Investor advocates renew calls against DSCs, trailing commissions

Separate letters reassert the need for regulators to ban trailing commissions at OEO firms as well as DSCS

Investor advocates renew calls against DSCs, trailing commissions

The debate over mutual fund-fee reform took an unexpected turn in September: Shortly after the Canadian Securities Administrators (CSA) released a proposed set of reforms that included a ban on deferred sales charges (DSCs) on mutual funds, the newly elected Ontario government rejected the suggested measure “as currently drafted.”

“We will work with other provinces and territories and stakeholders to explore other potential alternatives to ensure fair, efficient, capital markets and strong investor protections,” said Ontario Finance Minister Vic Fedeli in a statement.

Despite the clear favour for DSCs displayed by a jurisdiction with considerable weight among Canada’s securities markets, opposing stakeholders haven’t gotten discouraged. In response to the consultation on the CSA’s proposed reforms, investment-rights group FAIR Canada reasserted its points against such commissions.

“The proposed reforms in the Consultation Document are a step in the right direction,” FAIR Canada said in its response letter. “Prohibiting DSCs and prohibiting trailing commissions through discount brokerages or OEO firms, will address two egregious practices that harm investors and we support those proposed changes.”

Noting that DSCs “are rife with conflicts of interest, target the most vulnerable investors,“ and are associated with “evidence of mis-selling,” the group maintained that a DSC ban will help further the Ontario government’s pro-competitiveness stance. It also cited industry players, including IIROC and numerous private firms, which support a ban.

The letter also took aim at the practice of charging trailing commissions at Order Execution Only (OEO) firms. Noting that IIROC Dealer Member Rules prohibit discount brokerages from providing recommendations, FAIR Canada called for an immediate elimination of embedded commissions from investment products sold on such platforms. “If a ‘F’ class exists, it should be required to be offered through the OEO firm for those who want to invest without advice,” the group added.

In a separate response letter, senior-investor advocacy group CARP echoed many of the same points, but issued a stronger call to immediately ban mutual funds with DSCs. The group also urged the CSA to immediately prohibit funds with embedded fees on OEO exchanges, as well as require the exchanges to retroactively refund embedded fees that they previously collected.

“To the extent they once served a purpose, mutual fund companies with low investment thresholds and disruption in financial services markets have made [DSCs] obsolete,” CARP said.

Noting the negative impacts of DSCs on older Canadians, the group also cited its own member survey showing 79% of respondents supporting or strongly supporting an embedded-fee ban. CARP further urged the CSA to request information about DSC complaints from the Mutual Fund Dealers Association “to better understand the magnitude of DSC issues raised by investors.

“Indeed, in our respectful submission, no informed, rational investor would choose to invest in a fund with a 5% up-front commission and a locked in time-frame, over a 0% front-end load version,” the group said.


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