- prohibit trailing commission payments by investment fund managers, portfolio advisers and principal distributors of publicly-offered mutual funds (collectively with their respective affiliates, a fund organization) to participating dealers who do not make a suitability determination in connection with a client's purchase and ongoing ownership of prospectus qualified mutual fund securities, such as order-execution-only (OEO) dealers and dealers acting on behalf of a "permitted client" that has waived the suitability requirements, and
- prohibit the solicitation or acceptance of trailing commissions by participating dealers from fund organizations, in connection with securities of the mutual fund held in an account of a client of the participating dealer if the participating dealer was not required to make a suitability determination in respect of the client in connection with those securities.
As of June 1, 2022, mutual fund securities that are subject to a trailing commission may no longer be held in the account of a client for whom a dealer was not required to make a suitability determination.
A trailing commission is an ongoing charge for services and advice provided by a dealer representative and their firm. Trailing commissions are paid by a fund manager out of the fund's management fee for as long as the investment is held.
The CSA had examined, by way of public consultations and commissioned studies, the option of discontinuing all forms of embedded commissions, but determined that only trailing commissions to brokers, such as OEO dealers, who do not make a suitability determination would be banned.
Earlier this year, the CSA also adopted amendments that would prohibit the payment of upfront sales commissions by fund organizations to dealers. The intended effect of this ban is to 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). As discussed in a previous blog, the DSC option ban will not be adopted in Ontario1, but will be adopted by all the other Canadian provinces and territories.
The DSC option ban also will come into force on June 1, 2022 (the Effective Date).
The CSA had announced in September 2018 its intention to adopt the DSC option ban and OEO trailing commission ban. The Government of Ontario had expressed its disapproval of those CSA proposals at the time.
Operational impacts of the OEO trailing commission ban:
- By the Effective Date, mutual funds will need to amend their prospectuses, Fund Facts and ETF Facts, if necessary, to reflect the ban.
- Fund organizations that wish to offer their mutual fund securities to investors with OEO accounts after the Effective Date should make available a no-trailing commission series of their funds to participating dealers.
- On or before the Effective Date, fund organizations and OEO dealers will need to facilitate switches of trailing commission paying mutual fund securities to no-trailing commission series of the same fund held in client accounts administered by OEO dealers. The CSA Amendments provide exemptions from the Fund Facts delivery requirement and the ETF Facts delivery requirement that would normally apply in respect of such switches. These delivery exemptions can be relied upon for switches of existing mutual fund holdings, transfers and pre-authorized purchase plans.
- The CSA expects that dealers will facilitate transfers of DSC holdings by clients who want a suitability determination by a new dealer.
- The CSA expects fund organizations and dealers to take any necessary measures to ensure that investors with DSC holdings will not be required to pay redemption fees as a result of the implementation of the Amendments.
- The CSA expects fund organizations
- to communicate their implementation plans to investors with DSC holdings in accounts administered by dealers who are not required to make a suitability determination.
- to collaborate with each other and facilitate client communications, as necessary.
- Pre-authorized purchase plans that provide for the periodic purchase of mutual fund securities that are subject to a trailing commission will need to be amended to switch over to the purchase of a no-trailing commission series or class of the same fund if the dealer was not required to make a suitability determination. If a no-trailing commission series of the same fund does not exist, the pre-authorized purchase plan would need to be terminated or amended in consultation with the client to allow for periodic purchases of another mutual fund that is available on a no-trailing commission basis.
- By the Effective Date, affected fund organizations and dealers should amend their policies and procedures to give effect to the CSA Amendments.
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.