Provide trailer fee data, regulator urges mutual funds

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A finance professor in Toronto is about to become snowed under with an avalanche of sensitive information on mutual funds.

The Canadian Securities Administrators (CSA) has reached out to every fund company in Canada to provide detailed information on the fees they charge investors. Firms are under no obligation to respond, but if they do so, they are being asked to provide up to 73 data points to the regulator; more than 50 of these pertain directly to fees, including 13 alone on trailing commissions.

The information will be sent to Douglas Cumming, professor of finance and entrepreneurship and the Ontario research chair at the Schulich School of Business at York University. Companies are being asked to provide data on funds stretching back to 2003 and have until January 16, 2015, to get the information back to Prof. Cumming.

Even though the request for information isn't compulsory, Rhonda Goldberg, director of the investment funds and structured products branch with the Ontario Securities Commission (OSC), said she expects that the vast majority of companies will co-operate and participate. "We'll have to see whether this yields us the appropriate response. We expect them to be providing their data to Prof. Cumming. There's other tools in the tool kit, but as a starting point, we thought this was the best approach."

The data will be gathered as part of the CSA's continuing review of the mutual fund fee structure in Canada. The regulator first said in December, 2012, that it was exploring whether there are conflicts of interest that encourage advisers to recommend funds that pay the adviser the highest trailer fee, but might not be in the best interest of the client. Most Canadian advisers do not have a fiduciary duty toward their clients. In other words, they are under no legal obligation to recommend investments that are in the client's best interest; they only have to prove that their dealings with the client are "fair" and "honest."

Some of the potential outcomes of the regulator's review could be the introduction of a fiduciary duty standard for advisers, and/or an outright ban on trailer fees, which is the chief source of income for financial advisers in this country. Over the past 20 months, the regulator, through its provincial securities bodies, has conducted extensive stakeholder consultations, including a public round table on fees in June, 2013.

Asked whether there has been pushback on fees from mutual fund companies opposed to a changing of the status quo, Ms. Goldberg said "the industry has challenged us to identify the problems and be evidence-based, and we are doing exactly that with this data request. And it is now up to them to step up and provide us with the necessary information that will allow us to make an informed decision." She expects the regulator to make "some decisions" on fees by the end of March, 2015.

Prof. Cumming won't have a huge amount of time to digest the mutual fund data. He'll be publishing a research report on his findings in the first quarter of 2015. To assuage concerns over confidentiality, no specific fund companies will be identified in his report.

Furthermore, the data, will be "destroyed" (Mission Impossible style?) after one year, according to the CSA. And if companies are wary of e-mailing reams of data, they can hand deliver the information on a USB stick right to the professor's office.