Ban Announced on Mutual Fund Deferred Sales Charges and Certain Trailing Commissions
The Canadian Securities Administrators (CSA) announced a final decision to prohibit certain types of embedded commissions for publicly offered mutual funds:
- The payment of upfront sales commissions by fund organizations to dealers will be prohibited. The intended effect of this ban is to discontinue sales charge options that involve such payments, such as all forms of the deferred sales charge option, including low-load options (collectively, the DSC option). The DSC option ban will not be adopted in Ontario, but will be published for adoption by all the other Canadian provinces and territories (participating jurisdictions) in early 2020.
- Trailing commission payments by fund organizations to dealers who do not make a suitability determination, such as order-execution-only (OEO) dealers will be prohibited. The CSA had examined, by way of public consultations and commissioned studies, the option of discontinuing all forms of embedded commissions, but determined that only trailing commissions to brokers, such as OEO dealers, who do not make a suitability determination would be banned. The OEO trailing commission ban will be adopted by all CSA jurisdictions and will be published for adoption later in 2020.
With respect to the DSC option ban, the participating jurisdictions expect that:
- there will be a transition period of at least two years,
- on the effective date of the DSC ban, participating jurisdictions will not permit new sales using the DSC option in the participating jurisdictions, and
- DSC redemption schedules for sales made prior to the effective date of the DSC ban will be allowed to run their course in the participating jurisdictions.
With respect to the ban of OEO trailing commission payments, the CSA anticipate that there will be:
- a transition period of at least two years, and
- additional adjustments to respond to stakeholder comments.
The Ontario Securities Commission announced in a separate concurrent notice that, while it will not adopt the DSC option ban, it is considering possible restrictions on the use of the DSC option in Ontario to “mitigate negative investor outcomes”, including the following possible options:
- banning sales to seniors
- shortening the term of redemption fee schedules
- banning the use of borrowed funds to finance purchases
- putting limits on the account size
- giving investors hardship exceptions from redemption penalties.
We invite you to contact a member of our Securities Regulation and Investment Products Group should you have any questions regarding how these initiatives may affect your business.
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