Change is Coming: Targeted Reforms and
Update on CSA Fee Proposals
IFB
Toronto Fall Summit
November 1, 2016
Donna Spagnolo
Sienne Lam
Agenda/Status
• Targeted Reforms
• Comment period closed
• Next step: Draft rules?
• CSA Fee Proposals
• Consultation process – not yet begun.
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11 “Targeted” Reforms
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1. Conflicts of interest
2. Know your product – Reps
3. Know your client
4. Know your product - Firms
5. Suitability
6. Relationship disclosure
7. Proficiency
8. Titles and designations
9. UDP/CCO
10. Statutory fiduciary duty
11. Best interest standard
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CSA Objectives
• Enhance the obligations of firms towards their
clients
• Improve outcomes for clients and clarify the nature
of the client-registrant relationship
• NI 31-103 does not explicitly contain certain
requirements
• Better align the interests of registrants with interests
of clients
• “Status quo must change”
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Key Investor Protection Concerns
• Investors not getting value or returns they can
reasonably expect
• Expectation gap
• Conflicts of interest
• Information asymmetry
• “Clients not getting the outcomes that the regulatory
system is designed to give them”
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Targeted Reform 1:
Conflicts of Interest
• Determine how each conflict will be managed to
prioritize the interest of the client ahead of the firm
• Reasonable conflicts management system –
disclose, control or avoid
• Reasonable basis for concluding clients understand
the conflict
• Disclosure – prominent, specific and clear
• Cannot “cure” COI that is not in client’s best interest
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Targeted Reform 2:
Know Your Client
• KYC process must result in thorough understanding
of client
• Gather more data on 3 key KYC elements
1. Investment needs and objectives
2. Financial circumstances
3. Risk profile
• Update at least annually and more frequently in
response to material changes in circumstances
involving client or client portfolio
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Targeted Reform 3:
Know Your Product – Representatives
• Sufficient knowledge of product and KYC info on
client to support suitability analysis
• Consider impact on performance of recommended
product of fees, costs and charges
• Understand each security on firm’s shelf
• Structure, product strategy, features, costs, risks
• Consider how recommended product compares to
other products on firm’s shelf
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Targeted Reform 4:
Know Your Product – Firm
Mixed/
non-proprietary
Client profile for
firm
Annual review
of shelf
Proprietary firms
If mixed/non-proprietary does firm have a reasonable universe of
products most likely to meet the investment needs and objectives
of its clients?
“Fair and unbiased market investigation, a product comparison and
an optimization process”
Based on review of client profiles/client base + professional judgment
+ benchmarks for assessment to determine whether firm has
reasonable universe of products + written reports
Compare all products on list against benchmarks
(fees, costs, risk factors etc)
Only one product? No review required
Targeted Reform 5:
Suitability
1. Investment recommendations – including decision to
continue to hold. Must meet 3 suitability criteria for client
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Basic financial suitability
Investment strategy suitability
Product selection suitability
2. Suitability analysis must be of client’s entire portfolio
Don’t only rely on risk ratings?
3. May be more than one suitable product – but a more
costly one is likely not to be suitable
Targeted Reform 6:
Relationship Disclosure
 Easy to understand terms
 Disclose if proprietary or mixed/non-proprietary firm
 If mixed – give proportion of proprietary products
 If proprietary firm or restricted registration category
(including if mutual fund dealer only) – give
specified disclosure
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Targeted Reform 7:
Proficiency
 Increased proficiency for reps, including
continuing education
 Standards that ensure reps understand basic structure,
product strategy, costs and risks of all types of securities
 Increased proficiency on how product costs and
investment strategies (active vs passive) can impact
investment outcomes for clients
 Ethics training
 No specified courses
Targeted Reform 8:
Titles and Designations
 Prescribed client-facing business titles to alleviate
client confusion
 No other titles can be used
 Specific guidance on designations – focus on
vulnerable and less sophisticated clients with firm
pre-approvals required
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Targeted Reform 9 :
Role of UDP and CCO
 Amendments to NI 31-103 to reflect other
targeted reforms
 Similar enhanced expectations on CCO and
UDP
Focus on conflicts management
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 Suitability enhancements
 Compliance system must prioritize interests
of the client ahead of the firm
Targeted Reform 10:
Statutory Fiduciary Duty
• When registrant has been granted discretion
• Amendments to securities legislation
• Statutory fiduciary duty
Targeted Reform 11:
“Regulatory” best interest standard
• Deal fairly, honestly and in good faith with clients and
act in clients best interests (“Standard of Care”)
• Guiding Principles:
• Act in best interests of client
• Avoid or control conflicts of interest in a way that
prioritizes client’s best interest
• Provide full, clear, meaningful and timely disclosure
• Interpret law and agreements in favour of client
• Act with care
• Not a fiduciary duty
Update on CSA Review of Mutual Fund Fees
• CSA has NOT made a final decision
• Brondesbury Group – Mutual Fund Fees Report (Spring
2015)
• Professor Douglas Cumming – A Dissection of Mutual
Fund Fees, Flows and Performance (Fall 2015)
• CSA is launching a focused consultation to consider
moving Canada toward a model that would ban trailer fees
in favour of direct fee arrangements
CSA Staff Notice 81-327
• CSA evaluating the option of discontinuing embedded
commissions and transitioning to direct pay arrangements
that:
• directly engage investors in the dealer/representative
compensation process;
• deliver greater clarity on the services provided and
their costs; and
• better align the interests of fund industry participants
and investors.
CSA Consultation
• CSA will consult with stakeholders on:
• potential measures to transition to direct pay
arrangements
• potential impact of discontinuing embedded
commissions on Canadian market participants and
investors
Main objectives of consultation:
1. To assess impact of banning embedded commissions
2. To provide regulators with information to make an
enlightened decision on banning embedded
commissions
CSA Consultation
Main issues to be covered by the consultation:
1. Conflicts of interest
2. Discrepancy between commissions paid and
services/advice provided
3. Understanding of mutual fund fees by investors and
control over direct remuneration
Submit Your Comments!
• YOU are a stakeholder and should make a submission
• Send comments by mail or email (contact information
will be on Consultation Paper, e.g.
[email protected])
• Comments should be organized, well-reasoned and
pragmatic
• Comment period: 120 days
• CSA will also hold roundtables to discuss the potential
impact of discontinuing embedded commissions.
Questions?
Donna Spagnolo
Borden Ladner Gervais LLP
(416) 367-6236
 [email protected]
Sienne Lam
Borden Ladner Gervais LLP
(416) 367-16616
 [email protected]
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