long road
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This article appears in the May 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Following extensive consultation, the Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators (CCIR) have adopted the final total cost reporting (TCR) rules. Preparing to deliver that disclosure will be a substantial undertaking over several years.

Under the rules, investment funds (mutual funds, ETFs and scholarship plans) must provide investors with annual disclosure of the costs (in both dollar and percentage terms) built into funds through management expense ratios and trading expense ratios. Similar disclosures must be provided to segregated fund investors.

For the securities industry, the enhanced cost disclosure requirements build on Phase 2 of the client relationship model (CRM2) reforms, which introduced annual cost and performance disclosure requirements in 2016. Soon after, regulators began talking about “CRM3” — expanding the disclosure beyond the dealers’ trailer fees.

Insurance regulators also began considering the growing gap between the disclosure requirements for investment funds and seg funds amid concerns about regulatory arbitrage — the risk that dually licensed financial advisors might switch to selling seg funds to skirt the tougher investment-fund rules.

In the final TCR rules, the regulators aim to protect investors through more comprehensive cost disclosure, regardless of whether they’re buying investment funds or seg funds.

The CSA’s notice outlining the new provisions said TCR would lead to better informed decisions and better investing outcomes. The notice also stressed that improving investors’ understanding and awareness of the costs of investing “will help address the information asymmetry between investors and registrants.”

Investor advocates are generally pleased with the final TCR rules.

“They are essential to protect consumers and promote better outcomes for investors,” said Jean-Paul Bureaud, executive director of FAIR Canada. “The changes will go a long way in helping consumers better understand the costs and value of their investments, particularly the fees that are embedded in fund products.”

Industry groups also support the final version of the rules, which underwent significant changes as a result of industry concerns.

For example, the CSA and CCIR decided to require annual, not quarterly or monthly reporting. They also agreed to exclude prospectus-exempt funds and labour-sponsored investment funds from the new rules — at least initially.

Further, the requirements won’t take effect until 2026, and investors probably won’t receive the disclosure until 2027 (for the year ended Dec. 31, 2026). Regulators previously planned for investors to begin getting reports for the period ended Dec. 31, 2024, with the first annual report required for the year ended Dec. 31, 2025.

The Investment Funds Institute of Canada (IFIC) welcomed the final requirements.

“Providing investors with more complete fee information related to the investment funds they hold is the ultimate goal for regulators and the industry. It is our view that the CSA’s approach will achieve this goal by enhancing the information investors receive in a manner that strengthens the investor-advisor relationship,” said Andy Mitchell, president and CEO of IFIC, in a release.

During the final consultation on the TCR proposals in April 2022, IFIC supported the objective of improving cost disclosure, but objected to monthly or quarterly reporting. IFIC also called for a similar implementation period in line with what the industry was given to comply with CRM2 (three-and-a-half years).

In extending the implementation period, the CSA cited industry concerns about having enough time to develop the systems and processes needed for TCR, particularly concurrent with other major industry projects, such as shortening the securities settlement cycle by mid-2024.

The CSA and CCIR said they will work with the new industry self-regulatory organization to create an implementation committee to assist firms. The CSA added that it does “not anticipate extending” the current deadline, as it has done with some previous initiatives.

The new rules also feature added reporting flexibility for firms. For example, while the regulators encourage firms to report precise information to investors, they will allow fund managers to use “reasonable approximations” when exact information is unavailable or too costly to obtain. And the rules no longer require firms to use the latest regulatory disclosure (such as Fund Facts or ETF Facts) to provide those estimates.

Additionally, regulators don’t expect dealers or advisors to routinely undertake a due diligence review of the information provided by fund managers (except in certain extraordinary circumstances, such as when a dealer believes the information the manager has provided could be misleading).

Regulators also are not prescribing the information fund managers must provide to dealers or the timetable for delivering that data. Instead, they’re taking a more principles-based approach to the mechanics of how firms deliver disclosure. The regulators’ implementation committee may help develop common standards in this area.

The Canadian Life and Health Insurance Association Inc. (CLHIA) said it’s pleased that TCR is being adopted simultaneously for investment funds and seg funds.

“This is the result of a multi-year collaborative effort between the insurance and investment industries and regulators. It will result in better information for consumers to make informed investment choices and allow for continued strong competition and innovation in the market,” said Stephen Frank, president and CEO of the CLHIA.

But investor advocates aren’t as happy with some of the compromises regulators have made, particularly the extended implementation deadline.

“We are disappointed consumers will not see the changes until the 2027 reporting year,” Bureaud said. “The industry demanded more time than originally proposed to update their systems, and although we understand the challenges, we encourage firms to make every effort to implement these changes sooner.”

Bureaud also called on advisors “to proactively discuss costs with their clients and make it clear they may not be seeing the full cost picture until the enhancements take effect.”