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

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

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

CSA Objectives Enhance the obligations of firms towards their clients Improve outcomes for clients and clarify the nature of the client-registrant relationship NI 31-103 does not explicitly contain certain requirements Better align the interests of registrants with interests of clients “Status quo must change”

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”

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

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

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

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

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

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  

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

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

Targeted Reform 9 : Role of UDP and CCO Amendments to NI 31-103 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

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

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

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

CSA Staff Notice 81-327 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.

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

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

Submit Your Comments! YOU are a stakeholder and should make a submission Send comments by mail or email (contact information will be on Consultation Paper, e.g. comments@osc.gov.on.ca) 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.

Questions? Donna Spagnolo Borden Ladner Gervais LLP (416) 367-6236 dspagnolo@blg.com Sienne Lam (416) 367-16616 slam@blg.com