Firms voice concerns against imbalance between mutual fund advisors with corporations and IIROC counterparts
Aside from potentially creating a more harmonized system of regulation in Canada’s investment industry, the plan to establish a new self-regulatory organization could be an opportunity to resolve a long-standing inconsistency between mutual fund advisors and investment advisors.
In a comment letter responding to CSA Staff Notice and Request for Comment 25-304, which pertains to the planned new SRO to be put in place of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), Manulife Securities called on the CSA to collaborate with the new SRO and establish advisor incorporation as a long-term goal.
“Manulife works with advisors who sell mutual funds, securities, insurance, and provide financial advice. Many of these advisors currently use a corporate structure to manage aspects of their business but are required to conduct their securities-related business as unincorporated individuals,” the letter said.
“Incorporation would ease the complexity of running dual business models and provide more consistency and efficiency for the application of tax rules, as well as facilitate partnerships, growth and succession planning,” he said.
Directed commissions, an arrangement under which certain MFDA advisors are currently allowed to direct commissions they earn to go into their unregistered corporations, emerged as a point of focus among commenters.
IG Wealth Management lauded the decision to let individuals registered as a dealing representative, mutual fund dealer continue to allow directed commissions under the new SRO, specifically if they’re within jurisdictions that permit directed commissions in line with Mutual Fund Dealer Rule 2.4.1(b). The same arrangement will be allowed for dealing representatives receiving direct commission payments from a dual-registered firm.
“However, we would also urge the CSA to go one step further and consider leveling the playing field at the time of the launch of the New SRO … by permitting directed commission arrangements by individuals regardless of registration type,” the firm said, noting that IIROC has previously indicated that it is open to allow such arrangements.
Portfolio Strategies Corporation – a Calgary-based MFDA dealer also registered as an exempt market dealer and investment fund manager in certain provinces – pointed out that advisors registered at investment dealers will often direct insurance commissions to their corporation. The leap to allowing the same for securities-related commissions, it argued, should not be a huge one.
“[W]e do not understand why all IIROC advisors will not be given the same advantages as their mutual fund dealer only colleagues,” added Worldsource Wealth Management, an integrated wealth firm with business arms including Worldsource Financial Management Inc. (WFM), an independent mutual fund dealer, and Worldsource Securities Inc. (WSI), a full-service investment dealer.
“More importantly, we do not feel having an IIROC advisor direct their compensation to an unregistered corporation will bring any harm to our clients or to the general public,” Worldsource said. “In fact, continuing to allow an unequal compensation structure represents a barrier for entry to those advisors who may be contemplating joining either an investment dealer or a dealer registered as both an investment dealer and a mutual fund dealer.”
Designed Wealth Management, which also has a mutual fund dealer and an investment dealer arm, noted that advisors can use certain tax strategies that work within CRA rules to flow their income into a corporation, but they can take an unreasonable amount of time and money to implement. As an alternative, it recommended the use of corporate structures allowed for accountants, lawyers, and certain healthcare professionals.
“These Professional Corporation (PC) structures have established parameters that the new SRO could easily adopt in most provinces. MFDA representatives could be provided grandfathering, or a period of time, to establish their PC, whereas effective January 1st, 2023, dual registered firms could begin to establish these structures,” the firm said.
