5.3 Relationship Disclosure Information (RDI) and Pre-Trade Cost Disclosures

5.3 Relationship Disclosure Information (RDI) and Pre-Trade Cost Disclosures

Quick Answer: Under NI 31-103 s.14.2 and CIRO Mutual Fund Dealer Rule 2.2.7, dealer members must deliver written Relationship Disclosure Information (RDI) to every client before first trading or advising. The RDI covers account types, products and their limits, operating and transaction charges, compensation, complaint handling and material conflicts. Under NI 31-103 s.14.2.1, before accepting an order the firm must disclose the charges the client will pay, whether it will receive trailing commissions, and whether ongoing fund fees apply. Since June 1, 2022, fund companies may not pay upfront commissions, ending new DSC purchases while existing schedules run off. Ongoing reporting includes prompt trade confirmations (MFD Rule 5.4), statements at least every three months, and annual charges and performance reports. Since January 1, 2026, the charges report must also show fund expenses in dollars.

The Regulatory Framework of Relationship Disclosure Information (RDI)

The client-dealer relationship is built upon statutory transparency. Under National Instrument 31-103 (Registration Requirements, Exemptions and Ongoing Registrant Obligations) Section 14.2 and MFD Rule 2.2.7, registered dealers must provide all retail clients with comprehensive written disclosure that explains the fundamental terms, boundaries, and costs of their commercial relationship.

This disclosure package, universally designated as Relationship Disclosure Information (RDI) (or the Relationship Disclosure Document, RDD), must be delivered to the client before the firm first purchases or sells a security for the client or advises the client, which in practice means at account opening.

The RDI functions as an operational and legal baseline, ensuring that the client understands what services the dealer provides, what products are available, what costs will be incurred, and what recourse exists if grievances arise.

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Mandatory Components of the Relationship Disclosure Information

Under NI 31-103 s.14.2(2), MFD Rule 2.2.7 and MFD Rule 2.13 (CIRO membership disclosure), the RDI package covers the following core components:

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|               CORE COMPONENTS OF THE RDI DOCUMENT                |
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| 1. Account Types & Nature of Services Offered                    |
| 2. Products Available (Proprietary vs. Third-Party Funds)         |
| 3. KYC Verification and Suitability Assessment Mandate           |
| 4. Schedule of Operating Charges & Account Maintenance Fees      |
| 5. Schedule of Transaction Charges & Sales Commissions           |
| 6. Investment Performance Benchmarks & Reporting Standards       |
| 7. Content and Cadence of Client Account Reporting               |
| 8. Dispute Resolution, Complaint Protocols, & OBSI Access        |
| 9. Material Conflicts of Interest Disclosures                    |
| 10. Investor Protection Coverage (CIPF) & Absence of CDIC/Gov     |
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1. Account Types and Services Offered

Describes the specific legal structure of the account (e.g., non-registered cash account, margin account, or registered plans such as RRSPs, TFSAs, RESPs, and RRIFs) and clarifies the nature of the relationship—specifically that the mutual fund dealer provides non-discretionary advisory services where every transaction requires client authorization.

2. Available Products and Selection Limitations

Dealers must explain the range of products they are licensed and authorized to sell. Critically, the RDI must disclose whether the firm offers a broad universe of third-party mutual funds, or primarily/exclusively distributes proprietary products (funds managed by an affiliated investment manager or parent financial institution). If product selection is restricted, this limitation must be clearly stated.

3. Know Your Client (KYC) and Suitability

Explains the statutory requirement to collect and verify client personal and financial circumstances, investment knowledge, time horizon, investment objectives, risk tolerance, and risk capacity. It explains that the dealer uses this data to assess whether each trade recommendation is suitable and puts the client's best interest first.

4. Schedule of Operating Charges

Itemizes all non-transactional account charges, including account opening fees, annual registered plan administration fees (e.g., $50 annual RRSP trustee fee), account transfer-out fees (e.g., $150 to transfer to another institution), wire transfer fees, duplicate statement charges, and account closure fees.

5. Schedule of Transaction Charges

Outlines direct fees associated with trading activity, such as commissions, mutual fund switch fees, and currency conversion fees.

6. Investment Performance Benchmarks

Provides a balanced discussion of investment benchmarks. It explains that benchmarks (such as the S&P/TSX Composite Index or Bloomberg Canadian Aggregate Bond Index) can help clients assess portfolio progress against broad market indices, while clarifying the dealer's policy regarding whether benchmark comparisons will be provided on periodic performance reports.

7. Content and Frequency of Reporting

Outlines the timing and contents of written statements and reports the client will receive, including trade confirmations, monthly/quarterly account statements, and annual CRM2 performance and fee summaries.

8. Dispute Resolution and Complaint Procedures

Explains the branch and head office complaint escalation protocol. It must inform the client of their right to escalate unresolved grievances to independent dispute resolution bodies, specifically the Ombudsman for Banking Services and Investments (OBSI), and CIRO's regulatory complaints process.

