Laura Paglia, Borden Ladner Gervais

Paul Strijckers, Broadridge

Federation of Mutual Fund Dealers 3rd Annual Conference

Mutual Fund Fees: The Saga Continues

OVERVIEW

1) Status Review Of CSA Discussion Paper 81 – 407 – Mutual Fund Fees

2) Overview CRM2 & Key Implementation Considerations

3) Some Practical Considerations and Predictions For Advisors And Their Dealers In Light Of “Fee Focus”

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Status of CSA Discussion Paper and Request for Comment 81-407

• On December 17, 2013, CSA advised that:

1. It continues to consider and discuss the information gathered through the consultative process with a view to determining next steps and will advise in coming months what if any regulatory actions to be pursued including research initiatives;

2. The similarity of feedback received between this consultation paper and the best interest duty consultation paper suggests a need for CSA staff to coordinate their policy considerations on these initiatives going forward

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Status of CSA Discussion Paper and Request for Comment 81-407• On April 7, 2014, the CSA announced a request for proposals to conduct

research on Canada’s mutual fund fee structure. Firms were invited to submit proposals for two independent pieces of research to evaluate the extent, if any, to which:

1. Sales and trailing commissions influence fund sales;

2. The use of fee based versus commission based compensation changes the nature of the advice and investment outcomes over the long term

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Status of CSA Discussion Paper and Request for Comment 81-407

CSA Concerns Regarding Trailing Commission In Mutual Funds:

A. Limited investor knowledge of fund costs and control over advisor compensation;

B. Potential conflicts of interest for advisor;

C. Potential for cross subsidation of mutual fund investors or investors of different advisor comp;

D. The limited low cost mutual fund options available to discount brokerage investors

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Status of CSA Discussion Paper and Request for Comment 81-407

Investor Advocate Concerns Regarding Trailing Commission In Mutual Funds:

A. A misalignment of interest which impacts investor outcomes;

B. Minimum investor choice not to pay embedded commission;

C. [Need a best interest duty;]

D. [Need to increase advisor proficiency requirements and regulate use of titles]

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Status of CSA Discussion Paper and Request for Comment 81-407Key Points From Industry Response:

A. No evidence of investor harm that warrants a change in mutual fund fee structure;

B. Concern over unintended consequences for retail investors and the fund industry which includes;

(i) A reduction in access to advice for small retail investors;

(ii) The elimination of choice in how investors may pay for financial advice;

(iii) The creation of an unlevel playing field among competing products and opportunities for regulatory arbitrage

C. The need to assess the impact of domestic and international reforms. (U.K.)

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CRM-2 Process ChangesImplementation/transformation ConsiderationsBy Paul Strijckers

April 29, 2014

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Impact of NI 31-103

There are known knowns; there are things we know that we know.

There are known unknowns; that is to say, there are things that we now know we don't know.

But there are also unknown unknowns – there are things we do not know we don't know.

—United States Secretary of Defense, Donald Rumsfeld

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Timelines for NI 31 – 103 (CRM-2)

July 15, 2014: 14.2.1 -pre-trade disclosure of charges 14.12 -content and delivery of trade confirmation on

Debt Securities

July 15, 2015: 14.11.1 determining market value 14.14.1 additional statements, 14.14.1(3) that advisers must provide

monthly statements if requested by a client.

14.14.1 (5) Client Name reporting 14.14.2 original cost and book cost

July 15, 2016: 14.12(1)(c) -DSC charge disclosure on Confirms 14.17(1)(h) -Report on charges and other compensation 14.18/14.19 -Total Percentage Return and content

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July 15, 2014

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July 15, 2014 – Pre-trade disclosure

14.2.1 -pre-trade disclosure of chargesOverview:

Purchase or Switch of DSC Securities; and Other transaction which may compensate the dealer

disclose that DSC might be triggered upon redemption & Presentation of DSC Schedule

Referral fees Purchase of securities with Trailing commission

Provision of the securities prospectus or fund facts

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July 15, 2014 – Pre-trade disclosure

Process changes: Source of Data: DSC & Other Securities What will the firms policy be to implement Pre-Trade

Disclosure Charges? Verbal:

Provide a script to Advisors Document pre-trade disclosure; What & how? What process/education will be enforced to remind

Advisors Systems:

Captured within Order Management systems? Fixed or Free format?

Mandatory edits? Other communication methods: Smart Advisor solution?

email? How will this process be audited?

