In June 2025, the Canadian Securities Administrators (CSA) released proposed amendments to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations that will prohibit the use of "chargebacks" in the distribution of public investment fund securities. If this flew under your radar as the summer got underway, you're not alone. There is, however, still time to engage: the public comment period runs until September 24, 2025.
What Are Chargebacks?
In the context of the CSA's proposal, chargebacks refer to compensation arrangements where a dealing representative is paid an upfront commission when a client purchases investment fund securities. The representative is later required to repay some or all of that commission if the client redeems the securities early, typically within a pre-defined "chargeback period". This period is agreed to by the firm of the dealing representative and the investment fund manager of the fund or another registrant that is paying the upfront commission.
Chargebacks are currently limited in use, however, the CSA is concerned that these types of arrangements give rise to an inherent and significant conflict of interest. Namely, that dealing representatives may not act in a client's best interests and may be incentivized to discourage the client from redeeming the investment fund securities that they previously purchased before the "chargeback period" has expired.
Why Now?
The CSA views the proposed prohibition as a pre-emptive measure intended to address a conflict-ridden compensation practice before it becomes popular and a wide spread industry practice. The CSA compared the chargeback compensation model to the now-banned deferred sales charge model, highlighting that both structures risk placing a dealing representative's compensation interests ahead of a client's needs and eroding investor trust.
Scope of the Proposed Amendments
If adopted, this prohibition will apply to all registered dealing representatives, investment fund managers, advisers, dealers and their affiliates involved in the distribution of investment fund securities of reporting issuers. Notably, the proposal does not currently extend to non-reporting issuers, although the CSA is expressly seeking feedback on whether the scope of this prohibition should be expanded to cover such non-reporting issuers.
Canadian Investment Regulatory Organization (CIRO) members should be aware that corresponding amendments to the CIRO rules may follow if this prohibition is adopted, although they will not solicit any comment on the policy rationale of this prohibition. Accordingly, all CIRO members should provide any comments that they have on this prohibition as this time.
Questions Posed by the CSA
In addition to general comments, the CSA is specifically inviting feedback on:
- Whether this prohibition should extend to the securities of investment funds that are non-reporting issuers, and why; and
- Whether it should apply to other types of securities.
What's Next?
If finalized, the amendments implementing this prohibition will come into force six months after the final publication date. In the meantime, stakeholders, especially investment fund managers, dealers, and compliance teams may need to review their existing compensation models to ensure they are not reliant on structures that contravene the proposed changes.
How to Comment
Written comments are due by September 24, 2025 and should be submitted in Microsoft Word format to the Ontario Securities Commission (OSC) and Autorité des marchés financiers (AMF) with addresses here, which will circulate them to the rest of the CSA. Note that any comments that are submitted will not be kept confidential.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
