1. Donna Spagnolo Sienne Lam
Change is Coming: Targeted Reforms and Update on CSA Fee Proposals IFB Toronto Fall Summit November 1, 2016
Donna Spagnolo
Sienne Lam

2. Agenda/Status Targeted Reforms Comment period closed
Next step: Draft rules?
CSA Fee Proposals
Consultation process – not yet begun.

3. 11 “Targeted” Reforms 1. Conflicts of interest
2. Know your product – Reps
3. Know your client
4. Know your product - Firms
5. Suitability
6. Relationship disclosure
7. Proficiency
8. Titles and designations
9. UDP/CCO
10. Statutory fiduciary duty
11. Best interest standard

4. CSA Objectives Enhance the obligations of firms towards their clients
Improve outcomes for clients and clarify the nature of the client-registrant relationship
NI does not explicitly contain certain requirements
Better align the interests of registrants with interests of clients
“Status quo must change”

5. Key Investor Protection Concerns
Investors not getting value or returns they can reasonably expect
Expectation gap
Conflicts of interest
Information asymmetry
“Clients not getting the outcomes that the regulatory system is designed to give them”

6. Targeted Reform 1: Conflicts of Interest
Determine how each conflict will be managed to prioritize the interest of the client ahead of the firm
Reasonable conflicts management system – disclose, control or avoid
Reasonable basis for concluding clients understand the conflict
Disclosure – prominent, specific and clear
Cannot “cure” COI that is not in client’s best interest

7. Targeted Reform 2: Know Your Client
KYC process must result in thorough understanding of client
Gather more data on 3 key KYC elements 1. Investment needs and objectives
2. Financial circumstances
3. Risk profile
Update at least annually and more frequently in response to material changes in circumstances involving client or client portfolio

8. Targeted Reform 3: Know Your Product – Representatives
Sufficient knowledge of product and KYC info on client to support suitability analysis
Consider impact on performance of recommended product of fees, costs and charges
Understand each security on firm’s shelf
Structure, product strategy, features, costs, risks
Consider how recommended product compares to other products on firm’s shelf

9. Targeted Reform 4: Know Your Product – Firm
Mixed/ non-proprietary
If mixed/non-proprietary does firm have a reasonable universe of products most likely to meet the investment needs and objectives of its clients?
Client profile for firm
Annual review of shelf
Proprietary firms
“Fair and unbiased market investigation, a product comparison and an optimization process”
Based on review of client profiles/client base + professional judgment + benchmarks for assessment to determine whether firm has reasonable universe of products + written reports
Compare all products on list against benchmarks (fees, costs, risk factors etc)
Only one product? No review required

10. Targeted Reform 5: Suitability
1. Investment recommendations – including decision to continue to hold. Must meet 3 suitability criteria for client
Basic financial suitability
Investment strategy suitability
Product selection suitability
2. Suitability analysis must be of client’s entire portfolio
Don’t only rely on risk ratings?
3. May be more than one suitable product – but a more costly one is likely not to be suitable

11. Targeted Reform 6: Relationship Disclosure
Easy to understand terms
Disclose if proprietary or mixed/non-proprietary firm
If mixed – give proportion of proprietary products
If proprietary firm or restricted registration category (including if mutual fund dealer only) – give specified disclosure  

12. Targeted Reform 7: Proficiency
Increased proficiency for reps, including continuing education
Standards that ensure reps understand basic structure, product strategy, costs and risks of all types of securities
Increased proficiency on how product costs and investment strategies (active vs passive) can impact investment outcomes for clients
Ethics training
No specified courses

13. Targeted Reform 8: Titles and Designations
Prescribed client-facing business titles to alleviate client confusion
No other titles can be used
Specific guidance on designations – focus on vulnerable and less sophisticated clients with firm pre-approvals required

14. Targeted Reform 9 : Role of UDP and CCO
Amendments to NI to reflect other targeted reforms
Similar enhanced expectations on CCO and UDP
Focus on conflicts management
Suitability enhancements
Compliance system must prioritize interests of the client ahead of the firm

15. Targeted Reform 10: Statutory Fiduciary Duty
When registrant has been granted discretion
Amendments to securities legislation
Statutory fiduciary duty

16. Targeted Reform 11: “Regulatory” best interest standard
Deal fairly, honestly and in good faith with clients and act in clients best interests (“Standard of Care”)
Guiding Principles:
Act in best interests of client
Avoid or control conflicts of interest in a way that prioritizes client’s best interest
Provide full, clear, meaningful and timely disclosure
Interpret law and agreements in favour of client
Act with care
Not a fiduciary duty

17. Update on CSA Review of Mutual Fund Fees
CSA has NOT made a final decision
Brondesbury Group – Mutual Fund Fees Report (Spring 2015)
Professor Douglas Cumming – A Dissection of Mutual Fund Fees, Flows and Performance (Fall 2015)
CSA is launching a focused consultation to consider moving Canada toward a model that would ban trailer fees in favour of direct fee arrangements

18. CSA Staff Notice
CSA evaluating the option of discontinuing embedded commissions and transitioning to direct pay arrangements that:
directly engage investors in the dealer/representative compensation process;
deliver greater clarity on the services provided and their costs; and
better align the interests of fund industry participants and investors.

19. CSA Consultation CSA will consult with stakeholders on:
potential measures to transition to direct pay arrangements
potential impact of discontinuing embedded commissions on Canadian market participants and investors
Main objectives of consultation:
To assess impact of banning embedded commissions
To provide regulators with information to make an enlightened decision on banning embedded commissions

20. CSA Consultation Main issues to be covered by the consultation:
Conflicts of interest
Discrepancy between commissions paid and services/advice provided
Understanding of mutual fund fees by investors and control over direct remuneration

21. Submit Your Comments!
YOU are a stakeholder and should make a submission
Send comments by mail or (contact information will be on Consultation Paper, e.g.
Comments should be organized, well-reasoned and pragmatic
Comment period: 120 days
CSA will also hold roundtables to discuss the potential impact of discontinuing embedded commissions.

22. Questions? Donna Spagnolo Borden Ladner Gervais LLP (416) 367-6236
Sienne Lam
(416)