Heads up, dealers: you’re not going to have as much time as originally assumed to adopt new cost, compensation and performance reporting requirements.

Earlier this year, the Canadian Securities Administrators (CSA) finalized and began implementation of the second phase of its client relationship model (CRM 2) amendments. The new rules, which aim to bolster investor protection by enhancing the transparency of the costs of investing, dealer compensation and portfolio performance, are being phased in over a three-year period that began this past July, with the smallest changes being made first and bigger ones not taking effect until mid-2016.

Three years may seem like a long time to adopt these changes; but for many firms, the details of these new requirements still aren’t known. Indeed, while the CSA has finalized its CRM 2 rules, the self-regulatory organizations (SROs) – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – that oversee most of the retail industry, have yet to propose their own versions of these amendments geared to the firms under their oversight.

In late August, IIROC published a policy update indicating that it will propose its version of the CSA’s rules by the end of this year. And IIROC suggested that once its rules are finalized, dealers will then have the same amount of time to implement the changes as the CSA rules contemplate – one year for the smaller changes; up to three years for the biggest ones.

However, that is not the case. The CSA maintains that the SROs’ editions of the new rules will have to be implemented in the same time frame as the CSA’s rules. That means that dealers will not get the same length of transition periods as the CSA rules provide.

Rather, the CSA’s position means that dealers will have to adopt their SRO’s rules at the same time as the CSA requirements take effect – regardless of when the SROs finalize their versions of the CSA’s rules. In other words, all of the changes will have to be made by the dealers by mid-2016.

According to a regulatory official, speaking on background: “The CSA’s expectation continues to be that both SROs – IIROC and MFDA – will have implemented member rule amendments that are materially harmonized with the CSA’s CRM 2 requirements by the end of the CSA’s CRM 2 implementation period.”

And contrary to IIROC’s policy bulletin, Paul Riccardi, IIROC’s senior vice president, enforcement, member policy and registration, now confirms that dealers will be expected to adhere to the CSA’s timeline: “IIROC will implement its CRM 2 requirements at the same time the CSA implements its requirements, unless there are significant delays in IIROC receiving CSA approval of its proposals. Nobody is anticipating that there will be significant delays, but there is always this possibility when IIROC proposes to make amendments to its rules.”

The fact that implementation of CRM 2 requirements won’t take longer for SRO dealers than contemplated in the CSA rules should come as a relief to investor advocates who fear that the wait for the SROs to come up with their own versions of these rules could push this step toward increased investor protection even further into the future.

As it stands, the overall CRM project has already been in the works for a dozen years or so, originating as the Ontario Securities Commission‘s fair-dealing model project that got its start in 2000.

Moreover, the impact of the CRM 2 amendments is particularly important because they’re central to a couple of other major policy debates taking place within the industry – namely, the question of whether the regulators should impose a statutory fiduciary duty on financial advisors to act in their clients’ best interests; and whether regulators should intervene with the structure of mutual fund fees in order to reduce the inherent conflicts posed by the payment of embedded commissions (trailer fees), among other concerns.

The CSA has been engaging in consultations on both of these fundamental issues over the past year. And one of the industry’s central arguments against regulatory action in both cases is that certain aspects of the CRM 2 amendments – such as providing annual disclosure of the dollar cost of trailer fees – could solve some of the investor- protection concerns underlying these issues, making more radical changes unnecessary.

Investor advocates reject this argument. But if regulators do decide to take a wait-and-see approach to fiduciary duty and mutual fund fees, then a prolonged implementation period for CRM 2 would have the effect of kicking these critical investor issues even further down the road.

Instead, it’s the dealers that have to worry. For one, SRO adherence to CSA timelines dashes any hope that a protracted SRO rule-making process could allow these reforms to fade away or be watered down. And, two, firms are going to have less time to adapt to the new rules.

The purpose of the SROs making their own rules is to tailor the requirements somewhat to the business models of their members. So, firms are likely to want to see the final version of the rules they’ll face before they go too far down the road in making changes to their systems. Thus, the longer the SROs take to nail down the details, the less time dealers will have to implement the final requirements.

Barb Amsden, director, special projects, with the Investment Industry Association of Canada, says there are a host of questions that must be answered before firms can move ahead.

“Some fundamental answers must be obtained before investment can be made,” she says. “The period spent waiting for answers is cutting into the implementation time. While the fundamentals are known, this is very much a case of the devil being in the details.”

Nevertheless, Amsden suggests, firms can start to prepare for the changes they’ll have to make: “It is not the ideal way we wanted things to unfold. We would’ve preferred a harmonized rule-making approach and release. But firms can still move forward.”

The MFDA will propose its amendments in two parts, says Karen McGuinness, senior vice president of member regulation, compliance. The first part, dealing with the “relatively straightforward amendments,” is slated to be published for comment in October. The more substantive amendments – such as performance and cost reporting – will be issued next year.

In the meantime, the MFDA has been gathering feedback from mutual fund dealers in an effort to identify the areas in which the CSA version of the rules may need clarification in order to work well in the MFDA world.

© 2013 Investment Executive. All rights reserved.