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CSA bans DSC sales charges in all provinces – except Ontario

By Kate McCaffery | February 20 2020 01:44PM

Photo: Freepik

The Canadian Securities Administrators (CSA) announced that it will adopt rules, effective Feb. 20, 2020, that will lead to the end of deferred sales charges (DSC) on mutual funds, as of June 1, 2022. The rules will take effect in all provinces and territories, except Ontario.

The CSA says it considered alternatives to the DSC ban, including regulating sales through a series of restrictions, but concluded that these only partially mitigated investor harms identified, and did nothing to address “the conflicts of interest inherent in the DSC option or the harmful lock-in features imposed on investors. With ample evidence of investor harm, especially for the most financially vulnerable investors, and no evidence of any benefits, we see no reason to preserve the DSC option,” the CSA wrote in a statement.

“Mindful of the impact of the ban on dealers who sell mutual funds with DSCs, the participating jurisdictions are providing a significant transition period of almost two and a half years to allow dealers to adjust their business models.” During this transition period, they say dealers will be allowed to sell DSC mutual funds and the redemption fee schedules on those holdings will be allowed to run their course.

“Many investment fund companies and dealers have already transitioned away from this problematic compensation model as it no longer meets investors’ needs and reasonable expectations,” they add.

The CSA also says in plans to publish additional amendments in 2020 to prohibit the payment of trailing commissions by fund organizations to dealers who do not make suitability determinations.

OSC proposes restricting use of the DSC option

In a separate announcement released Feb. 20, the Ontario Securities Commission (OSC), published for comment, a proposed rule that would restrict the use of the DSC option in the sale of mutual funds.

The OSC’s rule would prohibit the sale of mutual funds with the DSC option, to clients who are 60 and over, or who have an investment time horizon that is shorter than the DSC schedule. Other proposed changes include a prohibition on sales to clients who intend to use borrowed money to finance their purchase, changes that would shorten the maximum DSC term to three years, and changes that would allow clients to redeem up to 10 per cent of the value of their investment without redemption fees. Those in financial hardship circumstances would also be allowed to redeem their investment without paying redemption fees.

The OSC says it expects the proposed rules would apply after June 1, 2022. Stakeholders are invited to submit comments in writing before May 21, 2020.

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