Securities administrators receive feedback on total cost reporting initiative

The Investment Funds Institute of Canada (IFIC) submitted its feedback to the Canadian Securities Administrators (CSA) on its request for comment about proposed total cost reporting requirements for investment funds and segregated funds.

In its extensive and detailed submission, IFIC says it has supported expanded cost reporting to investors since 2017, stating that providing investors with more complete cost information is the ultimate goal for regulators and the industry. That said, IFIC recommends against the proposed inclusion of a fund expense ratio (FER) in quarterly client account statements. It also recommends the CSA extend the proposed implementation timeline for compliance with the amendments.

The proposed amendments affect

•          National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 3-103) 
•          Companion Policy 31-103CP and 
•          Proposed Canadian Council of Insurance Regulators (CCIR) Individual Variable Insurance Contracts Ongoing Disclosure Guidance.

The letter from IFIC specifically focuses on the CSA’s proposals for the securities sectors and proposed amendments to the first two instruments.

It says it does not support the type of expanded cost reporting proposed for quarterly and possibly monthly client account statements, citing research from Pricewaterhouse Coopers LLP which states that “including investment fund fees in account statements that are not individualized, not in dollar terms and not in the context of appropriate performance information, risks confusion and sub-optimal investor choices.” 

They add that the proposed changes are not consistent with the theme of regulatory burden reduction adopted by the CSA.

“IFIC is supportive of expanded cost disclosure in the annual report on charges,” they state. “IFIC recommends that the proposed securities amendments not include the proposed changes to the account statements because they could be misleading, confusing and counterproductive for investors.” 

They go on to say that the CSA’s proposed transition period is inadequate and would introduce significant risks for stakeholders if not extended.

Describing the reporting issues in detail, they say the proposed amendments to the account statements would entail a significant increase in costs and time for system enhancements for fund managers and dealers.

“Consistent with the theme of regulatory burden reduction, this type of endeavor should only be undertaken where there are clear, significant and demonstrable benefits to investors. IFIC does not believe this to be the case in relation to the proposed changes to the account statements, and considers there to be an imbalance between relatively few investor benefits and the related cost and time of implementation.” They add that no comparable jurisdictions currently require quarterly fee disclosure.

Pointing also to the different reporting cycles – the reporting of management expense ratios (MER) and trading expense ratios (TER) in Management Report of Fund Performance (MRFP) documents is not in sync with the new required disclosures – they also ask the CSA to consider whether the intended purpose behind amended account statement requirements might alternatively be achieved through its access equals delivery model, currently under review.

As for the transition timelines, they state that “IFIC’s view is that the proposed transition period of 18 months is neither reasonably nor practical,” before getting into detail about the practicality of complying with the amendments. They also set out a timeline proposed by Fundserv, an aggressive transition period timeline, they add, which leaves very little margin for error and little incremental time to resolve unanticipated or difficult issues.

“It is critical to understand that neither Fundserv nor dealers and fund managers can not start working on any of their respective system changes until after the final version of the amendments to NI 31-103 is published by the CSA,” they write.

The data elements required to comply with the amendments, they add, do not currently exist. They also point out that the material enhancements required, need to be carried out and developed sequentially, not designed, coded or published in parallel. (The document extensively explains why.) 

Furthermore, they point out that the securities industry has generally indicated that it would follow the Securities and Exchange Commission’s proposed change to move the securities settlement cycle to T+1, effective Labour Day in September 2024, a timeline which substantially coincides with the same period proposed for the total cost reporting effective date.

“IFIC’s view is that the work described cannot begin until regulatory requirements are finalized,” they write, proposing that the CSA allow a minimum of 2.5 years to develop, test and implement systems, and an additional year thereafter to allow for the collection of data needed ahead of the first reporting dates.

Finally, they write that IFIC recommends the CSA establish an implementation standing committee for complex rule changes, not to debate regulatory objectives, but instead to focus on technology and operational issues. “Ultimately the CSA will decide the implementation timeline but only after a careful review,” they write. “In this way, the CSA and the industry will less likely be at odds publicly over timelines.”