The Canadian Securities Administrators (CSA) has published CSA Staff Notice 81-332, Next Steps on Proposals to Prohibit Certain Investment Fund Embedded Commissions (the Staff Notice). The document details the regulator’s ongoing plan to prohibit certain classes of embedded investment fund commissions.
After a period of consultation in 2018 and analysis of stakeholder feedback, CSA Staff has proposed the final amendments (the final amendments) to National Instrument 81-105 Mutual Fund Sales Practices (NI-81-105):
- Implementation of enhanced conflict of interest mitigation rules and guidance for dealers and representatives requiring that all existing and reasonably foreseeable conflicts of interest, including conflicts arising from the payment of embedded commissions, be addressed in the best interests of clients or avoided;
- Prohibition of all forms the payment of upfront sales commissions by fund organizations to dealers, and in so doing, 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), in respect of the purchase of securities of a prospectus qualified mutual fund; and
- Prohibition the payment of trailing commissions to, and the solicitation and acceptance of trailing commissions by, dealers who do not make a suitability determination in connection with the distribution of securities of a prospectus qualified mutual fund, such as order-execution-only (OEO) commission payments.
The securities regulatory authorities of the participating jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Nunavut, Northwest Territories, and the Yukon (the Participating Jurisdictions) are expected to publish the final amendments to ban the DSC option in early 2020. The Ontario Securities Commission (OSC) has declined to participate in the adoption of the final amendments to ban the DSC option.
In the jurisdictions where the final amendments are expected to come into force, there will be a transition period of at least two years. On the effective date of the DSC ban, new sales using the DSC option will not be permitted in the Participating Jurisdictions. Any DSC redemption schedules for sales made before the effective date of the DSC ban will be allowed to run their course in the Participating Jurisdictions.
The Participating Jurisdictions will provide more information when the final amendments are published, including any transitional provisions that may be required to allow the continued use of the DSC option after the Client Focused Reforms enhanced conflicts of interest requirements come into effect.
All CSA member jurisdictions are expected to implement the ban on payments of trailing commissions to dealers who do not make a suitability determination. CSA Staff anticipates at minimum, a two-year transition period for the ban to take effect, along with additional adjustments in response to stakeholder feedback.
CSA Staff Notice 81-332, Next Steps on Proposals to Prohibit Certain Investment Fund Embedded Commissions is available for download from the websites of the Participating Jurisdictions.
For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.
