The Mutual Fund Dealers Association of Canada is pushing ahead with proposed rule changes to improve the disclosure of transaction costs for clients despite some objections from members of the financial services industry.

The MFDA had published a proposed new rule for comment this past summer. That rule would require mutual fund dealers to tell clients about any fees, sales charges or other transaction costs that a proposed trade would trigger before the dealer can accept a client’s order; as well, firms will have to maintain evidence that clients have been told about these costs.

The fund dealers’ comments have been largely against the MFDA’s proposal, arguing that the rule is not necessary, that it duplicates other ongoing efforts to improve disclosure in the fund sector (such as the MFDA’s client relationship model reforms and the provincial regulators’ proposed new point-of-sale disclosure regime), and that complying with the new rule will be burdensome, expensive and impede the efficient execution of client orders.

Despite these objections, the MFDA is going ahead with the initiative. The proposed rule will be put before the fund dealers for approval at the regulator’s upcoming annual meeting this month. And, assuming the proposal is approved, the MFDA plans to issue a notice that clarifies its expectations and provides additional guidance on the new rule.

In the meantime, the MFDA stresses that the proposal is not intended to create an onerous new regulatory burden for mutual fund dealers; rather, it is intended to codify existing best practices in the industry, ensure that clients are making informed trading decisions and eradicate a common source of client complaints.

The MFDA notice on the proposal indicates that the amendments are targeting “the significant number of investor complaints” in which clients say they weren’t informed of the fees and charges that would result from a particular transaction, and that the clients discover these charges only when they receive a trade confirmation or account statement.

According to a draft of the guidance text the MFDA expects to publish once the rule is approved, one of the biggest sources of such complaints concerns deferred sales charges. It’s easy to see why these could be a cause of such trouble: while clients may be informed of a DSC schedule when they buy a fund, they probably don’t remember it when they decide to sell their mutual fund units several years down the line.

As well, the regulator reports that when these sorts of complaints arise, dealers often point out that there is no regulatory obligation to provide this disclosure under the current rules.@page_break@The new MFDA rule will create that obligation, hopefully erasing this common source of complaint and also giving dealers ammunition to refute future complaints that fees and charges weren’t adequately disclosed.

The proposed rule will apply to all sorts of fees and charges that are directly related to a transaction, including sales charges, redemption fees and switch fees. But the proposed rule does not apply to ongoing charges that take place within a fund, such as trailer fees or fund-management fees; nor does it apply to more general administrative fees that aren’t directly connected to a particular transaction order, such as account administration fees, trustee fees or transfer fees.

In terms of the operational issues that the proposed new rule may create, the MFDA indicates that the disclosure requirement can be met either in writing or verbally — and that firms can document their compliance as they do with other sorts of disclosure obligations (such as taking notes, recording client calls or maintaining copies of client acknowledgments).

The draft companion notice aims to clarify that the proposed amendments are not intended to impair the timely execution of client orders, and that the regulator understands that in certain situations — such as for redemption fees that are to be calculated on the net asset value of a fund after the market closes — it may not be possible to provide detailed fee information. In such situations, firms and reps would be expected to provide a “reasonable estimate” of the fees.

The MFDA notice also admits it may be tricky to provide detailed information on the magnitude of short-term trading fees and withholding taxes. In those circumstances, dealers would be expected to explain that these costs may be incurred but not have to calculate them precisely.

For unsolicited, online trades for which it may be impractical to provide detailed, specific information, dealer firms can comply with the rule by notifying clients of the types of fees and charges that may apply — and advising them to contact the dealer before they trade if they want more information.

In certain situations, disclosure won’t have to be made at all. For example, the MFDA notice explains that disclosure would not be expected when a client contacts a fund company directly to make a redemption request and the rep isn’t aware of the order until after it’s executed.

In addition, in cases in which a client places an unsolicited order and the dealer is then unable to reach the client, firms and reps “would be expected to use reasonable efforts” to contact the client and advise him or her of the transaction fees and charges.

Although dealers may reflexively resist the new rules, it would be a win/win for clients and the industry alike if a big source of client dissatisfaction can be defused. IE