The OSC Staff has announced steps it will take to eliminate trailing commissions for fee-based mutual fund series when they file their next annual renewal prospectuses. In the latest edition of the OSC’s Investment Funds Practitioner, OSC Staff expressed the view that a mutual fund series intended for fee-based accounts should not also have a trailing commission embedded in the ongoing cost of the fund series. In Staff’s view, this compensation structure is inconsistent with fee-based mutual fund series because of the extra trailing charge on top of the fee. The OSC Staff maintains this result may be contrary to a dealer’s general duty to deal fairly, honestly and in good faith with its clients.
Mutual fund fee-based series (often referred to as “F Series”) are only available to investors who meet certain eligibility criteria to participate in fee-based programs through their broker or dealer. These investors pay an annual fee to their dealer for ongoing financial planning advice which they negotiate directly with the dealer. Many mutual fund managers pay no service fees or commissions, including trailing commissions, to brokers or dealers in respect of F Series funds.
The OSC is working to eliminate trailing commissions for both existing and new fee-based fund series. For existing fee-based fund series that already have this compensation structure in place, Staff will intervene during the next annual prospectus renewal process by asking fund managers to advise Staff what would be a reasonable transition period needed to (i) cease all new investments in the series, and (ii) switch or redeem current investors out of the series or remove the dual compensation structure from the series.
This latest OSC Staff position is part of an ongoing focus by Canadian securities regulators on mutual fund fee structures and dealer compensation models which included a discussion paper in December 2012, stakeholder consultations and a public roundtable in June 2013, and the awarding of two research contracts in September 2014 to evaluate whether regulatory action is needed in this area. The Investment Funds Practitioner publication is becoming an increasingly important channel for OSC Staff to set out legal interpretations not otherwise specifically articulated in official companion policies or investment fund rules.