What you Should Know About the New Total Cost Reporting (TCR) Enhancements
Updated: Apr 25
On April 20, 2023, the Canadian Securities Administrators (CSA) released final amendments to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and its Companion Policy (CP) regarding TCR for investment funds and segregated funds (collectively, TCR). The Canadian Council of Insurance Regulators (CCIR) will also be updating Individual Variable Insurance Contract Ongoing Disclosure Guidance.
Currently, investors receive information about costs at the time of purchase. The TCR enhancements are aimed at improving investors awareness of ongoing embedded fees such as management expense ratios (MERs) and trading expense ratios (TERs), through an Annual Report on Charges and other Compensation (ARCC).
The TCR includes all mutual funds, segregated funds, scholarship plans, and foreign investment funds. However, it is not required for prospectus-exempt funds, labour-sponsored funds, private pooled funds and non-individual permitted clients.
Under the new rules, firms will need to report annually all costs for the securities owned by clients during the year including:
the aggregate amount of fund expenses in dollars for all investment funds
the aggregate amount in dollars of any direct investment fund charges (e.g., short-term trading fees or redemption fees)
the fund expense ratio (FER) as a percentage for each investment fund class or series
the registered firm’s charges (which are already required to be reported)
The revised formula is based on actual fund expenses for each day for which the fund was owned by an investor. Any fee waivers, rebates or absorptions are allowed to be reported as a separate line item.
In addition to enhanced cost reporting, the Annual Report on Charges and Other Compensation will require notifications to clients explaining:
how clients can take action on the information provided
any deferred sales charges (DSCs) paid by the client
any other direct fund charges charged to the client
if information reported on fund expenses, direct investment fund charges or fund expense ratios is based on an approximation or any other assumption
that structured products, LSIF’s or prospectus exempt products owned by the client have embedded fees which may not be required to be reported
that information about foreign funds owned by the client may not be directly comparable to the information provided for Canadian investment funds and may include different types of fees
The notifications will also refer clients to fund issuers’ documents for more information about fund expenses and performance and to their account statements for information about current holdings.
Modifications to the Enhancements Based on Industry Feedback
The TCR enhancements were released for a 90-day comment period on April 28, 2022. The comments were duly considered by the regulators and resulted in several significant changes. Accordingly, the CSA will:
provide an extended transition period
require the enhanced disclosures to be provided annually (as opposed to monthly or quarterly)
NOT require newly-established funds to provide TCR given that this information may not be available for newer funds, but a notification must be included in the annual report
NOT require dealers and advisors to conduct due diligence reviews of the information provided to them by investment fund managers (except in exceptional circumstances)
allow dealers and advisors to use reasonable approximations in circumstances where the exact information is unavailable or the costs of obtaining the information outweigh the improvement of approximation
require notification of third-party charges and embedded fees for products that are not included in the amendments such as structured products
In addition, the final amendments include a revised ARCC sample document that will help guide firms in implementing the new requirements.
To give registrants sufficient time to operationalize the requirements, the implementation date has been extended to January 1, 2026. As such, the first annual reports that include the required information will be delivered for the year ending December 31, 2026. The CSA and CCIR will establish an implementation committee to provide guidance, respond to questions and assist registrants in operationalizing the TCR enhancements.
SGD COMPLIANCE CONSULTING CAN HELP
Notwithstanding the extended implementation timeline and guidance provided by the implementation committee, the new TCR requirements will involve significant work and preparation to:
create updated policies and procedures
align systems to automate production of the TCR
create a customized firm Annual Report on Charges and Other Compensation document
SGD Compliance will provide resources to its clients in due course to help your firm with timely and effective implementation. If we can be of assistance, reach out: email@example.com and check out our website: www.sgdcompliance.ca.
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