come into force last. During the phase in period, the industry’s self-regulatory organizations, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), have to come up with their own versions of these rules, which meet the CSA standards, but tailor some of the details to the business models of their members.
Once the SROs arrive at versions of the rules that satisfy the CSA, the dealers under their jurisdiction — the traditional brokerage firms and mutual fund dealers — will have to comply with the SROs’ rules. However, but they would be exempt from the CSA’s requirements. Getting to this point is proving to be easier said than done.
Late last year, IIROC published its full slate of proposed CRM 2 rules for comment, but with different comment periods for different rules. The comment period for rules coming into force in July 2014 is now past. The comment period for the rules coming into force in 2015 and 2016 ends April 10.
The MFDA is also taking a staged approach, although it covered the more straightforward requirements in one batch, in October 2013. It will publish the bigger, more complex changes in a second set of proposals due later this year, expected this summer.
The result is that firms governed by the SROs will have less time to meet the final requirements than the dealers and portfolio managers under direct securities commission oversight; or, if they try to get a jump on things, they risk spending time and money on systems, training, and other changes that may have to be revised again to conform to the final requirements. In other words, those investments may be wasted.
This concern prompted the industry trade group, the Investment Industry Association of Canada (IIAC) to request that the CSA give firms under SRO jurisdiction some assurance that they will be exempt from its version of the CRM 2 rules, and that they will only have to comply with requirements imposed by their respective SROs.
The IIAC acknowledges that its request is an unusual one, but says that the implementation of the CRM 2 rules represents “unusual circumstances,” and that giving firms certainty that they will only face one set of rules will allow them “to proceed toward successful implementation.”
Yet, while the IIAC made its request in mid-February (as part of its comment on the first phase of IIROC’s CRM 2 rules) it still hasn’t been given this assurance from the regulators, reports IIAC managing director, Barb Amsden.
All along, the CSA has indicated that it will exempt the SRO dealers from its version of the CRM 2 rules, provided that the requirements imposed by the SROs are “substantially harmonized” with the CSA’s requirements and are imposed at the same time as the CSA requirements.
It is certainly the SROs’ intention to ensure that the requirements are harmonized. Indeed, Lucy Becker, vice president public affairs at IIROC, says: “We believe our proposals are substantially harmonized with the CSA’s CRM rules.”
But, despite these repeated reassurances, firms regulated by the SROs are still seeking greater guarantees that only the SRO regimes will apply to them. It is widely assumed that the SROs and the CSA will eventually get on the same page; but, until they do, the technical details of the rules remain uncertain, and firms may naturally be reluctant to move forward with implementation.
“Especially when it comes to some of the bigger bills, you can’t go ahead, realistically, on the assumption that things aren’t going to change,” says Amsden.
The irony underlying all of this is that the CRM was created ostensibly to bring the SROs into the reform effort (then known as the Fair Dealing Model) to make it more industry friendly. Recently though, at least where CRM 2 is concerned, it’s been more frustrating than friendly.