9.5 Supervising Performance Communications, Benchmarks, and Descriptions of Fees and Loads

9.5 Supervising Performance Communications, Benchmarks, and Descriptions of Fees and Loads

Quick Answer: Every advertisement, sales communication and client presentation that discusses returns or costs is supervised material. Under MFD Rule 2.7 it must be approved before use by a designated supervisor and must not be misleading. Under NI 81-102 Part 15, mutual fund performance must use standard periods, cannot be shown for a fund distributing for less than 12 months, and must include the prescribed warning. Benchmarks must be fair and relevant. Fees and loads must be described accurately, including trailing commissions and fund expenses that the client pays indirectly.

Regulatory Requirements for Investment Performance Benchmarks

Under CRM2 rules, dealer members are not legally required to include investment performance benchmarks on client statements. However, if a dealer member or dealing representative chooses to provide a benchmark comparison, strict regulatory standards apply under CIRO guidelines and NI 31-103.

Benchmark Regulatory Standards

1. Fair, Relevant, and Balanced: The benchmark must accurately reflect the client's actual portfolio asset allocation, risk profile, and investment mandate. It is a major regulatory violation to present a mismatched benchmark that makes the representative's performance look artificially superior.
   • Non-Compliant Example: Comparing a client's 100% Canadian equity portfolio against a 91-day Canadian Treasury Bill index during a bull market to brag about "outperforming the benchmark by 12%."
   • Non-Compliant Example: Comparing a conservative balanced portfolio (60% fixed income / 40% equity) against the 100% equity S&P/TSX Composite Index during an equity rally, or against a cash index during a market crash.
2. Mandatory Disclosure of Differences: The performance presentation must clearly disclose all material differences between the portfolio and the benchmark, including:
   • Differences in asset class weighting (equity vs. fixed income vs. cash).
   • Geographic and sector concentration (e.g., Canadian vs. Global exposure).
   • Currency risk and volatility profile.
3. Total Return vs. Price Return Specification: The benchmark disclosure must explicitly state whether the benchmark is a total return index (which includes reinvested dividends) or a price return index (which tracks only stock prices without dividends). Comparing a mutual fund's total return (including dividends) against a price-return index is deceptive because it artificially inflates the fund's relative outperformance.
4. Consistency Over Time: Representatives cannot "benchmark hop"—switching benchmarks from quarter to quarter to cherry-pick whichever index underperformed the client's portfolio during that specific period.

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Statutory Sales Communication and Performance Advertising Rules (NI 81-102 Part 15)

National Instrument 81-102 Part 15 establishes strict statutory guardrails governing how mutual fund performance can be advertised, marketed, or communicated to the Canadian public.

Definition of Sales Communication

Under NI 81-102, a "sales communication" includes any written, electronic, or oral communication delivered to retail clients or the public designed to induce investment in a mutual fund. This encompasses newspaper and television advertisements, website content, social media posts, seminar slide presentations, brochures, and quarterly client portfolio reviews.

Statutory Performance Prohibitions

• No Guarantees: Registrants are strictly prohibited from guaranteeing future performance, capital preservation, or specific distribution amounts.
• No Performance Figures for Funds Under 12 Months: A mutual fund that has been in distribution for less than 12 consecutive months is strictly prohibited from publishing or advertising any performance figures whatsoever. Regulators consider short-term performance highly erratic and unrepresentative.
• No Cherry-Picked Timeframes: Performance cannot be quoted for arbitrary, selective time windows (e.g., "up 28% over the last 4 months").
• No Hypothetical or Back-Tested Returns: Retail sales literature must never display hypothetical back-tested returns of a simulated model portfolio.

Mandatory Standardized Historical Periods

Whenever mutual fund performance is advertised or communicated in sales literature, it must present standardized compound annual returns for prescribed historical periods ending on the most recent calendar month-end or quarter-end:

Prescribed Standard Horizons: 1 Year, 3 Years, 5 Years, 10 Years, and Since Inception

Mandatory Net Performance and Warning Disclaimers

1. Performance Must Be Net of Fees: All quoted performance figures must reflect returns net of the fund's Management Expense Ratio (MER) and operating expenses. Quoting gross-of-fee returns without deducting the MER is illegal in retail mutual fund communications.
2. The Mandatory Past Performance Warning Disclaimer: Every written sales communication containing performance data must prominently display the standardized regulatory disclaimer:

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Describing Fees and Loads Accurately

Clients routinely misunderstand what a mutual fund costs, and inaccurate descriptions are a frequent source of complaints. The BCO should make sure representatives describe costs the same way the Fund Facts and the dealer's disclosure documents do:

Under NI 31-103 s.14.2.1, the charges for a particular trade, whether the firm receives trailing commissions, and whether ongoing fund fees apply must be disclosed before the order is accepted (see section 5.3).

BCO Supervisory Checklist: Performance and Sales Literature

• Marketing Pre-Approval: Confirm that every advertisement, promotional flyer, seminar slide deck, and social media posting has received written compliance pre-approval from Head Office Compliance or the BCO prior to public release.
• Standardized Return Horizons: Verify that all performance materials display standardized 1, 3, 5, and 10-year compound annual returns; confirm no performance is advertised for funds operating under 12 months.
• Mandatory Warning Language: Check that the full statutory past performance disclaimer is prominently printed in legible font on all marketing materials.
• Benchmark Relevance: Audit representative portfolio review presentations to ensure benchmarks are fair, balanced, disclose composition differences, and use total return data.
• Prohibition of Guarantees: Ensure no oral or written claims guarantee capital safety, distribution sustainability, or above-market returns.

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Practical Branch Scenarios and Exam Watchouts

Scenario 1: The Misleading Custom Excel Benchmark

A top-producing dealing representative creates a custom quarterly performance reporting template in Excel to send to high-net-worth clients. On the cover page, the representative plots the performance of their recommended high-risk Canadian Small-Cap Equity Fund against the 91-day Canadian Treasury Bill rate, highlighting that the fund "consistently generated 900 basis points of alpha over the benchmark."

• Compliance Analysis: This presentation breaches CIRO rules and NI 81-102. A 91-day Treasury Bill index is an unrepresentative, completely inappropriate benchmark for a volatile, high-risk small-cap equity fund. The benchmark is not fair, balanced, or relevant. Comparing high-beta equities to risk-free cash equivalents deceives clients regarding the true risk incurred to achieve the returns.
• BCO Action: The BCO must immediately reject the template, prohibit the representative from sending it to clients, require the representative to send corrective statements containing balanced benchmarks (such as the S&P/TSX SmallCap Index) with full disclosures, and log the deficiency in the branch compliance supervision binder.

Scenario 2: Advertising a 7-Month-Old Breakthrough Tech Fund

A dealing representative posts a graphic on LinkedIn stating: "Our new NextGen Artificial Intelligence Fund is up an astonishing 42% over its first 7 months! Message me today to get your money working in this top-performing fund before the next rally!"

• Compliance Analysis: This is an egregious regulatory violation of NI 81-102 Part 15. Canadian mutual funds that have been in distribution for less than 12 consecutive months are strictly prohibited from publishing performance data. Furthermore, using unapproved social media for securities promotion violates dealer communications policies, and advertising short-term 7-month returns breaches the standardized return period mandate.
• BCO Action: The BCO must order the immediate deletion of the LinkedIn post, issue a formal compliance reprimand, mandate that the representative undergo social media and advertising re-education, inspect the representative's communications for other unapproved posts, and escalate the infraction to the CCO.