On July 15, 2016, new requirements under the amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) and Companion Policy 31-103CP (“31-103CP”) came into effect. The new requirements are the final piece of the Canadian Securities Administrators (the “CSA”)’s implementation of phase 2 of the client relationship model (“CRM2 Amendments”). The CRM2 Amendments were implemented in stages, with earlier requirements that came into effect on July 15 in each of 2014 and 2015.

The following is a summary of the key changes to NI 31-103 which came into effect on July 15, 2016.

1. Registered dealers - additional disclosure in trade confirmations

As of July 15, 2016, a trade confirmation delivered by a registered dealer acting on behalf of a client in connection with the purchase or sale of security must include: (i) the amount of each transaction charge,1 deferred sales charge or other charges in respect of the transaction; and (ii) the total amount of all charges in respect of the transaction.

2. Registered firms - annual report on charges

Registered dealers, registered advisers and registered investment fund managers (collectively, “Registered Firms”) must provide their clients, for each 12-month period,2 a report summarizing all charges incurred by the client and all such other compensation received by the Registered Firm as may relate to the client’s account. This includes the nature and amount of compensation that third-party dealers and/or advisers may receive as either trailing commissions3 or referral fees. The following information must be included in the report:

  1. the Registered Firm’s current operating charges which might be applicable to the client’s account;
  2. the total amount of each type of operating charge related to the account paid by the client during the period covered by the report, and the aggregate amount of those charges;
  3. the total amount of each type of transaction charge related to the purchase or sale of securities paid by the client during the period covered by the report, and the aggregate amount of those charges;
  4. the total amount of the operating charges reported under paragraph (ii) and the transaction charges reported under paragraph (iii);
  5. if the Registered Firm purchased or sold debt securities for the client during the period covered by the report, either of the following:
     
    1. the total amount of any mark-ups, mark-downs, commissions or other service charges the firm applied on the purchases or sales of debt securities; or
    2. the total amount of any commissions charged to the client by the firm on the purchases or sales of debt securities and, if the firm applied mark-ups, mark-downs or any service charges other than commissions on the purchases or sales of debt securities, the following notification or a notification that is substantially similar:

“For debt securities purchased or sold for you during the period covered by this report, dealer firm remuneration was added to the price you paid (in the case of a purchase) or deducted from the price you received (in the case of a sale). This amount was in addition to any commissions you were charged.”;

  1. if the Registered Firm is a scholarship plan dealer, the unpaid amount of any enrolment fee or other charge that is payable by the client;
  2. the total amount of each type of payment other than a trailing commission that is made to the Registered Firm or any of its registered individuals by a securities issuer or another Registrant in relation to registerable services to the client during the period covered by the report, accompanied by an explanation of each type of payment;
  3. if the Registered Firm received trailing commissions related to securities owned by the client during the period covered by the report, the following notification or a notification that is substantially similar to the following:
     
“We received $[amount] in trailing commissions in respect of securities you owned during the 12-month period covered by this report. Investment funds pay investment fund managers a fee for managing their funds. The managers pay us ongoing trailing commissions for the service and advice we provide you. The amount of the trailing commissions depends on the sales charge option you chose when you purchased the fund. You are not directly charged the trailing commission or the management fee. But, these fees affect you because they reduce the amount of the fund’s return to you. Information about management fees and other charges to your investment funds is included in the prospectus or fund facts document for each fund.”

The new requirements also specify that the information in respect of securities of a client required to be reported under certain types of account statements must include a separate report on charges and other compensation. A Registered Firm may exclude or consolidate such information in a single report if it complies with the requirements outlined in section 14.17 of NI 31-103, which should be reviewed in detail.

These new requirements do not apply in respect of a permitted client (as such term is defined in NI 31-103) that is not an individual.

3. Investment fund managers - duty to provide information to other registrants

A registered investment fund manager of an investment fund must, within a reasonable period of time, provide a registered dealer or registered adviser who has a client that owns securities of the investment fund with the information concerning deferred sales charges and any other charges deducted from the net asset value of securities, and the information concerning trailing commissions paid to the dealer or adviser, that is required by the dealer or adviser in order to comply with its own enhanced trade confirmation and annual reporting obligations.

4. Registered firms - investment performance reports

A Registered Firm must provide its clients with an investment performance report for each of the clients’ separate accounts. A Registered Firm will be required to provide a report every 12 months4 providing the client information on the performance of their investments over the last 12-month period, and subject to certain exceptions, information on the performance over the previous three-year, five-year and ten-year periods, and the period since the account was opened (if the account has been opened for more than one year before the date of the report), if applicable.

The following must be included in the investment performance report:

  1. the market value of all cash and securities in the client’s account as at the beginning of the 12-month period covered by the investment performance report;
  2. the market value of all cash and securities in the account as at the end of the 12-month period covered by the investment performance report;
  3. the market value of all deposits and transfers of cash and securities into the account, and the market value of all withdrawals and transfers of cash and securities out of the account, in the 12-month period covered by the investment performance report;
  4. subject to the paragraph below, the market value of all deposits and transfers of cash and securities into the account, and the market value of all withdrawals and transfers of cash and securities out of the account, since account opening;
  5. if the account was opened before July 15, 2015 and the Registered Firm reasonably believes market values are not available for all deposits, withdrawals and transfers since the account was opened, the following: (a) the market value of all cash and securities in the client’s account as at July 15, 2015; and (b) the market value of all deposits and transfers of cash and securities into the account, and the market value of all withdrawals and transfers of cash and securities out of the account, since July 15, 2015;
  6. the annual change in the market value of the account for the 12-month period covered by the investment performance report, determined using the formula prescribed in section 14.19 of NI 31-103;
  7. subject to the paragraph below, the cumulative change in the market value of the account since account opening determined using the formula prescribed in section 14.19 of NI 31-103;
  8. if the Registered Firm reasonably believes the market value of all deposits and transfers of cash and securities into the account since account opening or the market value of all withdrawals and transfers of cash and securities out of the account since account opening required in the paragraph above is not available to the Registered Firm, the cumulative change in the market value of the account determined using the formula prescribed in section 14.19 of NI 31-103;
  9. the amount of the annualized total percentage return for the client’s account calculated net of charges, using a money-weighted rate of return calculation method generally accepted in the securities industry;
  10. the definition of “total percentage return” as prescribed in NI 31-103 and notification indicating the following: (a) that the total percentage return in the investment performance report was calculated net of charges; (b) the calculation method used; (c) a general explanation in plain language of what the calculation method takes into account.

What if there is no “ongoing relationship” with the client?

Exempt market dealers (“EMDs”) who do not hold a client’s securities and whose interaction with a client is limited to a specific private placement may be exempt from the requirement to provide the annual reports outlined above. Whether an ongoing relationship exists will depend on the totality of the EMD’s relationship with its clients. When considering the totality of such relationship, the EMD should consider, among other factors, the following:

  1. does the EMD expect to conduct further transactions with the client;
  2. will the EMD receive a trailer fee or other ongoing compensation in respect of the trade with the client;
  3. does the EMD regularly contact the client regarding securities offered by the EMD;
  4. does the client expect the EMD will continue to provide the client with services after completion of the transaction; and
  5. is the EMD also engaged with the client in a different capacity, for example, as a registered adviser managing the client’s other investments.

The above considerations are not exhaustive and the CSA’s expectation is that the EMD exercise its reasonable professional judgment. Where the relationship is limited to a single transaction and the factors outlined above support the position that no ongoing relationship exists, the EMD would not be required to deliver the annual report on charges and other compensation or the annual investment performance report discussed above.