CSA Finalizes Total Cost Reporting Rules for Investment Funds

On April 20, 2023, the Canadian Securities Administrators (CSA) and the Canadian Council of Insurance Regulators announced amendments relating to enhanced cost disclosure reporting requirements for investment funds and new cost and performance reporting guidance for individual variable insurance contracts. The changes affecting investment funds are comprised of amendments (Amendments) to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations (31-103CP).

The Amendments seek to enhance investor protection by adding transparency that will make it easier for investors to see and understand the ongoing embedded fees that form part of the cost of owning prospectus-qualified investment funds. Embedded fees include:

• the costs of managing the fund (i.e., the management expense ratio),

• the fund’s trading costs for acquiring or disposing of portfolio holdings (i.e., the trading expense ratio), plus

• any trailing commissions paid out to compensate dealers and advisers who distribute the fund to investors.

It is important to note that the Amendments do not apply to prospectus-exempt funds or labour-sponsored investment funds and that existing exemptions for statements and reports provided to non-individual permitted clients (including institutional investors) will continue to apply.

The Amendments

Reporting investment fund cost information in the annual report on charges and other compensation (ARCC)

The Amendments expand the required reporting in the ARCC to include certain information for all investment fund securities owned by a client during the year, including:

• the total amount of fund expenses, in dollars, for all investment fund securities;

• the total amount of direct investment fund charges (e.g., short-term trading fees or redemption fees), in dollars, for all investment fund securities; and

• the fund expense ratio, as a percentage, for each investment fund class or series of securities (collectively, the Additional ARCC Information).

The total amount of fund expenses, as well as each fund expense ratio, must be reported inclusive of performance fees and net of any fee waivers, rebates or absorptions.

The Ontario Securities Commission has published an article explaining the Amendments that includes a sample of an ARCC. The sample provides a sense of what an investor might see in their ARCC starting in January 2027 (though the article makes clear that the sample is not a prescribed form that dealers and advisers must use).

The ARCC must also report (i) the total investment fund expenses and charges, consisting of the total amount of (a) the fund expenses and (b) the direct investment fund charges; and (ii) the total costs of investing, consisting of the total amount of (a) the registered firm’s charges, which are required to be reported under current requirements and (b) the total investment fund expenses and charges.

The Amendments also revise notification requirements in the ARCC. The revised requirements include explaining to clients how they can take action based on the information provided in the ARCC, explaining any deferred sales charges or other direct investment fund charges paid by the client and describing any approximation or assumption on which any fund expense is based.  

The Amendments do not implement any changes to the reporting contained in the quarterly or monthly account statements required to be delivered by registered dealers or advisers to their clients under NI 31-103.

Investment fund manager (IFM) duty to provide information to dealers and advisers for fund expense reporting purposes

Under the Amendments, the IFM’s duty to provide information under NI 31-103 to dealers and advisers who have clients that own funds managed by the IFM is expanded to encompass the Additional ARCC Information. Dealers and advisers must report the Additional ARCC Information based on the information provided by IFMs under NI 31-103 (where IFMs are required to do so) except in certain exceptional circumstances.

Calculation method for cost information

The Amendments specify the method that must be used for calculating the aggregate amount of fund expenses. In summary, for each day in the reporting period, based on the information provided by the IFM, registered dealers and advisers must multiply the amount of fund expenses per security for that day by the number of securities owned by the client on that day, for each class or series of investment fund securities owned by a client. The dealer or adviser must then add together the resulting amounts for each class or series of investment fund securities owned by a client and for each day in the reporting period to obtain the aggregate amount of fund expenses for the year.

Use of reasonable approximations

The Amendments allow for the use of approximations by IFMs in certain scenarios where it would not result in misleading information. For example, the Amendments allow IFMs to use reasonable approximations of the inputs referenced in the formula for calculating the fund expenses per security, as well as the aggregate amount of fund expenses, aggregate amount of direct investment fund charges and fund expense ratio for each class or series of investment fund securities.

Exemptions

The Amendments include exemptions from certain reporting requirements for “newly established investment funds” — funds that are required to but have not yet filed a management report of fund performance or funds established less than 12 months before the end of the period covered by the ARCC — as information about the fund expenses and fund expense ratio of such funds may not be available. In cases where such information is excluded, a notification must be included in the ARCC.

Effective date and transition period

The Amendments take effect on January 1, 2026, and securities registrants will have to deliver the first annual report incorporating the new requirements under the Amendments for the year ending December 31, 2026. The extension of the transition period was made in light of significant implementation issues and concerns identified in the comment letters received by the CSA and in technical consultations with industry stakeholders and service providers. The CSA has indicated that an implementation committee will be established to provide guidance, respond to questions and otherwise assist registrants to operationalize the Amendments within the transition period.

For further information, please contact:

Stacy McLean                         +1-416-863-4325
Christopher Yeretsian           +1-416-863-2410
Jessie Dewdney                      +1-416-863-2299

or any other member of our Investment Products & Asset Management group.