Should embedded commissions be banned from mutual funds? Are there ways to reduce the regulatory burden on reporting issuers without compromising transparency? What obligations and disclosures should be established to help improve transparency and promote responsible conduct in the over-the-counter (OTC) derivatives markets?

These are just some of the questions the Canadian Advocacy Council (CAC) grapples with. The CAC, which represents more than 17,000 CFA Institute members across the country, provides regulators and policy-makers with feedback from industry stakeholders. But how does the CAC develop its responses, and how do the current issues addressed by the CAC affect CFA members?

DIVERSE VIEWS

Created in July 1995, the CAC has since evolved from an informal gathering of society presidents to an advocacy council comprising experienced CFA charterholders. The CAC engages with securities regulators, self-regulatory organizations, industry groups, and legislators in Canada mainly through comment letters (i.e., responses to government) and in-person discussions. Twelve members from across Canada—each with different professional backgrounds and working in diverse roles within the investment industry—bring their own perspectives to the issues that have been raised. The group’s diversity is especially helpful when considering how different responses could affect stakeholders.

“We engage in a lot of discussion and debate before we can begin to form our response to any consultation,” says Parham Nasseri, who has been a member of the CAC for about two years. Nasseri currently is manager, investment analysis and business intelligence, at the Ombudsman for Banking Services and Investments. He says the CAC gives him “a rare opportunity to contribute towards strengthening the Canadian capital markets while learning about emerging issues and collaborating with CAC colleagues from across Canada.”

“The CAC’s overriding mission is to represent the interests of Canadian CFA societies.”

The CAC’s overriding mission is to represent the interests of Canadian CFA societies. The mission is guided by the CFA Institute’s Code of Ethics and Standards of Professional Conduct, with the principles of putting clients’ interests first, maintaining the integrity of capital markets, and disclosing conflicts of interest influencing the CAC’s responses. Nasseri views the council’s engagement with issues that shape the regulatory environment in Canada’s capital markets to be a central advocacy effort that not only lends a credible voice on critical policy matters, but also elevates the awareness of the CFA charter.

EMBED OR NOT

One notable issue the CAC recently responded to was the consultation held by the Canadian Securities Association (CSA) on whether Canada should follow the lead of Australia and the U.K. with a ban on embedded commissions in investment funds (these commissions, usually included in a fund’s management expense/fee, are paid to a financial advisor). Those agreeing with a ban suggest investors will be able to make more informed decisions if fees are charged outside of the funds. Those opposed—represented mostly by fund dealers—say banning embedded commissions will lead to an “advice gap” similar to what emerged in the U.K., where it’s believed that removing embedded commissions made it harder and more expensive for less affluent clients to receive financial advice.

Any changes to embedded commissions are expected to have a ripple effect across the industry. On the front line, while some advisors have restructured their businesses to be “fee based,” a large number will have to change the way they charge clients for their services. This change will also affect anyone working in fund operations or product management. Investment firms could expect to see more cost competition—a benefit for investors, but a potential source of difficulty for firms with tight profit margins or for advisors that haven’t found a way to demonstrate the continued value-add of the advice and planning support they offer (often referred to as their “gamma”).

The impact on fund management is not direct, but it could be argued that increased transparency will help to clarify the alpha that’s being generated by active fund managers. A contrarian view might be that the greater focus on cost could push investors towards the lowest cost option—and not necessarily the “best cost” option.

In its response to the CSA, the CAC supported the discontinuation of embedded commissions, along with complementary reforms to enhance client/advisor regulation. If regulators aren’t prepared to go ahead with a ban, the CAC has proposed alternatives. For example, the CAC’s submission suggests helping investors better understand their options by limiting the variety of fund series and fee structures, and doing away with front- and back-end load options. The submission further suggests explicitly dividing representatives into “salespeople” and “advisors,” based on the type of service they offer.

Such a distinction would give investors a truer picture of potential conflicts and the services each type of representative offers, according to the CAC submission. Alternatively, the CAC suggests improving fee transparency further “by requiring product manufacturers to comprehensively disclose all costs: for example, the amounts paid to dealers.” This would assist in helping investors to seek “answers as to whether a riskier recommended fund has higher fees associated with it.”

FURTHER ISSUES

The CAC’s work is ongoing and covers a variety of topics. It recently completed a response to a CSA consultation that aims to reduce the regulatory burden for non-investment fund reporting issuers. The CAC supports efforts to reduce duplicated information, while ensuring the investing public gets the information it needs to make informed decisions. The CAC identified concern about reducing financial disclosure requirements for smaller reporting issuers, arguing that this information may be required to support comparisons and can sometimes be used to help analysts make informed investment decisions. If this information were to disappear completely, analysts might struggle to find alternative sources.

Other priority topics included a consultation on operational, reporting, and disclosure requirements for OTC derivatives dealers and advisors, and a local perspective on a global consultation on credit ratings agencies. (You can access the CAC’s final responses to these at http://www.cfaadvocacy.ca.)

YOUR VOICE

The CAC’s responses, which have also been highlighted in the industry press, have provided additional promotion and awareness of the CFA Code of Ethics and Standards. But the true focus of the CAC is its advocacy work and, as a CFA member, this is truly a benefit. The CAC uses a litmus test to prioritize which initiatives and responses to undertake, and a big contributor to this test is whether the issue is important to members of Canadian CFA societies. So, if there’s an issue that’s important to you, the CAC would like to hear from you; for contact information, please go to http://www.cfaadvocacy.ca.