Torys offers guidance on registration reform

Few advisors have likely made it all the way through the 138-page tome that is National Instrument 31-103, better known as registration reform, but the Toronto law office of Torys is encouraging all advisors to do their homework on this one.

“We were a little taken aback when we read this instrument,” Marlene Davidge, a partner with Torys, said in her opening remarks at a packed luncheon seminar last Friday. Davidge and her colleagues were expecting something different, and they want to make sure advisors know what is coming down the pipe.

There are several proposed changes that will impact advisor businesses including new registration requirements for private investment managers and disclosure rules that would force advisors to delve into the thorny issue of explaining fees to clients.

As the proposed rules stand, advisors will be required to boil down the fees for their clients, accounting for each basis-point and who receives what. “Indirectly, because of that requirement, you are basically characterizing the bulk of that fee as the referral fee,” says Naomi Bartlett, an associate in the corporate department with Torys.

She points out that this fee, in some cases, is going to the entity that did not provide the advice. “Optically, this results in an interesting disclosure situation for clients,” she says.

This fresh requirement isn’t limited to new clients. Advisors will have 120 days to go back and talk to existing clients to make sure they are given the necessary information pertaining to fees, Bartlett explains.

Advisors in the private investment management business will be the most impacted by this since that is where most of the referrals are being paid, says Davidge. At the same time, a lot of the advisors in private investment management also have their own proprietary pooled funds, she adds, which means they will have to be registered as investment fund managers.

“On the pooled fund side, that’s where the hit is,” Davidge says. Pooled funds will feel the effects of registration reform more because of the new obligations related to investment fund managers, she explains. What that means is whereas advisors once relied on companies like RBC Dexia, CIBC Mellon or State Street Trust Co. as trustees of pooled funds, they are now being told that they are responsible for overseeing the trust company and are liable.

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Sales representatives from investment dealers who aren’t registered advisors may not be keen on the new fee disclosure obligations either. As Davidge notes, the new regime says that if a dealer refers a client to a registered advisor, that advisor would have to highlight not only the fact that the dealer was not qualified to act as an advisor but that the dealer is being paid a referral fee, and then explain how that fee is calculated.

While the general concept of fiduciary duty suggests registered advisors should have been making sure their clients were aware of referral fees, Davidge says, it wasn’t written down. Now it is.

Overall, the new rules are difficult to absorb. Not only because of the way they are written but because of their scope and ambiguous use of the term “advisor.”

“There really are a lot of different businesses under this category called ‘advisor,’ and your perspective on these rules will depend on what business you are in — and that’s where the issue is,” says Davidge. “It’s sort of a one-size-fits-all regulation.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(03/07/07)