CSA propose ban on trailer fees, embedded commissions for mutual funds

Securities regulators reveal reform plan for mutual funds, with move away from commissions gathering pace

CSA propose ban on trailer fees, embedded commissions for mutual funds

The Canadian Securities Administrators will hold a consultation this fall to investigate the possibility of banning trailer fees and other embedded commissions in mutual fund sales.

Such a move will change the fund industry greatly, and represents the next step of an apparent move away from the commission-based system by regulators.

In a statement released yesterday, the CSA said: “After thorough examination, the CSA find that the prevailing practice of remunerating dealers and their representatives for mutual fund sales through commissions, including sales and trailing commissions, paid by investment fund managers (embedded commissions) raises a number of investor protection and market efficiency issues that suggest a need to consider change. We believe there is considerable scope for better aligning the interests of investment fund managers and dealers/representatives with those of the investors they serve.”
Canada’s move to a direct fee-based system mimics moves already made by other nations, including Britain and Australia, which have already banned the use of trailer fees. Trailer fees are paid to advisers annually when their clients hold a mutual fund. Some grey area exists concerning the fees, as many customers are unaware of the fact advisers can also receive fees from mutual fund companies. This can create a conflict of interest and is a major reason why securities regulators appear keen to move away from this model.

Following the announcement, Ontario Securities Commission vice-chair Grant Vingoe said it was not a final decision to ban trailer fees, but is a real option. “Since it’s such a powerful antidote to the harms involved, in Ontario we would need very persuasive evidence to move away from it,” he said. “But we’re very open to commentary that addresses how we should do it and how the industry would transition from the present situation to these direct pay arrangements.”

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