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). Changes will also be made to the Canadian Council of Insurance Regulators (CCIR) Individual Variable Insurance Contract Ongoing Disclosure Guidance.1
Total Cost Reporting is intended to improve investors’ awareness of the embedded fees included in the funds that they own.
Good News
Does not apply to prospectus-exempt funds
PMAC is pleased that prospectus-exempt funds are excluded from TCR, which includes private pooled funds. The same is true for labour-sponsored funds.
More time
The implementation date has been extended to January 1, 2026. The first annual reports that include the required information will be delivered for the year ending December 31, 2026. This will give registrants additional time to operationalize the requirements.
Does not apply to non-individual permitted clients
TCR excludes non-individual permitted clients. The CSA did not accept PMAC’s request to also exempt other institutional clients that do not meet the permitted client definition. The CSA indicated that exemptive relief may be available to registrants on a case-by-case basis. PMAC will continue to explore with the CSA the possibility of a blanket exemption or other collective/streamlined process to obtain such relief.
Annual reporting only
Reporting will be on an annual basis only, and will be included in the Annual Report on Charges and other Compensation (ARCC). The CSA indicate that consolidating all cost-related information in a single annual report is expected to facilitate investor understanding of this information. The sample ARCC published with the final amendments was developed and tested by the OSC Investor Office Research and Behavioural Insights Team to maximize investors’ understanding of the cost information it contains.
More flexibility
The CSA have provided additional flexibility with respect to the information that may be used to determine the costs of the fund; permitting the use of reasonable approximations in calculations; and regarding cost reporting for newly established funds.
Dealers and Advisers can rely on information from the IFM
The amendments allow dealers and advisers to rely on information provided by the investment fund manager (IFM), except in certain circumstances.
Implementation Committee to help industry operationalize
An implementation committee will be established including CSA staff, SRO staff and representatives of the CCIR. This committee will assist registrants with operationalizing TCR including by answering questions, providing guidance, and developing common industry standards. PMAC will participate in the implementation committee and will communicate with members on its activities.
Harmonized with insurance segregated funds
After years of advocacy, we are pleased that TCR will be applicable to segregated funds offered by insurance companies. This will allow more accurate comparisons of the costs of investment funds compared to segregated funds.
Summary of Amendments
TCR is intended to improve investors’ awareness of the embedded fees included in the funds that they own. TCR applies to registered dealers, advisers and IFMs. TCR is required for mutual funds, ETFs and scholarship plans, including foreign investment funds. As noted above, prospectus-exempt funds, including private pooled funds and labour-sponsored are excluded from the new reporting requirements, though the CSA may undertake a separate, future consultation about their eventual inclusion.
What is included?
All embedded fees, including management expense ratios (MER)2 and trading expense ratios (TER)3 (the sum of which make up the Fund Expense Ratio (FER)4) will now be reported annually to investors in the ARCC.
The ARCC will list all funds owned by the investor during the year, and will be required to show:
- the aggregate amount of fund expenses paid by the investor, in dollars, for all funds;
- the aggregate amount of any direct investment fund charges (e.g., short-term trading fees or redemption fees) paid by the investor, in dollars, for all funds, and;
- the FER, as a percentage, for each investment fund class or series.
The amendments specify in section 14.17(6) how the aggregate amount of fund expenses is calculated. The amendments do not require these expenses to be reported for each fund owned by the investor. The CSA state that this would not provide a meaningful comparison, since the principal invested in each fund and the holding period of each fund will vary.
IFMs will be required to provide necessary information to the dealers and advisers that distribute their products to allow them to include it in the ARCC (together with costs already reported by the dealer or adviser). IFMs should establish policies and procedures to ensure that they meet this obligation. It is expected that the extended transition period will assist the industry in developing the infrastructure required to transmit the necessary information between IFMs, dealers and advisers.
The publication document includes a sample ARCC that dealers and advisers may use to make the disclosure.
Calculation of expenses
The CSA have provided a formula in section 14.1.2 to clarify how cost information, such as fund expenses and direct investment fund charges, are required to be calculated. The calculation is based on the fund expenses per security per day and the market value for each day the investor owned the fund.
The CSA encourage the use of exact information whenever it is available. However, IFMs will be permitted to use reasonable approximations, including in situations where no daily NAV or market value is available. The use of approximations must not result in misleading information being reported to investors. If approximations or other assumptions are used, a notification must be included in the ARCC.
The CSA have adopted a flexible approach with respect to the source of the information used to calculate the FER. Where applicable, information from the fund’s most recent fund facts, ETF facts, prospectus or management report of fund performance (MRFP) may be relied on, but is not required to be used.
The actual fees paid by the investor, including any performance fees, and deducting any fee waivers, rebates or absorptions, should be reported. Additional disclosure regarding waivers, rebates or absorptions may be included in the report as a separate line item. If a dealer or adviser provides fee waivers, rebates or absorptions, for example a householding rebate, this should not be included in the total amount of fund expenses, but rather in the dealer or adviser charges portion of the ARCC.
The TCR Amendments also require the ARCC to include, where applicable, a notification that the fees may not include fees paid to third parties directly by the investor, such as custodial fees, intermediary fees or interest charges that may be deducted from the account. The same requirement applies to embedded fees for products not included in the scope of TCR (structured products).
New Funds
In certain circumstances, where information is not available to be reported, newly established funds will be excluded from TCR. If information regarding a newly established fund is not available to report, a notification must be included in the ARCC.
Foreign Funds
TCR applies to foreign funds. Given that the information available to dealers and advisers from foreign funds may be limited or differ from Canadian disclosure requirements, TCR allows dealers and advisers to make a reasonable approximation of the costs of foreign funds to be reported. This approximation should be based on the information available in the fund’s jurisdiction, unless more accurate information can be obtained through reasonable means. A notification must be provided in the ARCC if the investor holds foreign funds to indicate that the information may not be directly comparable to Canadian funds.
Dealer and adviser responsibility
Dealers and advisers may generally rely on the information provided by the IFM to include in the ARCC. There are certain exceptional circumstances in which a dealer or adviser may be required to conduct additional due diligence, but this is limited to making “reasonable efforts” to obtain the information, subject to the materiality and costs of doing so. In such cases, reasonable approximations can be used.
Next Steps
PMAC will continue to provide members with updates and information regarding TCR and its implementation and looks forward to actively participating in the Implementation Committee through which we will keep members apprised of material developments. If you have any questions, please contact Victoria Paris or Melissa Ghislanzoni.
[1] The CSA had proposed these amendments in April 2022 (2022 Proposals). PMAC’s submission on the 2022 Proposals can be read here.
[2] Management Expense Ratio (MER) as defined in s. 1.1 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106).
[3] Trading Expense Ratio (TER) is defined as the ratio, expressed as a percentage, of the total commissions and other portfolio transaction costs incurred by an investment fund to its average net asset value, calculated in accordance with paragraph 12 of item 3 of Part B of Form 81-106F1 Contents of Annual and Interim Management Report of Fund Performance of NI 81-106.
[4] Fund Expense Ratio (FER) is the sum of an investment fund’s management expense ratio and trading expense ratio, expressed as a percentage.