The OSC is proposing restrictions on the ability of dealers to sell mutual fund securities with a Deferred Sales Charge (“DSC”) option. Sales would not be permitted to certain clients, including those over the age of 60, whose investment time horizon is shorter than the DSC schedule, whose account size is over $50,000 or who use borrowed money to purchase the securities. In addition, dealers could not accept commissions on reinvested distributions and only for new contributions to a client account.
Dealers would have to ensure that redemptions fees are not levied on investors in certain circumstances, including permanent disability or involuntary loss of full time employment; in short, the OSC is setting out more specifically the factors dealers will need to take into account in their suitability determinations.
Investment fund managers offering a DSC series would need to ensure the maximum term of the redemption fee schedule is no longer than 3 years, clients could redeem 10% of the value of their investments (on a cumulative basis) without fees each year, and that the DSC option is placed in its own series of units (to ensure there is no cross-subsidization of larger management fees from other unitholders). It is anticipated the rule would come into force on June 1, 2022 to coincide with the ban on DSCs being implemented in all other Canadian jurisdictions.
Overview of the Council’s Comments:
The CAC views the current system of financial incentives associated with DSC products as driving sub-optimal behaviour and inherently ridden with irresolvable conflicts. The financial industry and investors would benefit from a structure of economic incentives that promotes transparent, simple fee structures, full attribution of all costs to the end investor related to their financial advice, and a structure that promotes competition in the distribution of investment fund products to investors on the basis of product quality and value-for-advice rather than compensation to advisors. However, barring the ability to ban DSCs in Ontario, we support the Proposed Rule and believe the suggested restrictions are incrementally positive for investors and the industry.
We highlighted the need to review substantively similar compensation arrangements in products similar to securities-regulated products regulated via other channels (such as segregated funds regulated in the insurance channel) and would strongly support collaboration and harmonization across regulatory channels/verticals to deliver uniform outcomes and protections to investors, who may not be aware of differences in regulatory coverage between products, advice, and sales channels.
We raised concern that there may be a possibility that investors purposely or inadvertently exceed the contemplated cap if they open more than one account at a dealer (through a holdco, dealer nominee account, or otherwise). To the extent the dealer has the relevant information, the cap should be per investor and not per account.
Finally, under the new client focused reforms, registrants will have an obligation to consider a reasonable range of alternative recommendations available to the registered individuals through the registered firm when providing advice. For larger firms, we expect that many dealers will be required to make investors aware of alternative products that may be less costly, suggesting that the DSC business model may be likely to be phased out over time.