IIROC White Paper – Proficiency Upgrade and Directed Commissions

April 22, 2016

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IIROC White Paper – Proficiency Upgrade and Directed Commissions

Letter Summary:

We understand that the costs for maintaining a separate corporation could potentially outweigh the tax benefits for registrants that could choose to utilize the structure as proposed, and that a large volume of mutual fund sales and commensurate commissions would be required in order for the structure to make sense economically. It is possible that a registrant in this scenario selling solely mutual funds under the IIROC platform could be motivated to do so as a result of the tax benefits of their directed-commission holding company structure and not the best interests of the client. Our fear is that mutual funds sales generating sufficient commissions to justify a separate incorporated and unregulated entity, serving one or a small group of registrants, are potentially being sold at a scale or volume whereby the registrant(s) may either not be sufficiently advising an excessively numerous client base, or selling financial products with trailer fee burdens that are not appropriately sized to the scale of their clients’ portfolios.

Overview of the Council’s Comments:

The potential benefits to IIROC-regulated investment dealers and their representatives of the directed benefit structure that have been espoused, including potentially creating a more taxefficient structure and facilitating succession planning, are not in our view sufficient to outweigh the potential negative implications, such as the impact on the legal liability to clients and the potential for increased conflicts of interest.