Securities regulators announce final rules to implement a ban aimed at improving investor protections
It’s been slow to come for many, but Canada’s securities regulators are taking a significant step forward in investor protection with a ban on trailing commissions being paid to order-execution-only (OEO) dealers that sell investment funds.
In a press release, the Canadian Securities Administrators (CSA) announced final rules to implement the prohibition, which would take effect on June 1, 2022. That’s the same effectivity date for rules adopted in all provinces except Ontario which would lead to a ban on deferred sales charges (DSC) in mutual funds.
“The effective date takes into account the need for dealer firms and representatives to transition their systems and processes … reassess their internal compensation arrangements and implement new fee charging systems,” the CSA said. “Additionally, the effective date provides fund organizations with sufficient time to make available a no-trailing commission mutual fund series for OEO investors.”
The OEO trailer ban will apply to all funds that pay trailing commissions, including those sold under the DSC option. The CSA said it expected fund organizations and dealers to comply with the new rules to comply in a way that produces the best outcome for investors with DSC holdings, including waiving early redemption fees that would otherwise apply to such investors as a result of the OEO trailer ban, and clearly communicating the measures they intend to adopt.
“The CSA, along with the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada (the SROs), remind registrants of their obligations to treat investors fairly and recommend suitable products,” the regulatory body said, noting the increased liquidity needs and shortened time horizons faced by many investors hit by the COVID-19 pandemic. “CSA and SRO staff will be highly attuned to inappropriate sales of DSC products ahead of the ban.”
But for some stakeholders, the June 2022 effectivity date represents a case of justice being denied through delay. In a letter responding to the announcement, investor advocacy group Kenmar Associates said “[t]here is no good reason or just cause for any transition time. … The people harmed by this decision are ordinary Canadians saving for retirement or their children’s education.”
It noted that in May 2017, IIROC had already called on regulators to limit the sale of series A funds to channels where advice is permitted, which don’t include discount brokers. A number of class actions representing investors impacted by the “discount brokerage scam” have been launched against mutual-fund companies and discounters, Kenmar added.
“The issue of overcharging clients has been known to the CSA for well over a decade,” the letter said. It pointed to CSA figures estimating that around $25 billion is held in series A mutual funds held with discount brokers.
Michael Thom, managing director at CFA Societies Canada, expressed similar dismay. In a LinkedIn post, he said the announcement was “[l]ong overdue” and “[w]ill be unfortunately remembered as a failure for investors by the securities and funds industry in Canada, and by those that regulate them.”
