New York – What began as a bang ended as a whimper, as Canadian security regulators approved new soft dollar guidelines after three years of iterations. The Canadian Securities Administrators (CSA) initially proposed regulation which followed the higher UK disclosure standards, and actually would have gone a step further, but in the end approved soft dollar regulation in line with the US Security and Exchange’s (SEC’s) less stringent soft dollar requirements.
Background
In July 2006, the CSA proposed soft dollar guidelines which advanced the global standards for commission transparency by requiring asset managers to itemize each service received as part of bundled commissions and allocate those costs to each of their clients. Not surprisingly, the proposed rules generated a firestorm of protest, with over 43 comment letters received. Even worse, the SEC came out with its soft dollar guidelines the same month, which had no guidance on disclosure whatsoever.
Under pressure, and seemingly divergent with the SEC, the CSA proposed a more reduced set of disclosure requirements in a release in January 2008. The revised guidelines placed greater emphasis on narrative disclosure and eliminated the requirement to provide client-level disclosure. Quantitative disclosure was cut back to an estimate of “the total client brokerage commissions paid by the client during the period reported on [periods will be annual]“. Also, advisers were to estimate on an aggregate basis, across all clients, the portion of commissions paid for goods and services other than execution.
What was adopted in the end has no quantitative disclosure, relying solely on narrative disclosure. Even the narrative disclosure has been cut back, as a proposed list of all list of dealers and third-party suppliers paid by soft dollars is information to be supplied only ‘on request’ by adviser clients.
Our Take
The CSA action is symptomatic of the broader regulatory inertia on commission transparency. The UK’s Financial Services Authority (FSA), which was the trend setter in commission disclosure, found that its commission disclosure regime did not materially change market practices, and so has backed off from additional regulation. As the CSA notes in its recent release: “experience in the U.K. has shown that even the most sophisticated investors are not using the disclosure provided.”
Meanwhile the SEC has proposed narrative disclosure in Form ADV and some guidelines for mutual fund directors, but has implemented nothing on commission disclosure. The CSA found this an insurmountable obstacle. When Canadian managers use US sub-advisers, a nightmare would develop: “it may not be possible to obtain the necessary information from sub-advisers to meet the disclosure requirements,
when those sub-advisers are not required by the laws in their jurisdiction to maintain such information.”
The reality is that regulators will not require commission disclosure until there is some impetus, such as a scandal or an aggressive state-level DA, or market reality is such that disclosure happens through increased volumes of electronic trading.