Total Cost of Fund Report – Coming to Investor Statements by 2025? – Fund management / REITs

After a multi-year hiatus to focus on client-centric reforms, among other regulatory priorities, the Canadian Securities Administrators (CSA) has resumed the inevitable next steps of changes to investor reporting that came into effect in 2016. , known as CRM2. The CSA is now focusing on reporting by registrants of the total costs of investing in investment funds.

At the end of April 2022, the CSA published for comment Proposed Amendments to National Instrument 31-103Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and its related policy. These changes would require brokers and advisers to include new total specified cost (TCR) information on investor statements for the funds in which their clients invest. The registered investment fund managers of the relevant funds will be required to provide TCR information to brokers and advisers so that they can prepare these statements for clients.

At the same time as the CSA published its proposals to amend NI 31-103, the Canadian Council of Insurance Regulators (CCIR) proposed a new CCIR guideline on continuous disclosure for individual insurance contracts with variable capital (the CCIR guideline).

The CCIR guidelines relate to annual investor reporting requirements, including TCR information, in respect of segregated funds and would apply to all insurers offering segregated funds through life insurance contracts. individual variable capital. Its intention is to add new reporting requirements, which will catch up with CRM2 requirements, and also to implement the TCR for segregated funds. The CCIR Guidelines are intended to raise awareness of policyholder rights to benefits and how their actions may affect those benefits.

The CSA and CCIR proposals are the result of a joint committee comprised of members from the CSA, CCIR, the Canadian Insurance Services Regulatory Organizations, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.

The CSA and CCIR explain that the proposals are important investor protection initiatives, aimed at improving investor awareness of common fees and expenses for investments in mutual funds and segregated funds. The CSA and CCIR acknowledge the work done to date to provide investors with clear point-of-sale information about fees and expenses (e.g., in Fund Facts) and ongoing disclosure (e.g., in the financial statements and management reports of fund performance). They are concerned, however, that investors do not have access to point-of-sale disclosure after making their investment and that they often do not review the financial statements and DRRFs of the funds in which they invest.

The CSA suggest that their research shows that investors mistakenly believe that the statements they receive from the chosen registrant (dealer or adviser) provide them with all the costs of investing, including fees paid indirectly through investments. in funds. The objective of the TCR project is to ensure that there is ongoing reporting of expenses and fees paid by fund, as well as an aggregated annual report of fees and expenses paid directly by the investor.

Next steps and timeline for implementation

The CSA and the CCIR explain that it is their intention that the amendments to NI 31-103 and the CCIR Guidelines be finalized at the same time and that they remain consistent in their requirements. They also reported a short transition period. Assuming the proposals become final in September 2024, the proposed implementation dates are as follows:

First monthly/quarterly/half-yearly report

First annual report

Securities Industry Reports

Q4 2024

December 2025

Insurance Industry Reports

June 2025, where the insurer sends periodic reports as well as annual reports

December 2025

Necessary operational and legal comments

In light of the CSA and CCIR’s warning of the inevitability of these proposals, it is essential that industry participants review the requirements and provide feedback on the proposals by the end of the comment period on July 27, 2022.

There are legal and definitional issues with the proposals, as well as some assumptions about investor needs, which we intend to comment on. Equally, if not more importantly, industry participants need to focus on the art of the possible with these proposals. Does what CSA and CCIR propose make sense in light of the available information, and are the proposals operationally feasible – particularly in the proposed transition periods? The CSA and CCIR are also asking the industry to review and comment on prescribed formulas/methods that fund managers and insurers must follow when calculating fund expenses.

Proposed changes

Securities sector

The proposed amendments to NI 31-103 would require:

  • Clients’ required monthly or quarterly account statements must include information on the total of the management expense ratio (MER) and trading expense ratio (TER) as a percentage,
    (using the new term fund expense ratio) for each investment fund (per series) held by the client at the end of the applicable statement period;

  • The mandatory annual cost and performance report must include the total dollar amount of fund fees for all investment funds held by a client during the applicable year, as well as the total dollar amount of all fees direct investment fund costs (eg redemption fees or short-term trading fees) that the client incurs during the year;

  • The aforementioned disclosure with respect to all
    investment funds in which the client invests, including publicly offered mutual funds, exchange-traded funds, scholarship plans, prospectus-exempt funds and “foreign funds”;

  • Mandatory disclosure of investment fund fees and expenses in applicable statements; and

  • Investment fund managers inform brokers and advisers of the daily cost per unit/share of the relevant class or series of an investment fund calculated in dollars, determined using a specific formula. The calculation requires that the applicable fund’s expense ratio be divided by 365, then multiplied by the net asset value per share/unit of the applicable class or series for the day.

Investment fund managers would be permitted to provide approximations of the above data using publicly available information in fund facts, ETF facts documents, prospectuses, or management reports of fund performance. , unless the information was published more than one year ago, or the manager has reasonable grounds to believe that it would make the information given in the account statement or report misleading.

In addition, if the advisers or dealers do not believe that the information received from the investment fund manager is reliable, they would be required to make reasonable efforts to obtain the information in another manner. If this is not possible, the registered firm must exclude the information from the calculation of the amount of fund expenses or direct investment fund expenses reported to clients or, in the case of a fund expense ratio, not report the ratio and disclose exclusions in the relevant report.

There is little or no discussion of the likelihood of obtaining this information from non-Canadian managers of non-Canadian funds.

We note that the existing exemptions for statements and reports for Authorized Clients who are not individuals would continue to apply.

Insurance sector

For clients who hold segregated funds, the proposed CCIR guidelines require insurers to provide them with the information specified below at least annually. They can provide it more frequently if they wish:

  • The fund expense ratio for each segregated fund the client held during the statement period;

  • The total amount of fund spend, in dollars, for all segregated funds the client held during the statement period;

  • The total cost of insurance coverage under the segregated fund contract, in dollars, for the statement period; and

  • The total amount of all other expenses under the segregated fund contract, in dollars, for the statement period.

Additional information will be required to make separate fund statements more compliant with CRM2 securities industry requirements.

Related Publications

The consultation includes a sample statement and prototype report for the securities and insurance industries, as well as an appendix explaining the differences in products, distribution channels and regulations between segregated funds and investment funds .

For the securities industry, the Ontario Securities Commission has released a Regulatory Impact Assessment. It is important to provide the OSC with feedback on its assessment of the anticipated costs and benefits of the proposals. If the benefits are overestimated and the costs underestimated, this imbalance will have to be corrected.

Next steps

We expect to provide comments on the proposals by the July 27 deadline and would be happy to answer your questions and assist you in providing your comments.

About BLG

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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