Editor’s note: This article updates an article from the January 2014 issue of Investment Executive.

The Investment Industry Regulatory Organization of Canada’s (IIROC) version of its proposed cost and performance reporting rules unveiled on Thursday, December 12, shows that the self-regulatory organization (SRO) is closely following the path set out in the measures finalized by the Canadian Securities Administrators (CSA) this past spring — albeit with several minor variations.

When the provincial securities regulators finalized Phase 2 of their client relationship model rules, known as CRM 2, they established a vision for the future of retail regulation that was hailed as a watershed moment for investor protection. Those rules promise to usher in a new era of transparency for investors, both in terms of the performance of their portfolios and the cost of their investments.

Yet, for most financial advisors and their dealers, the publication of IIROC’s CRM 2 rules is at least as important.

IIROC’s proposals spell out its plan for its version of the CRM 2 rules, which are being published as a single package but with two different comment periods. IIROC president and CEO Susan Wolburgh Jenah says that the SRO decided to publish a single set of proposals to give dealers, and others, a full picture of how the rules will work together.

The hope is that this will lead to better feedback on the proposals and give the investment industry plenty of time to think through the implications of the proposed rules, which will be implemented over the next two and a half years. Thus, the requirements slated to come into effect by mid-2014 are out for just a 60-day comment period; those that don’t have to be implemented until 2015 or 2016 have a 120-day comment period.

For the most part, IIROC’s proposals closely follow the path set by the CSA. All along, both SROs (IIROC and the Mutual Fund Dealers Association of Canada), have promised that their versions of the CRM 2 rules would be “substantially similar” to the CSA’s rules and be implemented on approximately the same timeline.

This close harmonization is necessary to ensure that the provincial regulators exempt SRO-regulated firms from the CSA rules. This avoids duplication and, at the same time, provides some opportunity to customize the CSA’s raw requirements to fit existing industry practices and business models, thereby cushioning the regulatory burden a bit.

IIROC’s proposals differ from the CSA rules in several areas, although these deviations are not dramatic. In fact, Wolburgh Jenah says, IIROC staff has been in constant communication with the CSA on these issues, and she believes the provincial regulators are comfortable with these differences.

For example, investment dealers will have to start producing new annual reports for clients that spell out all of the fees and charges they’ve incurred during the previous year, including items such as the dollar value of trailer fees paid. However, unlike the CSA’s rules, IIROC won’t require dealers to produce these reports for clients who haven’t incurred any charges during the year: “IIROC staff do not believe it is necessary to send a ‘nil’ fee/charge report to a client.”

IIROC’s proposals also contain some differences in defining certain elements of client reporting, such as how market value, book cost and original cost are to be calculated. IIROC proposes that disclosure of the compensation paid on debt securities should be required only for retail clients and that cash balances not be included in the reporting of client assets held outside the dealer, which would never receive compensation for balances held externally.

Finally, IIROC’s proposals also contemplate giving dealers an extra two years to provide clients with upfront disclosure that discusses performance benchmarks. The CSA rules contemplate requiring that disclosure in July 2014; IIROC proposes requiring this beginning in July 2016. Given that firms will be implementing new relationship-disclosure requirements in March 2014, IIROC’s position is that it’s too early to start revising these requirements and thus wants later implementation.

As it is, the IIROC proposals indicate that the cost of implementing certain aspects of its rules will likely be substantial — particularly, the annual performance reporting and the annual cost reporting requirements.

The cost impact will vary by firm, IIROC suggests. Those firms that already have the systems and processes needed to collect the information required for CRM 2 disclosures are likely to feel less of a hit than firms that have yet to start collecting the required data and generating adequate client reports.

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