9. Material Conflicts of Interest

Provides plain-language disclosure of all material conflicts identified by the firm and explains how the dealer manages them in the best interest of the client, including dealer compensation structures, internal sales incentives, and referral programs.

10. Investor Protection and Absence of Guarantees

Explicitly clarifies that investments in mutual funds and securities fluctuate in value, do not have a guaranteed return, and are not insured by the Canada Deposit Insurance Corporation (CDIC) or government deposit insurance. It explains that client assets are safeguarded under the Canadian Investor Protection Fund (CIPF) against dealer insolvency, within prescribed limits.

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Pre-Trade Disclosure of Charges (NI 31-103 s.14.2.1)

Pre-trade disclosure of charges was introduced by the Client Relationship Model Phase 2 (CRM2) amendments to NI 31-103. Its purpose is that investors understand what a trade will cost before they decide.

Mandatory Pre-Trade Disclosure Elements

Before the firm accepts a client's instruction to buy or sell a security (outside a managed account), it must disclose:

1. Charges the Client Will Pay: The charges in respect of the purchase or sale, or a reasonable estimate if the exact amount is not known. Example: a 1.00% front-end commission on a $10,000 purchase is $100, so $9,900 is invested in fund units. Switch fees and short-term trading fees that apply to the transaction are also charges.
2. Trailing Commissions: Whether the firm will receive trailing commissions in respect of the security. Good practice is to explain the rate (for example, 1.00% a year, about $100 per $10,000 invested) and that it is paid out of the fund's management fee.
3. Ongoing Fund Fees: Whether there are investment fund management expense fees or other ongoing fees the client may incur in connection with the security.

The former requirement to explain deferred sales charges was repealed after DSCs ended in 2022. Firms must still identify holdings that remain subject to a DSC schedule on account statements.

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The Nationwide Ban on Deferred Sales Charges (DSC)

One of the biggest shifts in Canadian mutual fund distribution took effect on June 1, 2022. Amendments to NI 81-105 (adopted by the CSA, with parallel action by the OSC) prohibited fund organizations from paying upfront sales commissions to dealers. That removed the funding model behind the DSC and low-load purchase options, which ended across Canada.

The Mechanism and Regulatory Harm of DSC

Under the historical DSC model (back-end load):

• The investment fund manager paid an upfront sales commission (typically 5.00% of the invested amount) directly to the dealer member at the time of purchase.
• The investor paid zero commission upfront; 100% of their principal was invested in fund units.
• However, if the client redeemed their units before a specified schedule expired (typically 5 to 7 years), the fund manager deducted a declining redemption penalty from the redemption proceeds (e.g., 6% in year 1, 5% in year 2, declining by 1% each year to 0% after year 7).
• A variant, known as the Low-Load (LL) option, featured lower upfront dealer commissions (2.00% to 3.00%) and a shorter redemption schedule (2 to 3 years).

Regulators determined that the DSC structure created severe, unmanageable conflicts of interest:

• Representatives were financially incentivized to recommend DSC funds to capture the large upfront commission, regardless of the client's time horizon or liquidity needs.
• Retail investors—particularly senior and vulnerable clients—found their capital trapped behind punitive redemption penalties when unforeseen life events (such as illness or retirement) necessitated withdrawals.
• The structure distorted objective suitability assessments and conflicted with the CFR best-interest standard.

Regulatory Status Post-June 1, 2022

• No New DSC Purchases: Effective June 1, 2022, new purchases under DSC or low-load options are no longer available anywhere in Canada, because fund organizations cannot pay the upfront commission that financed them.
• Grandfathered Position Run-Off: Units purchased under DSC schedules prior to June 1, 2022, were permitted to remain in place and run off naturally according to their original redemption schedules until the redemption fees expire.
• Free Redemption Allowances: Many DSC schedules let investors redeem a portion (commonly 10%) of their DSC units each year without a redemption charge. This is a term of the fund's prospectus, not a regulatory entitlement.
• Switching Out of DSC Holdings: Recommending that a client redeem DSC units still subject to redemption charges, in order to generate new commissions or fee-based assets, is a classic suitability and conflict red flag. Under MFD Rule 2.2.6 the recommendation must put the client's interest first, considering the charge, the costs of the new holding and reasonable alternatives, and the rationale must be documented.

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Post-Trade and Ongoing Periodic Disclosures

Disclosure obligations do not cease when a trade is executed. CIRO and NI 31-103 mandate a continuous chain of post-trade communications to keep investors informed of transactions, holdings, and costs.

