In recent years, securities regulators have grown concerned over investor protection issues relating to the deferred sales charge (DSC) option in mutual fund sales. This concern has gained further prominence in light of recent cases where investment dealers made unsuitable investment recommendations to unsophisticated investors, which led to owing substantial DSCs.1
On February 20, 2020, members of the Canadian Securities Administrators (CSA), (notably other than the Ontario Securities Commission (OSC)), published Multilateral CSA Notice of Amendments to National Instrument 81-105 – Mutual Fund Sales Practices (NI 81-105) and related instruments. On the same date, the OSC published its own proposed amendments in relation to DSC.
The CSA amendments
Pursuant to the CSA amendments, the participating jurisdictions will prohibit the use of DSCs completely. These amendments will come into force on June 1, 2022. The Notice of Amendment states that given the "extended period" of transition, "compliance with the new rules will immediately be expected" on the effective date.
Under the CSA amendments, mutual funds purchased with the DSC option before the effective date will not require conversion into other sales charge options. Rather, the redemption schedules of such DSC options will be allowed to adhere to their scheduled timelines.
The OSC proposal
In contrast to the CSA amendments, the OSC proposal rejects an outright ban on DSCs. Instead, the OSC proposal limits the circumstances in which mutual funds can be sold with DSCs, and gives clients greater flexibility to redeem these investments without penalties. Like the CSA amendments, the OSC's proposal will come into force on June 1, 2022.
Under the OSC's proposed rules, the sale of mutual funds with the DSC option will be prohibited in the following circumstances: where a client is 60 or older, where a client's investment horizon is shorter than the DSC schedule, and/or where a client intends on using leverage or borrowed funds to finance the purchase of mutual funds.
The OSC has proposed other changes, meant to provide greater flexibility to clients. These include reducing the maximum term of the DSC schedule to three years, entitling clients to redeem 10 per cent of the value of their investment without redemption fees annually, and entitling clients to redeem the entirety of the value of their investment without paying redemption fees in circumstances of financial hardship (e.g. loss of permanent employment and permanent disability).
Investors Group Financial Services Inc. (Re), 2019 CanLII 67469 (CA MFDAC); Daues (Re), 2017 CanLII 142998 (CA MFDAC).