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CSA – Proposed Amendments to the Principal Distributor Model
Letter Summary:
The Canadian Securities Administrators (CSA) has published for comment proposed amendments to the principal distributor model in the distribution of mutual funds. The proposed amendments clarify that a principal distributor may only act for mutual funds in the same mutual fund family and require disclosure of principal distributor arrangements and compensation to investors purchasing mutual fund securities distributed by principal distributors.
Overview of the Council’s Comments:
The CAC provided feedback on the proposed amendments to the principal distributor model in response to the consultation issued by the Canadian Securities Administrators (CSA). In its letter, the CAC expressed concerns about the embedded conflicts of interest in the model and questioned whether it should be retained at all. The letter also emphasized the need for a more robust, data-driven analysis and called for greater alignment with the principles of the Client Focused Reforms (CFRs). The CAC urged regulators to take immediate action to limit the model to affiliated entities while conducting a broader review of its long-term viability. Additionally, the CAC reiterated the need for a long-term regulatory vision for the principal distributor model.
Key highlights:
Concerns with the Principal Distributor Model:
- The CAC argued that the model poses significant conflicts of interest that may not align with the principles of the CFRs, which require registrants to prioritize clients’ interests.
- The CAC questioned the rationale behind regulators’ decision to maintain the model without a robust, data-driven justification.
- The letter called for an evaluation of whether the model benefits investors or merely persists due to historical convenience.
Need for Immediate Regulatory Action:
- The CAC recommended restricting the model to cases where the principal distributor is affiliated with the investment fund manager.
- The CAC urged regulators to establish a long-term vision for the model, considering its place in a post-CFRs landscape.
- The CAC suggested sunsetting the model if it does not clearly serve investor interests.
Response to Consultation Questions:
- Multiple Principal Distributor Relationships: The CAC did not see any justification for allowing a dealer to act as a principal distributor for more than one mutual fund family and supported transitioning to a participating dealer model instead.
- Investor Protection Measures: The CAC agreed with the proposed amendments, such as prohibiting deferred sales charges and restricting incentives for representatives, but maintained that broader reforms were needed.
- Disclosure Requirements: The CAC recommended that disclosure of principal distributor relationships be made more prominent, such as by using bold text in relevant documents.
- Transition Period: The CAC found the proposed 18-month transition period sufficient but would support a shorter period of 12 months, citing the urgency of investor protection.
- Chargebacks: The CAC strongly opposed chargebacks, arguing they create conflicts of interest that could lead representatives to act in their own interests rather than those of investors.