The ontario securities Commission has created a new working group to discuss the latest regulatory efforts to improve transparency and disclosure of advisor compensation, conflicts of interest and risk.
The new group will include not only mutual fund managers, but also dealers and industry service providers — as well as the Investment Funds Institute of Canada. Until now, there was little invited input from two key players — fund managers and IFIC.

The CSA Registration Reform Initiative (renamed from its original and inappropriately titled “Fair Dealing Model”) is undergoing an overhaul after the original six industry advisory committees, organized by the OSC, were dismantled in October 2004.
IFIC and a number of its members, as well as representatives from securities regulators, the Mutual Fund Dealers Association of Canada and the Investment Dealers Association of Canada, had participated on these committees.

The initiative was bumped over to the Canadian Securities Administrators, which formed a steering committee and three new working groups. Although pleased that other jurisdictions were co-operating, we were dismayed that industry representation chosen for the influential steering committee did not include any of the mutual fund industry representatives or IFIC staff members who had contributed to the work of the “original six” committees. In fact, it was only after some pretty convincing arguments from both IFIC and the MFDA that David Sharpe, vice president and chief compliance officer at Mississauga, Ont.-based PFSL Investments Canada (an IFIC and MFDA-member firm) was included on the steering committee.

We didn’t fare much better on the new groups. The list of participants shows only a sprinkling of IFIC members and not one IFIC staffer.

And despite strenuous representations from IFIC, there were no independent fund managers on the new working groups. This absence is significant in that systems changes and costs associated with many of the subjects discussed by the working groups will directly affect fund managers as well as fund dealers. More particularly, data needed to fulfil many of the proposed requirements relating to performance and compensation must be obtained from both parties. The new working group agreed to by the OSC will address these data issues and advise the steering committee.

IFIC is in favour of investors knowing what they pay for professional advice and follow-up consultation. This information, expressed on a percentage basis, is widely available in the fund’s prospectus. Investors also need to know that trailing commissions exist, where the money comes from, when it’s paid and who it goes to — items that have also been disclosed clearly in the prospectus for more than a decade. But in a January 2005 report, one of the new working groups recommends that the dollar value of sales commissions and trailers for a transaction be disclosed, among other places, in trade confirmations.

Putting all this information in a confirmation raises many operational challenges for the mutual fund industry. Today, many dealers rely on fund managers to produce and forward confirmations to investors. This is explicitly permitted by securities laws.
However, fund managers who prepare and send confirms in most cases simply do not have access to the compensation information required to present this enhanced disclosure. If changes are going to be made to securities laws to accommodate this, fund managers need to be at the table to provide their input. Having fund managers participate at this consultative stage will also lead to a better-informed process and better results.

Similarly, fund manager participation will be essential to conduct a comprehensive cost-benefit analysis — a securities law prerequisite to any regulatory change. In fact, one of the three working groups, the Account Opening Working Group, stated that none of the recommendations it suggested be implemented without first conducting a cost-benefit analysis.

An objective cost-benefit analysis will also help determine whether enhanced transparency, more meaningful disclosure and personalized performance could be achieved more economically by other means, including through regulatory initiatives already proposed or underway.

Thomas Hockin is Toronto-based president and CEO of the Investment Funds Institute of Canada.