On November 28, 2024, the Canadian Securities Administrators (“CSA”) announced proposed amendments to the principal distributor model for the distribution of mutual fund securities which will result in changes to National Instrument 31-103  Registration Requirements, Exemptions and Ongoing Registrant Obligations ( “NI 31-103” )  and National Instrument 81-105 Mutual Fund Sales Practices (“NI 81-105”). These amendments to NI 31-103 and NI 81-105 (the “Proposed Amendments”) will be open for public comment for 90 days until February 27, 2025.

Background Behind the Proposed Amendments

NI 81-105 was introduced in 1998 to protect investor interests by establishing minimum standards of conduct for mutual fund industry participants involved in the marketing and sale of mutual fund securities with a view to prohibiting practices that could impair the ability of dealers and their dealing representatives from making decisions or recommendations other than those premised on the interests of their customers. The CSA highlights that principal distributors are exempt from certain NI 81-105 provisions applicable to participating dealers because they only distribute within the same mutual fund family, where there is less conflicts of interest. This intention was noted in the 1997 consultation of the proposed instrument NI 81-105. However, the CSA recognizes that this premise is not fully reflected in the current provisions in NI 81-105. The Proposed Amendments will seek to clarify that principal distributors may only distribute mutual fund securities of the same mutual fund family.

Following the CSA’s adoption of amendments on June 1, 2022, which were adopted to address conflicts of interest from payments of upfront sales commissions by managers to participating dealers for mutual fund sales, and was “intended to result in the discontinuation of all forms” of the deferred sales charge (“DSC”) options[1], the CSA believe that the same conflict of interest exists for payments of upfront sales commission by managers to principal distributors. As a result, to ensure that the DSC option is not available to investors purchasing mutual fund securities from participating dealers or principal distributors, the Proposed Amendments would extend the prohibition of charging of a fee to investors upon the redemption of mutual fund securities in all circumstances.

Additionally, the Proposed Amendments will also enhance disclosure requirements related to principal distributor arrangement and compensation paid to principal distributors and their representatives.  

Proposed Amendments and Changes

(a) Principal Distributor Model

The Proposed Amendments clarify that a dealer can only have one principal distributor relationship, except when acting as a principal distributor for mutual funds within the same mutual fund family.

A mutual fund family is defined in NI 81-105 as “two or more mutual funds that have (a) the same manager, or (b) managers that are affiliates of each other.”

The CSA clarifies that this proposed amendment will not “affect the ability of a principal distributor to also distribute mutual fund securities as a participating dealer to multiple managers”. Managers may have more than one principal distributor for the distribution of its own mutual fund securities.

(b) Principal Distributor Practices

To promote fair practices, the prohibition for providing incentives to representatives to recommend one mutual fund over another mutual fund that currently applies to participating dealers will extend to principal distributors.

(c) Disclosure of Principal Distributor Compensation

The Proposed Amendments require simplified prospectus, fund facts document, and annual report on charges and other compensation to disclose if a principal distributor has exclusive rights to distribute mutual funds. The principal distributor must also disclose any payments received beyond trailing commissions, including the maximum percentage of management fees that is paid by the manager to the principal distributor for its services.

(d) Prohibition on Fees for Redemptions

The Proposed Amendments prohibit managers from charging fees to investors upon redemption of mutual fund securities in order to ensure that DSC options are unavailable to investors purchasing mutual fund securities from principal distributors.

However, exceptions exist for securities bought before June 1, 2022, which are under existing redemption fee schedules. It is important to note that fees for short-term trading and large redemptions that are retained by the mutual fund would not be affected by the Proposed Amendments.

As a result of the DSC bans that were adopted on June 1, 2022, which prohibit managers from paying upfront sales commissions to participating dealers in respect of mutual fund securities, the proposed redemption will also repeal provisions related to commission rebates from dealer representatives who paid all or part of the redemption fee when an investors redeemed mutual fund securities purchased under the DSC option from one mutual fund family and purchased mutual fund securities under the DSC option from a different mutual fund family.

Phased Implementation

The CSA has announced that the Proposed Amendments will be come into force 3 months after the final public date with the caveat that:

• Proposed Amendments to NI 31-103 and proposed changes to 31-103CP will come into force on January 1, 2026.
• Proposed Amendments to NI 81-105 will come into force 18 months after the final public date. The CSA noted that the phased approach to the implementation of the Proposed Amendments to NI 81-105 is intended to provide “sufficient time for principal distributors who act as principal distributor for more than one unaffiliated manager to transition their practice, operational model and compensation arrangements”.

The CSA has also expressed that it will be open for commenters impacted by the Proposed Amendments to provide feedback on alternative transition measures which could assist their transition to comply with the Proposed Amendments.

Please reach out to Sean Sadler, Christopher Yam, or another member of our Securities Regulation & Investment Products group if you have any questions or for assistance.

[1] See Multilateral CSA Notice of Amendments to National Instrument 81-105 Mutual Fund Sales Practices, Changes to Companion Policy 81-105CP to National Instrument 81-105 Mutual Fund Sales Practices and Changes to Companion Policy 81-101CP to National Instrument 81-101 Mutual Fund Prospectus Disclosure relating to Prohibition of Deferred Sales Charges for Investment Funds published on February 20, 2020 and OSC Notice of Local Amendments to National Instrument 81-105 Mutual Fund Sales Practices, Local Changes to Companion Policy 81-105 Mutual Fund Sales Practices and Related Consequential Local Amendments and Changes – Prohibition of Deferred Sales Charges for Mutual Funds published on June 3, 2021.