CSA warns industry against abuses as bans loom for trailers, DSCs

By James Langton | September 17, 2020 | Last updated on September 17, 2020
3 min read
People who blame
© kokouu / iStockphoto

The regulatory ban on fund managers paying trailer commissions to discount brokers will take effect in mid-2022, regulators said in a release on Thursday. That will happen alongside a ban on deferred sales charge (DSC) mutual funds in much of the country. With those measures on the way, the regulators also fired a warning shot across the industry’s bow.

The Canadian Securities Administrators (CSA) have adopted final rules that will outlaw the payment of trailers to discount brokers as of June 1, 2022.

The CSA’s trailer ban is slated to take effect at the same time as a ban on DSC funds in every market except Ontario. The Ontario government has refused to adopt an outright ban on DSC funds, and is instead considering a series of curbs on the funds that aim to reduce investor harm.

Along with its final rules on trailers, the CSA signalled to the industry that the measures must be implemented in a way that doesn’t penalize investors.

In a statement, the CSA said it “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 trailer ban, and to clearly communicate the measures they intend to adopt to investors.”

The regulators also warned they will be “highly attuned to inappropriate sales of DSC products ahead of the ban.”

More generally, the CSA — along with the industry self-regulatory organizations, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada — cautioned the industry against taking advantage of investors, given the economic and market disruptions caused by the Covid-19 outbreak.

To that end, regulators issued a statement reminding firms of their obligations to “treat investors fairly and recommend suitable products, as many investors face shorter time horizons and heightened needs for liquidity due to continued economic uncertainty caused by the pandemic.”

Before the pandemic, the CSA moved to ban the payment of trailers to discount brokers and to eliminate DSCs (ex-Ontario) due to “important investor protection concerns,” the CSA said, noting that its policy decisions in this area are based on “extensive research, analysis and consultations.”

The practice of fund firms paying trailers to discount brokers, in part for advice to investors that these firms are prohibited from providing, is also the subject of several investor class actions.

“These rules, together with enhanced conflict of interest obligations under the client-focused reforms, address investor protection concerns with clients buying investment fund products subject to trailing commissions where no suitability determination is made,” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers.

The CSA said its mid-2022 deadline for banning trailers to discount brokers will provide time for firms to revise their systems and processes to comply with the new rules, and to “reassess their internal compensation arrangements and implement new fee charging systems.”

It also gives fund firms time to develop non-trailer-paying versions of their funds for discount brokerage clients.

“Where possible, investment fund managers and [discount brokers] are strongly encouraged to accelerate their transition away from mutual fund series with trailing commissions,” Morisset said.

James Langton headshot

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.