As noted in our April bulletin, the Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators (CCIR) released proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), 31-103CP and proposed a new CCIR Individual Variable Insurance Contract Ongoing Disclosure Guidance, all related to new total cost reporting (TCR) requirements for investment funds and segregated funds. The proposals were a joint committee effort involving members of the CSA, CCIR, Canadian Insurance Services Regulatory Organizations, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.
The proposed insurance guidance would apply to all insurers offering segregated fund contracts and is intended to add new cost and performance reporting requirements for individual variable insurance contracts. The changes to the insurance guidance also seeks to improve awareness of the rights of policy holders to guarantees and how their actions might affect their guarantees. The remainder of this update focuses on the changes proposed with respect to the disclosure of costs of holding investment funds.
The purpose of the enhanced cost disclosure is to enhance investor protection, by improving awareness of ongoing embedded fees for investment funds such as a fund’s management expense ratio (MER) and trading expense ratio (TER). Currently, there is no requirement to provide ongoing reporting of such costs after the initial sale in a form that is specific to an individual investor’s holdings. The amendments impact the account reporting requirements for registered dealers and advisers and would place obligations on registered investment fund managers to provide dealers and advisers with specific information to allow them to include the new TCR data in account statements.
The changes to NI 31-103 would require account statements to include information on embedded fees as a percentage (i.e. the newly coined fund expense ratio) for each fund held on the monthly and quarterly account statements. In addition, information would be required to be included on the annual report on charges and other compensation for the account as a whole which shows the aggregate dollar amount of fund expenses for all investment funds held during the year and the aggregate dollar amount of any direct investment fund charges (e.g. redemption fees or short-term trading fees) held in the account during the year. Fund expenses are to be calculated with reference to the fund expense ratio, which is the sum of the MER and the TER.
The disclosure would apply in respect of all investment funds, including scholarship plans, foreign funds and prospectus exempt funds. Existing exemptions for statements and reports for non-individual permitted clients would continue to apply. Investment fund managers must provide information to dealers and advisers on the daily cost per unit/share of the relevant class or series of an investment fund calculated in dollars, determined using the specified formula. The calculation requires the applicable fund expense ratio to be divided by 365, and then multiplied by the NAV of a share/unit of the applicable class or series for the day. With respect to the source of the required data, investment fund managers would be allowed to rely on publicly available information in fund facts, ETF facts documents, prospectuses, or management reports of fund performance, unless the information is outdated, or the manager reasonably believes that it would cause the information reported in the account statement or report to be misleading. If advisers or dealers do not believe the information received from the investment fund manager is reliable, there would be an obligation for them to make reasonable efforts to obtain the information by other means. If that is not possible, the registered firm must exclude the information from the calculation of the amount of fund expenses or of the direct investment fund charges reported to clients, or in the case of a fund expense ratio, not report the ratio and disclose the exclusions in the affected report.
The consultation also includes a sample prototype statement and report for both the securities and the insurance sectors, as well as an annex explaining the differences between products, distribution channels and regulation between segregated funds and investment funds. It is proposed that final amendments would come into effect in September 2024, meaning the new first quarterly account statements would be required for the period ending December 2024, and the new annual reports for the period ending December 2025.
We suspect market participants will have many questions and comments with respect to the new proposal, including with respect to the obligation to source the required data by other means, as the proposed changes to 31-103CP suggest this may include relying on information reported by a reliable third-party service provider. We would be happy to answer any questions you have on these proposals or assist with comments, which are due by July 27.
May 31, 2022