The second phase of the client relationship model (CRM2) takes effect in three stages, on July 2014, July 2015 and July 2016. Although the Canadian Securities Administrators (CSA) has finalized its rules for all three phases, this is not the case for the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). These two self-regulatory organizations are tailoring the rules for their members while maintaining harmony with the CSA regime. IIROC’s 2015 and 2016 amendments have been published for a second round of comments, while the comment period for the MFDA’s amendments recently closed. Here are the basics of the CSA rules, by year:

JULY 15, 2014

Pre-trade disclosure

All of the charges, fees and other costs paid to firms for a non-managed account that arise from a purchase or sale of securities, including investment funds, must be disclosed to the client prior to the transaction. The information can be delivered verbally or in writing, but it must occur prior to the finalization of any trade. This includes any deferred sales charges (DSC) applicable on redemption of mutual funds, including the fee schedule. Trailing commissions must also be disclosed.

The nature of the charge must be disclosed, as well as the exact amount of all direct and indirect charges resulting from a trade, such as front-end loads. These amounts must be given in precise dollars-and-cents amounts. If the exact amount is not available, the advisor must provide a reasonable estimate.

– Trade confirmations for debt securities

Enhanced, post-trade disclosure, in writing, for transactions dealing with debt securities is now required. This includes a security’s annual yield and, either the total dollar compensation received by the firm, including a mark-up or mark-down, commissions, and other service charges, or the dollar amount of the commission and a statement indicating that a mark-up or mark-down was applied.

– Benchmarks

Dealers must now share information with clients about their use of investment-performance benchmarks. This information is to be included in the relationship disclosure information documents required under the first phase of CRM. Firms must provide an explanation of what a benchmark is and how the investor can use one to assess the performance of his or her portfolio. If the firm does not use benchmarks in its reporting, no action is required.

JULY 15, 2015

– Enhanced account statements

Client account statements must be sent quarterly – or monthly, if requested – and include enhanced disclosure about market value and the cost of each security. There is a detailed definition of market value, which includes a hierarchy of methods that may be used, depending on available information. If the market value cannot be determined using usual methods, the security must be excluded from the market-value calculation for the account. This exclusion must be disclosed.

A position cost of securities must also be included. This may be either the original cost – the amount paid to acquire the security, including transaction costs – or the book cost. The latter is calculated as original cost, adjusted for reinvested contributions, return of capital and corporate reorganizations. The account statement must also disclose which securities carry a DSC and whether a security is covered by an investor protection fund, plus the name of that fund.

Additional statements are required for client securities that are held by a party other than the dealer (a.k.a. off-book or client-name accounts) in cases in which the dealer can verify the holding, such as having trading authority or receiving a continuing payment, such as trailer fees. The difficulty may be in gathering the information. (See story on page 9.)

JULY 15, 2016

– Annual charges and compensation reports

Investors must receive annual cost and compensation reports that include: all charges paid directly to the firm, including account operating charges, trading commissions, and compensation paid on debt securities trades; and, compensation received from third parties in connection with their accounts, such as mutual fund trailer fees, which must be disclosed in dollar terms.

– Annual performance reports

Clients must receive a performance report that includes a summary of the activity in their accounts over the past year and since their accounts were opened. For both time periods, it must include the account’s opening market value, deposits, withdrawals, change in the market value of the account and closing market values. It must provide an annualized “total percentage return” for the account for one, three, five and 10 years – as well as since the account was opened. The calculation of the total percentage return must be explained – and it must be noted that it is net of charges to the account. In a controversial move, rates of return must use a dollar-weighted method of calculation. (See story on page 9.)

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