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|                    ONGOING DISCLOSURE TIMELINE                   |
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| BEFORE THE ORDER IS ACCEPTED                                     |
| - Pre-trade disclosure of charges (NI 31-103 s.14.2.1)           |
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| PROMPTLY AFTER THE TRADE                                         |
| - Written trade confirmation (MFD Rule 5.4; NI 31-103 s.14.12)   |
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| AT LEAST EVERY THREE MONTHS                                      |
| - Account statement (MFD Rule 5.3.1)                             |
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| ANNUALLY (with or within 10 days after a statement)              |
| 1. Report on charges and other compensation (incl. fund expenses)|
| 2. Investment performance report (money-weighted return)         |
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1. Trade Confirmations (MFD Rule 5.4)

Under MFD Rule 5.4 (and NI 31-103 s.14.12), a Member that acts as principal or agent in a trade must promptly send the client a written confirmation. For mutual funds, the Member need not send its own confirmation if the fund manager sends one containing the required information. For automatic plans with monthly or more frequent purchases, a confirmation is required for the initial transaction only.

The trade confirmation must contain the prescribed details, including:

• The quantity and description of the security;
• The price per security (NAVPU);
• Each transaction charge, deferred sales charge or other charge, and the total;
• Whether the dealer acted as principal or agent;
• The trade and settlement dates; and
• The name of the dealing representative involved.

2. Account Statements (MFD Rule 5.3.1)

Each Member must send every client an account statement at least once every three months. NI 31-103 s.14.14(2.1) exempts mutual fund dealers' mutual fund activity from the monthly statement rules that apply to other dealers. Statements show transactions for the period, each holding with its quantity, market value and cost, cash balances, whether the account is eligible for an investor protection fund, and which holdings may be subject to a deferred sales charge. They must also carry the CIRO logo and web address (MFD Rule 2.13).

3. Annual Charges and Performance Reports

For each 12-month period, the dealer must send two reports covering the same period. Under MFD Rule 5.3.5 they are delivered combined with, accompanying, or within 10 days after an account statement:

1. Report on Charges and Other Compensation (NI 31-103 s.14.17; MFD Rule 5.3.3): the dollar totals of operating and transaction charges the client paid, and the trailing commissions and other payments the dealer received (for example, "We received $420.50 in trailing commissions..."). Under the total cost reporting amendments in effect since January 1, 2026, the report must also show, in dollars, the fund expenses (management fees, operating expenses and trading costs) the client indirectly bore through their investment funds, along with each fund's expense ratio.
2. Investment Performance Report (NI 31-103 ss.14.18-14.19; MFD Rule 5.3.4 and Rule 700): opening and closing market value, deposits and withdrawals, the annual and cumulative change in value, and the annualized money-weighted rate of return net of charges for the 1-, 3-, 5- and 10-year periods and since account opening.

Comprehensive Fee and Cost Disclosure Matrix

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Branch Supervision and BCO Trade Surveillance Protocols

Branch Compliance Officers must enforce cost transparency and fee compliance through daily and periodic supervisory routines.

BCO Supervisory Checklist

• RDI Delivery Gatekeeping: Verify that every newly opened account file contains documented confirmation that the client received the RDI document before any trading orders were accepted.
• Pre-Trade Cost Audit: Review daily trade tickets for representative notes detailing pre-trade fee discussions. Red flags include high-volume trading accounts with zero documented pre-trade cost notes.
• DSC Controls: Confirm order systems cannot accept DSC or low-load purchase codes, and reject any order that somehow carries one.
• Grandfathered DSC Switch Surveillance: Scrutinize all switches or redemptions involving grandfathered DSC units. If a representative recommends redeeming grandfathered DSC units that still carry a 3% or 4% redemption penalty to buy a new fund, the BCO must require documented justification proving why the switch is in the client's best interest despite the penalty.
• Fee Schedule Notification Verification: Confirm that branch clients received written notification at least 60 calendar days prior to any firm-wide increase in administrative or operating fees.

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Practical Branch Scenarios and Exam Watchouts

Scenario 1: The Attempted Low-Load Purchase

On August 14, 2024, a dealing representative submits a mutual fund purchase order for $20,000 using a 3-year Low-Load (LL) sales charge option. The representative argues that low-load options were not traditional DSCs because the redemption schedule is only three years rather than seven, and that the client preferred paying zero upfront commission.

• BCO Action: The BCO must reject the order. Since June 1, 2022, fund companies cannot pay upfront commissions, so all deferred sales charge options, including 2- and 3-year low-load schedules, are unavailable for new purchases. The BCO must instruct the representative to resubmit the order under a permitted purchase option (such as front-end load negotiated at 0% or an approved fee-based series) after delivering mandatory pre-trade cost disclosures.

Scenario 2: Vague Pre-Trade Cost Explanations

During an audit of trade tickets, a BCO notices that a representative's trade notes consistently state: "Client advised of standard mutual fund fees." When questioned, the representative admits they told the client that mutual funds have operating costs, but did not disclose the 1.00% front-end load ($150 on a $15,000 trade) or the 1.00% trailing commission.

• Regulatory Reality: This fails NI 31-103 s.14.2.1. Generic statements like "standard fees apply" do not disclose the charges the client will pay (here the 1.00% front-end commission, $150), whether the firm receives a trailing commission, or the ongoing fund fees. Firm policy should require the specific amounts to be given and recorded. The BCO must issue a compliance deficiency notice, require the representative to amend their practices, and document the reprimand.