FAIR Focus
May 2022
In this month’s newsletter, we discuss investing in uncertain times and the importance of checking in with your advisor. We also discuss the ban on two types of mutual fund charges and fees, which takes effect on June 1. As well, we discuss proposed changes that would allow public companies to “deliver” financial statements and other documents by simply issuing a press release indicating they are available. Lastly, we highlight a new podcast series on protecting yourself from investment fraud.

Investing in Uncertain Times
This year is proving to be one of the more challenging years in recent memory for investors and financial consumers. Inflation and interest rates are rising at unprecedented levels and show no signs of slowing down anytime soon.

Stock markets are highly volatile and housing prices are still out of reach for too many Canadians. The conflict in Ukraine is creating new and uncertain market risks, in addition to the tremendous human suffering.

With all this uncertainty, investing becomes more challenging and riskier for everyone.
You should also be aware that advisors are not necessarily required
to contact you in periods of market volatility.
For those who rely on an advisor to help make investment decisions, your advisor is required by law to provide advice that is suitable. This includes understanding the key features of the product they are recommending and how it fits into your investment needs and objectives, risk profile and investing time horizon. However, this requirement, known as “suitability,” is not an ongoing obligation. Rather, your advisor is only required to revisit the suitability of your investment in certain specified situations or within certain time periods. 

You should also be aware that advisors are not necessarily required to contact you in periods of market volatility. While the better advisors will try to touch base with you on a regular basis, they are not obligated to do so. If your advisor works at an IIROC-regulated firm, they should also let you know when you open your account whether they’ll review your investments’ suitability in the case of a triggering event, such as a significant market fluctuation. That doesn’t mean you cannot take the initiative to contact your advisor if you feel uneasy about your current financial situation.
 
Check out the following for tips on working with your advisor:



For do-it-yourself investors who may be considering working with an advisor, see our webpage on Choosing an Advisor.
Ban on Unfair Mutual Fund Fees Starts June 1
As of June 1, 2022, your advisor will no longer be able to sell you mutual funds that include a fee if you sell them before a specified period.

Currently, some mutual funds have such fees, called Deferred Sales Charges (DSCs), attached to them. These DSC charges usually apply for five to seven years after you purchase the mutual fund.

For example, if you decide to sell it within one year, you may be required to pay approximately 6% of the amount you sell as a sales charge. If you sell the fund in the second year, you may have to pay 5% of what you sell. The fees typically decrease by one percentage point each year, and disappear after about five to seven years. If you sell after the five-to-seven-year period, you no longer have to pay the fee.
The main problem with DSCs is that they create pressure on you to stay invested in a fund to avoid paying the fee, even if your fund is performing poorly...
FAIR Canada advocated for the ban of DSCs because they are unfair and harmful to investors. The main problem with DSCs is that they create pressure on you to stay invested in a fund to avoid paying the fee, even if your fund is performing poorly, or you want to sell because you need the money to cover unexpected expenses. After many years of advocacy on behalf of investors, we are pleased that the ban will finally take effect this June for mutual funds.
Did you know?
For DIY investors, fund managers currently pay
trailing commissions each year to discount brokers,
even though they don't provide investment advice.
DSCs, however, may also be charged when you buy a segregated fund, which is a type of mutual fund that includes life insurance and is sold by life insurance brokers. The DSC ban does not apply to segregated funds. We are urging insurance regulators to also ban DSCs for segregated funds as soon as possible. Recently, the regulators have begun urging insurers to stop selling segregated funds with DSCs as of June 1 as well. However, a ban is not expected to come into effect for segregated funds until June 2023.
 
For DIY investors, trailing commissions—paid by fund managers each year to discount brokers—will also be banned as of June 1. These commissions are mainly supposed to pay for investment advice you receive from your broker. Since discount brokers don’t provide advice, it’s not fair for them to receive these commissions. Once the ban on the trailing commission takes effect, investors may be entitled to a rebate. However, to help make up for the lost commissions, some discount brokers may start charging you a fee to buy or sell mutual funds, like the fees paid to trade stocks.
 
Although the bans are good news, it’s important to remember that they do not kick in until June 1. In the case of DSCs, you will not be protected from sales charges on the funds you purchased before this date. Check your portfolio to see if you are paying any DSCs and speak with your investment firm as they may be willing to waive the charges. 
Update: Burden Reduction – Getting it Right for Investors
In our October 2021 newsletter, we noted that securities regulators are yet again looking to reduce costs for public companies by moving further away from the need to deliver key investment-related documents to you, including annual notices informing you about these documents and your right to request copies.

While current rules provide different options on how public companies can meet their obligations to deliver documents to investors, not all public companies take advantage of them and continue to deliver paper copies. This requires them to pay for printing and postage costs. This is particularly true when it comes to prospectuses, which contain details about a company and the investments being offered for sale to the public.

With respect to financial statements, to save costs companies will mail an annual request form asking some of their investors whether they want to receive a paper copy of the annual financial statements and copies of the interim financial statements. If so, the investor will need to complete the form and mail it back to the address provided. For other investors, they may not receive the annual request form if, at the time they opened their account, they indicated to their advisor they did not want to receive this type of information.
To further reduce costs for public companies and “modernize” how information is delivered to investors, the Canadian Securities Administrators (CSA) are proposing a new “access equals delivery” (AED) model for certain documents.

The key features of the proposal include:

  • For financial statements and related management discussion and analysis (MD&A) documents, and most types of prospectuses, instead of delivering a copy of the document to you, the company you’ve invested in can choose to issue and file a press release indicating the documents are available on SEDAR.

  • The company will not be required to post the document on its own website, or reach out to inform you that it’s now available on SEDAR.
 
  • Investors wanting this information will need to monitor the public company’s press releases and then download the documents they need directly from SEDAR.
 
  • The press release will also have to include instructions on how you can request copies of the documents from the public company.
 
  • The new model will not apply to mutual funds or exchange-traded funds (ETFs), or time-sensitive documents, such as annual proxy and voting-related forms.

FAIR Canada is reviewing the proposal to ensure investors will continue to be treated fairly should it be adopted.
 
Our focus is ensuring that investors receive real notice and better access to information they need to make informed investment decisions. This includes advocating for improved investor communications using existing mechanisms as well as new digital technologies. In our view, instead of focusing on reducing costs for public companies, we need to focus on modernizing the delivery requirements to promote enhanced disclosure and reflect investor preferences. This should include facilitating the ability of investors to “subscribe” to the information they want to receive.
 
Let us know your thoughts on the proposed AED model by sending us an email message at info@faircanada.ca. 
New Podcast Series! Protect Yourself From Investment Fraud
The Manitoba Securities Commission released a new podcast series, Time to Call Out Fraud, that’s worth a listen. There are seven episodes, each covering different components of investment fraud and how to protect yourself from scams. The series takes a deep dive into the world of investment fraud by interviewing psychologists, crypto experts, police, and victims of fraud.
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