Regulatory comments debate trading rule cap levels

01 No surprises in latest NI 31-103 proposals

In July, CSA published for comment proposed amendments to NI 31-103—Registration Requirements, Exemptions and Ongoing Registrant Obligations and its companion policy.

These follow 2013’s CRM2 amendments (phased in over the last three years) and the October 2014 amendments (most of which became effective on January 11, 2015). Unlike the previous amendments, “these are more of a housekeeping nature,” says Darin Renton, a partner at Stikeman Elliott in Toronto.

The new proposals include CRM2 amendments, such as:

• relief for IIROC and MFDA members from certain 2013 CRM2 amendments if they comply with their own corresponding provisions (temporary relief was granted in May 2015);
• additional guidance on pre-trade disclosure of charges to clients who are frequent traders (section 14.2.1 of the companion policy); and
• additional guidance on reporting charges and other compensation, such as non-cash incentives and embedded fee disclosure (section 14.17 of the companion policy).

Referring to the latter proposed guidance, Renton says, “The CSA, with this set of proposals, is going so far as disclosure, rather than coming out with restrictions on how [to] remunerate individuals.”

Such restrictions apply in Europe under the Alternative Investment Fund Managers Directive, he says. “They’ve had issues around remuneration and disclosure of compensation in Europe for a couple of years now, so we’re a market follower.”

Gillian Dingle, counsel at Torys in Toronto, says the proposed guidance is “a continuation of a trend we’ve seen from the regulators toward clear disclosure of compensation that advisors receive […]. This puts those dealers [who offer non-cash incentives] in the same position as dealers who simply provide financial compensation to advisors. You’re going to have to disclose one way or the other.”

With CRM2 implementation, disclosure is nothing new for advisors, who’ve “already been [considering] the discussions they’re going to have with clients about their compensation disclosed in the annual report,” says Dingle, “and this [proposed disclosure of non-cash incentives] is just an addition to that.”

The proposal suggests non-cash incentives, such as promotions or other employment benefits, be listed in the annual report on charges. As a macro type of disclosure, that’s no big deal, says Renton, but if disclosure “has to be broken down at an individual advisor or dealing representative level, it could be quite cumbersome.”

Proposed embedded fee disclosure refers to mutual fund management fees. Dingle says the disclosure is “a further example of regulators struggling to help clients understand how mutual funds work […] and [they] are looking for help from the industry to make that more clear to clients.”

In practice, the proposed embedded fee disclosure aligns with what’s already happening, says Renton. “It just means adding another line.”

The comment period ended October 5, 2016.

02 Trading Rules commentary

Recent amendments to NI 23-101 Trading Rules and its companion policy include:

• a 2.5% market share threshold to the order protection rule (OPR);
• guidance related to intentional order processing delays (also known as speed bumps); and
• an active trading fee cap of $0.0030 per share or unit for interlisted securities (those which trade on both Canadian and U.S. exchanges) that are priced at or above $1, which is the same as the U.S. cap.

The amendments were enacted July 6, except for the market share threshold, which was enacted October 1, 2016.

A separate notice requested comment on or by July 6 on proposed amendments to establish an active trading fee cap of $0.0017 per share (or unit) for Canadian-listed securities that don’t trade in the U.S. (known as non-interlisted securities) and that are priced at or above $1.00.

The caps attempt to address costs associated with OPR compliance.

The basis point equivalent of the inter-listed securities cap was used to determine the $0.0017 proposed cap for non-interlisted securities.

	Volume-weighted average price	Trading fee cap	Basis point equivalent
Interlisted securities	$25.26	$0.0030 per share or unit	1.2 bps
Non-interlisted securities	$14.30	$0.0017 per share or unit	1.2 bps

Source: Request for comments, Annex A

Renton says there’s general consensus the $0.0030 cap is too high, because Canadian securities tend to be cheaper than U.S. securities. “But it’s going to take some cross-border co-operation to make sure if [regulators] move that, [they] don’t distort the markets,” he says.

Comments received call for careful monitoring of the cap. The Investment Industry Association of Canada suggests Canadian regulators work with their U.S. counterparts in respect of the U.S. pilot program on fee caps at different levels.

On the proposed non-inter-listed cap, Renton says,

“The move […] is a welcome one, and people are in favour of anything that reduces the high cost in the system.” But there’s debate about whether the cap is too high or too low.

What side of the debate you fall on “depends on whether you’re buying securities or whether you’re trying to be a liquidity provider,” says Renton.

On the buy side, “most advisors and managers don’t have enough volume for this to make a significant difference,” he says.

Ronald Schwass, a partner at Wildeboer Dellelce in Toronto, takes a larger view and asks, “Why focus on trade fees and ignore the large market data fees?”

He’s not the only one.

While the instrument’s enacted amendments include a formalized data fees methodology to make the oversight of such fees transparent, comments from the Canadian Foundation for Advancement of Investor Rights (FAIR) suggest going further.

The group recommends conducting a survey to assess the availability and cost of market data to which retail investors and advisors currently have access.

FAIR also suggests a study of rebate prohibition in marketplaces, as do other commenters.

Says Schwass: “People are looking hard […] at whether or not [the market] is a fair place.”

by Michelle Schriver, assistant editor of Advisor Group.