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July 15, 2014 – Confirms for Debt Securities July 15, 2014:

14.12 -content and delivery of trade confirmation on Debt Securities: Disclose Total Dollar amount of compensation taken on the

trade (mark–up or mark-down, commission or other services charges)

Or Total amount of commission (if any) and/or text similar to:

“Dealer firm remuneration has been added to the price of this security (in the case of a purchase)or deducted from the price of this securities (in the case of a sale). This amount was in addition to any commission this trade confirmation shows was charged to you”

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July 15, 2014– Confirms for Debt Securities

Process changes: Which method will be used? How & where will this be calculated? How will this be processed? Impact on Down stream processes:

End user websites Desktops for Advisors Confirms Print vendors

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July 15, 2015

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14.11.1- Determining market value

Funds to use NAV

Quoted on marketplace: Long positions- Bid Price Short positions – Ask Price

No reliable source: Look to the past and make necessary adjustments

Apply firm policy for determining market value (14.14 (1)(b) (iii))

If firm policy is applied, then add: “There is no active market for this security so we have

estimated its market value.”

If no value, apply $0

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14.11.1- Impact of new securities valuations Source of Securities valuation

Do you have the coverage for bid and ask

Enhance firm policies on valuation of securities: Identify new securities with no price Identify securities not being priced Identify securities for firm estimate Identify stale prices Securities valuation will be critical for Performance

Reporting

Add additional resources/tools to securities pricing

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14.11.1- Impact of new securities valuations

Identify system and process which will be impacted: Security master and associated pricing data Statement process Statement layout/notations (running out of space) Client Reporting Performance engines Fee systems Transfer systems Web/Desktop presentation layer

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14.14. Account Statements

Option to receive statements on a monthly basis regardless of cash balance, holdings, and activity – Section 14.14(1)(b)

Denote whether the securities are covered under an investor protection fund and name the fund – Section 14.14(5)(f)

Denote which securities might be subject to a deferred sales charge if they are sold – Section 14.14(5)(g)

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14.14.1 Challenges for Account Statements Option to receive statements on a monthly basis

New flag to facilitate the requirement to deliver statements on a monthly basis at account level

Disclosure of securities’ coverage under any investor protection fund Is it applicable? If yes, do you disclose it? How to disclose this on

account statements? Is the “MFDA IPC” referral/logo on statements enough?

Disclosure of securities subject to a deferred sales charge Source of DSC indicator

How do we determine if DSC are applicable? Is “DSC” in the name of a mutual fund enough?

What if a DSC fund has been held past the DSC schedule?

How to display the DSC indicator?

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14.14.1 Additional Statements – Client Name

Statements of securities held by a party other then the dealer or adviser (a.k.a client name accounts, off-book accounts) Statement required at least once every 3 months;

investors could request monthly statements Disclose the name of the party that holds or controls

security as well as a description of the way it is held - Section 14.14.1(2)(f)

Disclose whether the securities are covered under an investor protection fund and name the fund – Section 14.14.1(2)(g)

Disclosure that deferred sales charges may apply to applicable securities when sold - Section 14.14.1(2)(h)

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14.14.1 Additional Statements – Client Name Identify if you have assets held away and receiving

compensations: Mutual Funds: Month End Rec Files (Nominee, Client

Name, & Intermediary) Other assets held elsewhere

Business decision: Do you want to maintain such business

Can your current system handle these assets or do you need to upgrade system or new system

New processes and down stream affects to maintaining such accounts: Reconciliation Systems/Displays Reports

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14.14.1 Additional Statements – Client Name Statements requirement:

How do we determine the name of the party that holds / controls the position along with the description of how the position is being held?

How do we determine if DSC are applicable and how to display it on statement (same question as for account statements)?

Investor protection disclosure (same question as for account statements)?

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14.14.2 Original or Book Cost by position

Cost Definition by CSA“original cost” The total amount paid to purchase a security, including

any transaction charges related to the purchase

“book cost” The total amount paid to purchase a security, including

any transaction charges related to the purchase, adjusted for reinvested distributions, returns of capital and corporate reorganizations

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14.14.2 Original or Book Cost by position

14.14.2 (2)(b)(ii): Use Market value of the security position as at July 15,

2015 if there is no cost value of the securities positions Must note on the statement that Market Value has been

used for cost value of the security

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14.14.2 Cost: Known Problems

Improper configuration of transactions codes Not enough care taken in transaction code setup. For Return of Capital, errors in configuration can have more

pronounced effect. Review of transaction codes used by your firm may be necessary. More care needed in future!

