On June 14, 2012, the Canadian Securities Administrators (CSA) published for comment a second version of amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) with respect to the second phase of the Client Relationship Model initiative (CRM II).

CRM II is designed to give investors key information to better assist them in understanding the charges they pay in respect of their investments, the compensation received by their dealer and/or adviser and the performance of their account. The first phase of the Client Relationship Model was part of NI 31-103 when it became effective on September 28, 2009 and included the need for a relationship disclosure document when a client opened an account.

CRM II requires a more detailed periodic disclosure of the costs of the investments held in a client’s account and regular reporting on the performance of the client’s account. One of the primary purposes of the disclosure is to show in the same document the charges embedded in the cost of a product.

Following numerous comments on the first draft of CRM II, which was published on June 22, 2011, as well as further research and consultations with industry groups, the CSA issued CRM II on June 14, 2012 and requested that any comments on the proposal be submitted to the CSA by no later than September 14, 2012.

The second draft of CRM II:

  • Requires that “book cost” instead of “original cost” be used for every security in a client’s account, and that a “dollar-weighted performance method” be used to calculate the performance of the client’s investment portfolio instead of a “time-weighted performance method”;
  • Requires the disclosure of all embedded fees such as the amount of trailing and fixed-income commissions for greater transparency;
  • Expands a client’s statement to not only list the transactions carried out by the client since they received their last statement, but also to report on securities held in nominee name and in client name separately;
  • Provides a methodology for dealers and advisers to use when calculating the market value of a client’s securities for greater consistency in reporting, that can be used for both securities traded on a market place and those that are not;
  • Allows for the consolidation of performance reports for more than one account of the same client in certain situations; and
  • Requires performance reporting that shows the change in the value of a client’s account over the last 12 months and since inception, including opening and closing balances, plus deposits and withdrawals.

However, CRM II still raises a number of issues relating to performance reporting, including the choice by the CSA of the “dollar-weighted performance method” over the “time-weighted method”, which has been the preferred industry approach to performance reporting in the past.  The impact of this new methodology is being closely examined by the industry. 

Another issue is the introduction of the use of benchmarks against which the performance of a client’s account is to be measured.  The problem is trying to identify an appropriate benchmark which is a reliable comparison depending on the nature of a client’s investments.

CRM II is also expected to help harmonize cost and performance disclosure requirements for dealers that are members of the MFDA or IIROC, and those who are not.  For the time being, both the MFDA and IIROC have suspended their cost and performance reporting rules until the CRM II initiative is finalized.

The CSA currently expects that CRM II can be implemented on or about January 1, 2013. 

As noted above, comments on CRM II will be accepted by the CSA until September 14, 2012.