On September 13, the Canadian Securities Administrators (CSA) published for comment the long-anticipated rules (Proposed Rules) that will prohibit certain embedded commissions currently allowed under National Instrument 81-105 Mutual Fund Sales Practices (NI 81-105). If the proposed changes are adopted, investment fund managers will be prohibited from paying dealers:

  • upfront sales commissions for the sale of mutual funds offered under a prospectus; and
  • trailing commissions where the dealer does do not make a suitability determination.

The second prohibition will apply even for sales to permitted clients who have waived the suitability requirements. The CSA expects that the prohibition of upfront sales commissions will eliminate the deferred sales charge (DSC) option that certain fund managers offer their clients. The new rules, if adopted, likely will be subject to a one-year transition period.

Almost coincidentally with the release of the CSA’s announcement, Ontario’s Minister of Finance indicated that the government disagrees with the Proposed Rules as currently drafted. In a news release, Minister Fideli stated that the proposed amendments “result from a process initiated under the previous government and, if implemented, will discontinue a payment option for purchasing mutual funds that has enabled Ontario families and investors to save towards retirement and other goals.” This statement implies that the governments is principally concerned with the potential elimination of DSC option for mutual fund purchases. The Minister then indicated that Ontario will work with other provinces, territories and stakeholders to explore other potential alternatives to ensure fair, efficient capital markets and strong investor protections.

It is not unheard of for a government in Canada to disagree with an initiative proposed by an independent securities regulator. But usually such differences of opinion are resolved either before a regulatory initiative is published for comment or through discussions once the comment period closes. It will be interesting to see whether and how the Ontario government, Ontario Securities Commission (OSC) and other CSA members reach consensus on a way forward, especially since the Proposed Rules reflect the results of over five years of research by securities regulators and consultation with stakeholders on this topic.