Fair Dealing rules still months away

(April 6, 2005) It has been quite a while since anyone has heard much about the Fair Dealing Model, the registration reform package initiated by the OSC in October 2002.

Originally slated for release in the fourth quarter of 2004, draft rules are now expected to be available for comment “around the end of this calendar year,” according to one mutual fund industry insider.

“Like many regulatory initiatives, there’s good news and bad news,” says John Murray, vice-president of regulation and corporate affairs for IFIC. “The main good news is that in response to overwhelming industry pressure, the name of the model itself — which for many implied some sort of inherent unfairness or ulterior motives on the part of the industry participants — has been changed. It’s now the CSA Registration Reform Initiative.”

The project was handed off from the OSC to the CSA, with its original six industry advisory committees disbanding in October 2004. The initiative now consists of a steering committee and three working groups, focusing on performance reporting; account opening; and costs, conflicts and compensation transparency.

“The securities regulators are planning major changes to the registration regime affecting financial advisors,” says Murray. “Many of these changes, as we understand them today, will have a significant effect on the current compliance procedures and regimes used by both Canadian mutual fund dealers and managers.”

Despite this, there are no representatives from the mutual fund managers on any of these working groups, but Murray says IFIC and MFDA have succeeded in having a representative named to the steering committee.

Murray says the rules to come out of the project are likely to be the developed in their entirety by the IDA and the MFDA, which will allow members to comment on any proposed rule changes.

“Bear in mind that the securities regulators are paying very close attention to this process, so they won’t be without influence,” he says. “I would suggest that having the discipline of these SROs in place will result in the overall changes that were proposed under the original Fair Dealing Model becoming somewhat tempered.”

He says these rule changes will more likely take the form of tinkering with the existing rules, rather than making sweeping changes. One contested proposal that has been dropped altogether is that third-party compensation for mutual fund sales should be banned.

“The re-characterization of this initiative, from an OSC-only project to a CSA/SRO joint project limits the possibility that any rule changes would be imposed by a single jurisdiction,” Murray says. “You won’t have to worry about one set of rules for Ontario and another set for B.C., et cetera.”

But Murray cautions that no one has performed any kind of cost-benefit analysis for the project, leaving those who will be affected “shooting in the dark” as to what it will cost to implement. He has serious doubts that implementation will be as smooth or cost effective as regulators are suggesting.

The performance and risk working group has said a cost statement, both for specific securities and for the account in total, should be required to be disclosed on account statements, which Murray says will involve significant systems changes.

The group also recommends performance data be included on statements for each security as well as the account, tracking at least the returns for the current year and since inception.

No one has asked investors if they want this added information, or if they are willing to pay for it, even though they will eventually foot the bill. So far the approach has been to implement the new rules and then decide if it was worth the effort.

“The working group found that ‘new requirements will result in most registrants incurring substantial costs, which will ultimately accrue to investors,'” says Murray. “In our most recent comment letter, IFIC questions whether the benefits investors will receive from the recommended performance and risk information will warrant the additional cost.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com