Firms, associations and reps weigh in on advisor compensation

The Canadian Investment Regulatory Organization (CIRO) following the amalgamation of its predecessor organizations, the Mutual Fund Dealers Association (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC), has been left with two broad constituents of financial services representatives that it regulates – those governed by the regulator’s Mutual Fund Dealer (MFD) rules and those governed by the CIRO Investment Dealer and Partially Consolidated (IDPC) rules.

These two groups of advisors and representatives have two different sets of rules governing how the end representative is paid. Specifically, those governed by MFD rules can have their compensation paid to a third party or personal corporation, where approved persons governed by IDPC rules are not permitted to use such an approach – a disparity the regulator began to address when it published a new position paper in January 2024, entitled Policy options for leveling the advisor compensation playing field.

The consultation paper proposed three policy options for leveling the compensation playing field, identified which option the regulator prefers, and asked specific questions it hopes that stakeholders can answer. In response to the call for comments which closed on March 25, the CIRO received 39 responses from a wide range of stakeholders, including investment dealers, mutual fund dealers, insurance companies, individual representatives and a range of associations.

Insurers weigh in 

Among the insurers which submitted feedback, including Desjardins, Manulife’s subsidiary, Manulife Wealth, Canada Life and Sun Life, responses were supportive, but varied. Sun Life says it supports the premise that investment dealer approved persons should be allowed to utilize the same compensation practices that mutual fund dealer approved persons “have used for decades,” they write.

“We believe that any proposed regulatory oversight of a directed commissions model under harmonized rules should be proportional to any known or realized risk. The mutual fund industry has allowed the practice of directing compensation for decades,” they add saying this has had a positive impact on advisors. “In our experience, there have not been any concerns or issues that have been identified to indicate that there is heightened risk in allowing investment dealer approved persons to use the same approach. In other words, the mechanics in allowing directed commissions does not create confusion, or risks to the client experience, relationships or disclosures.” 

Regulatory gaps 

FAIR Canada, however, disagrees, saying directed commission arrangements used by mutual fund dealers leave regulatory gaps. “We also have serious concerns that by focusing on its preferred approach, CIRO risks introducing new risks and significant new regulatory costs and burden for very little added investor protection benefits. Simply put, this position paper puts the cart before the horse,” they write. “We are disappointed that CIRO is considering using its limited regulatory resources, as well as the resources of CSA members and provincial governments, beyond what is necessary to address the current inconsistency.” The incorporation options presented by CIRO in its position paper require provincial and territorial governments to amend local securities legislation.

Manulife Wealth, meanwhile, opts for CIRO’s third presented option, the registered corporation model. “While we are particularly in support of the registered corporation approach because it aligns with Manulife’s business needs, we also recognize that limiting incorporation to just one incorporation model may not be necessary and that CIRO could instead encourage the availability of different options so that dealers and advisors may better adjust to their operational, business and client concerns.” 

That company’s submission also indicates support for the Investment Industry Association of Canada (IIAC) submission’s suggestion that incorporation models created by CIRO should include both registerable and non-registerable activity. (Other submissions also detail the operational challenges which could ensue should the two need to be separated.)

“We also believe that to retain proper oversight, an advisor’s corporation must be directly owned by the registrant and/or their immediate family members. Without this guardrail, we will see a dynamic emerge where third-party organizations buy out these advisory businesses, leaving only the advisor registered with us, and no meaningful relationship with or oversight over the actual owner of the business,” Manulife warns.

Another submission, this time from Worldsource Wealth Management, states nearly the opposite, providing a discussion about the reality where corporate branch structures and instances where the dealer member already owns the advisor’s book of business. It advocates for CIRO to remove the corporate ownership rules proposed altogether. “CIRO’s proposal to limit an incorporated approved person corporation’s shareholders would also limit the pool of individuals that would have the financial resources to purchase a book of business,” they state. “It would further strain the ability of the registrant to seek top dollar for their book of business, given the limited number of individuals that would be allowed to purchase that book of business.” 

A critical initiative 

Finally, Canada Life’s submission calls the CIRO effort a critical initiative, advocating for the regulator to collaborate with the Canadian Securities Administrators (CSA) to permit corporations to engage in registerable activity, by pursuing the second option contemplated in the CIRO position paper –the incorporated approved person approach. In the interim, however, it recommends the regulator also pursue its first suggested option, the enhanced directed commission approach. 

Both approaches are outlined in the CIRO position paper, available here. 

“Permitting corporations to engage in registrable activities under option 2 is the optimal solution,” they write. “It is imperative, however, that the corporation be permitted to engage in registerable activity,” they add, saying the second option must not be implemented otherwise. “In the interim, CIRO should act swiftly to level the playing field by implementing option 1.” 

They add that the transition to any new approach should not be underestimated. It encourages CIRO to allow mutual fund advisor incorporation arrangements to continue. To the extent that a transition would be required for those advisors, as well, it asks for a transition period of no less than four years. 

Other factors to consider  

In its own submission, meanwhile, the Independent Financial Brokers of Canada (IFB) points out that some jurisdictions may continue to disallow incorporation: “We wonder how successful any implementation will be given that some jurisdictions may continue to disallow any incorporation options. If these jurisdictional differences continue unresolved, incorporation will continue to be inaccessible for advisors licensed in Alberta and under the AMF (Autorité des marchés financiers), and for those licensed in multiple jurisdictions when they include Alberta and Quebec,” the IFB states. “It will be important for CIRO and the CSA to work towards resolving these discrepancies.” 

Tax laws 

More than one submission also raises concerns about the Canada Revenue Agency’s (CRA) acceptance of the incorporation schemes proposed.

“As CIRO notes, the position paper does not engage in a discussion or analysis of compliance with applicable tax laws. Accordingly, CIRO and others could spend considerable regulatory resources to develop and implement a proposed approach the CRA rejects. Simply put, CIRO has not put forward sufficient evidence that the benefits will outweigh the costs of its expanded options,” FAIR Canada writes. “Without clarity on the application of relevant tax laws or the CSA’s willingness to approach any of the proposed options, it is premature to seek comment on them,” 

Similarly, PMAC, the Portfolio Management Association of Canada also requests more information from the regulator. 

“We believe that before making any changes, it should be determined whether the use of personal corporations in the manner described in the position paper complies with the relevant corporate, securities, and taxation laws,” they warn. “The determination may well indicate which of the proposed options, if any, is preferable from a regulatory point of view. As indicated in the position paper, any rule amendment should be subject to publication for public comment and CSA review and approval. It is difficult to understand how stakeholders and the CSA can properly consider any proposed changes without this information.” 

Related: 
Regulator proposes incorporation for approved persons