DSCs to end for (nearly) everyone in 2022

Securities regulatory authorities across country – except Ontario – rubber stamp decision to adopt CSA rules

DSCs to end for (nearly) everyone in 2022

It’s official: deferred sales on mutual funds will end for every province except Ontario on June 1, 2022.

The securities regulatory authorities of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, Nova Scotia, Prince Edward Island, New Brunswick, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon yesterday rubberstamped their decision to adopt rules that will lead to the end of DSCs.

These rules will prohibit fund organizations from paying upfront sales commissions to dealers. Those payments give dealers an incentive to sell mutual funds that impose redemption fees to investors if they sell their holdings before a certain period of time.

"This decision was motivated by important investor protection concerns," said Louis Morisset, Chair of the CSA and President and CEO of the Autorité des marchés financiers. "Upfront sales commissions create conflicts of interest and impose liquidity constraints that harm investors. This compensation bias incentivizes dealers to recommend a product that may not be in the best interest of investors and has led to suboptimal investor outcomes."

“We considered alternatives to the DSC ban, including regulating sales through a series of restrictions, but concluded they only partially mitigated the investor harms we identified and none dealt with the conflicts of interest inherent in the DSC option, or the harmful lock-in feature imposed on investors. With ample evidence of investor harm, especially for the most financially vulnerable investors, and no evidence of any benefits, we see no reason to preserve the DSC option.”

Morisset’s verdict stands in contrast to that of the Ontario Securities Commission, who decided to restrict DSCs rather than ban them. It released a proposed rule yesterday outlining a series of restrictions.

In a press release, the CSA said that many investment fund companies and dealers have already transitioned away from this problematic compensation model as it no longer meets investors' needs and reasonable expectations. Innovation has opened significant new avenues for serving smaller accounts at an affordable cost. Investors today have access to a wide variety of funds, including no-load mutual funds and exchange traded funds, regardless of account size.

It added: “Mindful of the impact of the ban on dealers who sell mutual funds with DSCs, the Participating Jurisdictions are providing a significant transition period of almost two and a half years to allow dealers to adjust their business models. During this transition period, dealers will be allowed to sell these mutual funds, and the redemption fee schedules on those holdings will be allowed to run their course.”

The release added that until the ban takes effect, the participating jurisdictions will grant relief to dealers, with respect to the DSC feature, from the enhanced conflicts of interest requirements that will take effect on December 31, 2020 following the adoption of the client focused reforms. During that time, dealers will still need to comply with conflicts of interest requirements that are currently in effect under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

As announced on December 19, 2019, the CSA plan to publish later in 2020 amendments to prohibit the payment of trailing commission payments by fund organizations to dealers who do not make a suitability determination, such as order-execution-only (OEO) dealers.