Improper processing of journals Complex aspects of cost: including re-orgs, returns of capital or re-

invested dividends. Transfer in: Originating firm uses “Original Cost” or unknown.

Identifying suspected data and ability to fix it Tools/reports

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14.14.2 Cost: Known Problems

System deficiencies. (aka bugs) Need to identify deficiencies How will this be remedied?

System limitations. (non bugs) Retroactive Cost adjustments can be problematic when the target

position has subsequently been transferred or gone through a re-org. Return of Capital

Manual adjustment of the transfer cost is necessary or alternative processes created.

Operations staff will need to understand the impacts of using the correct/incorrect journals/transaction codes

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July 15, 2016

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14.12.(1)(c) Addition of Deferred Sales Charge (DSC)

On Confirms: The amount of each transaction charge, deferred sales charge or other charge in respect to the transaction and the total amount of all charges in respect of the transaction

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14.12.(1)(c) Addition of Deferred Sales Charge (DSC)

New Confirm file requirements

Confirms Presentation of data Is there enough room?

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14.17 Report of charges and compensation

Requirements to deliver report on charges and compensations

Based on a 12-month period Exemption for accounts held less than a year

Applies to both nominee and client name accounts Presentation can be done using a separate report or

combined with the statements which investors have been receiving

Must have an explanation of what trailing commission is. A sample explanation can be found on CSA’s portal

May be mailed with statement or up to 10 days after the statements

Report must contain the data described in the following table:

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Overview cont’d

Amended NI 31-103 Section 14.17

Operational Charges Transactional Charges Other Charges

Firm’s current fee schedule

• Each charge applicable to the account

• Each charge related to a purchase / sale

• Unpaid amount of any enrolment fee for Scholarship Plan Dealers

• Total of operational charges

• Total of transactional charges

• Total amount of charges other than trailing commission, e.g. referral , success or finder’s fee

• Total amount of trailing commission

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Challenges / Discussions

Source of data Do ESG feeds provide all fund related charges? How about other charges? What are they and how do we

get them? The Companion Policy (CP) mentioned the need to disclose referral / success / finder’s fee

For debt related transactions, how do we calculate the mark up / mark down as well as other applicable charges?

Importance of using appropriate transaction codes

Complexities increase when dealing with client name/off book accounts

Will the report be combined with the Statement or separate?

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14.18/14.19 Percentage Return and Content

14.18-20 Investment Performance Report

Money Weighted method (aka IRR)

New report required investment performance

Every 12 months

May be integrated into statements, but not required to be.

May be mailed with statement or up to 10 days after the statements

Comes into force July 15, 2016

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Performance

Do you have an performance engine that can accommodate IRR method and the volumes?

Have you tested the volumes?

Integration to systems

Support/Verification Team for Advisors/Clients

Education and tools for the Advisors

Report Delivery: Design/format/content of report Incorporate with Statement or separated If combined, how many days of delay can your firms

accept to incorporate investment performance data.

Market Value of inflows/out flows will be critical

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Performance

Operationally: Securities that are not priced

New Securities Transfer in/out (Contribution/Distribution) Will need to constantly monitor (i.e. daily/weekly)

Need be aware of unique situations and impact on ROR, examples: Account has no assets and trading starts: Account has no assets, is cross guaranteed, and trading

starts An account with a negative equity value (Short positions,

much too little cash to cover in the account, but with another account with sufficient credit as guarantor). 

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CRM 2: AIM

TRANSPARENCY =

TRANSFORMATION

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TRANSFORMATION

OperationTechnologySalesProducts sold/providedValue PropositionFuture Business Model

5568073-v-240

Some Practical Considerations Regarding Mutual Fund Fees In Light of CRM21. Advisors will be under increased pressure to justify their “value”;

2. “Value Add” activities are likely to require compliance review

• Example: Mass reporting\updates to clients, further seminars,

blogging, social media etc.

3. Advisors to consider:

a) Which accounts will be more sensitive to fees (e.g. small accounts);

b) Which clients are actually looking for more “value add” by way of increased client contact;

4. Increase in request for fee rebates to avoid complaints;

5. Increase in complaints about fees:

a) Often reportable on Mets;

b) Anticipate greater regulatory scrutiny on fees in light of CSA initiatives and possible increase in complaints