Regulators are hoping to answer, once and for all, the question of whether mutual fund commissions drive sales. The problem is that many fund portfolio managers are refusing to turn over the data required to solve that mystery.
Last autumn, the Canadian Securities Administrators (CSA) awarded a pair of contracts for research to help inform the regulators’ deliberations over whether the CSA should take action on concerns about mutual fund fee structures. The key study, which is to be carried out by York University finance professor Douglas Cumming, involves collecting a large quantity of data from the fund companies on their fees, sales and other information going back 10 years.
The CSA formally requested the necessary information from fund-management firms back in November, and asked that they deliver it by Jan. 16.
The CSA declines to say exactly how many firms have complied with the call for data, but admits that only a few firms have done so.
“As this is third-party research, we’re unable to share detailed information,” says Rhonda Goldberg, director of the Investment Funds and Structured Products Branch of the Ontario Securities Commission. “What we can tell you is that Cumming has advised that he has received only a small number of responses.”
Investment Executive contacted the Investment Funds Institute of Canada (IFIC) and several major mutual fund companies for comment on this story. IFIC did not respond to requests for comment; one fund company, CI Investments Inc. of Toronto, replied that it had submitted data.
Goldberg says the reason that has been given for the low response rate is that the fund companies apparently are worried about the safety and privacy of their data: “A large number of managers have been holding off on submitting their data until their confidentiality concerns are resolved.”
In a bid to resolve those concerns, Cumming provided the fund companies in early February with a signed undertaking, which pledges to protect the integrity of the data that fund companies provide to the research project. CI says it submitted data after receiving this confidentiality agreement.
Cumming’s pledge was accompanied by a letter from Bill Rice, chairman of both the CSA and the Alberta Securities Commission, calling upon the fund managers, once again, to provide data for the research project. As Rice wrote in his letter: “Your support and assistance is vital to ensuring that we achieve the best outcome for Canada’s capital markets.”
Rice’s letter also indicates that regulators believe that Cumming’s undertaking “addresses the concerns that have been expressed regarding the protection and use of any non-public information.”
This sentiment is echoed by Goldberg, who says the agreement should resolve any qualms about confidentiality: “We expect data to be provided to Cumming without further delay.”
The CSA has been promising to protect the security and privacy of the fund companies’ data from the outset. Indeed, the CSA’s initial data request to the fund companies in November said: “Confidentiality will be provided to the fullest extent possible by law.”
At that time, a letter from Rice also set out specific measures that would be taken to protect fund companies’ data, including that: the data would be kept in a password-protected file on a password-protected computer; the data would be used only for the research in question; data would not be shared with rival companies or the CSA; and the data would be kept for one year before being destroyed.
All of these measures also are reflected in this new undertaking, which doesn’t particularly expand on them. The question now is whether putting these promises into legalese is enough to satisfy the fund companies that claim to be worried about confidentiality.
Another important question is whether the researchers will receive the data that they need to complete their analysis on time (the report is due by the end of the first quarter of this year) and with enough of a sample to make the research useful and credible.
The CSA first set out its concerns over investor protection with the existing mutual fund fee structure in a discussion paper more than two years ago. Since then, the member regulators have held public consultations on the issue, which produced much anecdotal evidence and conjecture. Cumming’s project represents the first effort to validate or debunk those concerns based on hard data.
Neil Gross, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) is keen to see the research carried out with adequate academic rigour. “Hopefully,” he says, “Cumming will get the data from all firms – or, at least, a solidly representative sample – so that he can proceed to conduct his analysis. It would be best if the research doesn’t have to make assumptions.”
Fortunately, the other component of this research effort is not dependent upon the fund industry’s willingness to hand over data. That study, which is being carried out by the Brondesbury Group, is a review of existing literature to look at the difference in the effects of fee-based vs commission-based compensation on the nature of advice and on investment outcomes over the long term.
By all accounts, that research is proceeding on schedule. That CSA report should be published by March 31.
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