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CSA – Prohibition on the Use of Chargebacks in the Distribution of Investment Fund Securities
Letter Summary:
The Canadian Securities Administrators (CSA) have proposed amendments to National Instrument 31-103 that would prohibit the use of chargebacks in the distribution of investment fund securities.
Chargebacks, where upfront commissions are clawed back if a client redeems early, pose a conflict of interest, potentially leading representatives to prioritize compensation over client needs. The proposed ban aims to eliminate this risk and reinforce trust in Canada’s capital markets.
Overview of Comments:
In response to the CSA’s consultation on proposed amendments to NI 31-103 regarding the prohibition on chargebacks in the distribution of investment fund securities, the Canadian Advocacy Council (CAC) expressed strong support. The CAC welcomed the CSA’s proactive stance in addressing the inherent conflicts of interest posed by chargebacks and viewed the amendments as a natural extension of the prior ban on deferred sales charges. The Council also urged regulators to investigate past use of such structures for potential breaches of client obligations. The CAC emphasized the need for continued regulatory scrutiny of compensation models that may misalign advisor and client interests.
Highlights by Question:
Q1. Are there other types of securities that should be subject to the proposed ban?
The CAC recommended applying the ban to all investment fund securities, including scholarship plan dealer products and similar fund-like securities. They also called for coordination with insurance and other regulators to ensure consistent treatment of analogous compensation structures.
Q2. Should securities of investment funds that are non-reporting issuers also be subject to the proposed ban?
The CAC supported extending the ban to non-reporting issuer funds, noting the same investor protection concerns apply regardless of reporting status.