Industry urged to prepare now for last phase of point of sale disclosure

By Susan Yellin | June 23 2015 08:49AM

While the final leg of CRM2 may seem to be taking centre stage for 2016, dealers and advisors would be well served to remember that next year will also bring with it the last phase of point of sale disclosure (POS), as well as the possibility of two other key initiatives that could affect the way advisors conduct their businesses, a conference was told in April.Robyn Mendelson, vice president, legal, with Fidelity Investments, said the third and final stage of POS will come into effect May 30, 2016, when dealers must, with few exceptions, provide Fund Facts disclosure documents before a mutual fund can be sold. As it now stands, Fund Facts must be delivered within two days following a trade.

Mendelson told the Federation of Mutual Fund Dealers Canada (FMFD) conference that the Canadian Securities Administrators (CSA) has remained steadfast in its pre-delivery stance, despite some resistance from the industry.

“While the rules have gone through many rounds of comments and many changes, the one thing the CSA has not wavered on…is that it’s important to deliver this information to investors in advance of their trade so they can make a more informed investment decision.”

She said the CSA does not mandate how the Fund Facts are to be delivered, noting that any method using paper or electronic delivery is acceptable, whether regular mail, courier, fax, in person or email.

Time restrictions

But some time restrictions have been placed on dealers as to when they can send out the Fund Facts.

“Dealers are not allowed to send [out Fund Facts] a month, or even longer, before the trade unless there is a clear link to the client’s recommendation on instructions as to how to invest in the fund. Similarly, they also don’t want you to deliver the Fund Facts seconds before the trade because they want to make sure that there is a reasonable opportunity for investors to consider the information.”

Mendelson said regulators have emphasized that access does not mean delivery, so telling a client to look up the Fund Facts on a company website will not suffice.

New risk classification

The CSA is also tacking on a new “very high” risk classification category for mutual funds, with the possibility that funds that had been previously suitable for a client may no longer be appropriate. She said regulators did not intend the new classification to be disruptive, but do want greater transparency of mutual funds.

Mark Gordon, president and CEO of the Mutual Fund Dealers Association (MFDA), said both POS and CRM2 will provide investors with critical information that will help them make informed decisions.

But Gordon also acknowledged that both of those initiatives will also require significant resources and efforts to ensure dealers are compliant with them.

“Members will need to obtain and maintain vast amounts of data; members are going to have to prepare systems to prepare extensive calculations to do client reports; and members are going to have to deliver education not only to their approved persons but also to their clients to facilitate a clear understanding of what all this new reporting even means. It’s a big chore.”

Suitability of deferred sales charges

In the meantime, the MFDA is undertaking a suitability sweep of trades with deferred sales charges (DSC), Karen McGuiness, senior vice president, member regulation – compliance, told the conference.

“Fees are a hot topic for regulators and suitability of DSC trades is something that frequently comes up both in compliance and enforcement,” said McGuiness. “The sweep is currently under way and we have started our review specifically looking at what the member supervision and inquiry practices are for DSC trades where the DSC schedule is longer than the client’s time horizon.” It will also look at whether disclosure of the fees was provided to a client before the trade, especially where significant redemption charges apply.

Two other policy initiatives – embedded commissions and fiduciary duty – are also being contemplated for the industry over the next while.

“Either one can materially impact the way advice is delivered in this country,” said Gordon.

Regulators are currently researching the two issues, conducting some of their own studies. They are expected to issue some of that research by the late spring or early summer of this year and follow it up later with a summary status. However, no decisions are expected until the end of the first quarter of 2016.

Preparing advisors for CRM2

John Novachis, executive vice president, Investment Planning Counsel, said it’s CRM2 – the new cost and performance disclosure documents that come into play in July 2016 – that is causing a number of challenges among advisors. Many are asking questions about whether they should sell their books of business, retire, or consider another platform.

Novachis said IPC has been helping advisors make the best choices for their businesses by providing them with ways to analyse their books of business, showing them how to “slice and dice” their statistics and determine possible future direction.

Susan Silma, co-founder and partner, CRM2 Navigator, and the former director of the Ontario Securities Commission who launched CRM2, said dealers need to show advisors how they add value to their clients.

Silma said the No. 1 complaint from clients is that they don’t hear frequently enough from their advisor, suggesting dealers urge advisors to start talking now about cost and performance before the disclosure documents come out next year.

Meanwhile, the FMFD announced that a new solution to connect mutual fund dealers to exchange-traded funds (ETFs) has now been created.

From a regulatory point of view, mutual fund dealers with the proper training are allowed to sell ETFs, but have been hampered because they have no access to exchanges, where ETFs are bought and sold.

But Christine Rodrigues, senior vice president of relationship management and business development for National Bank Correspondent Network (NBCN) said it has created an omnibus account for each mutual fund dealer, which will document and track the dealer’s ETF business.

The MFDA has created a working group which is preparing a draft notice to members and also outlines an ETF course which will establish a general proficiency principle, said McGuiness.