The Ontario Securities Commission (OSC) has officially adopted a number of amendments to mutual fund sales practice rules, ending the sale of deferred sales charge (DSC) option mutual funds in Ontario, effective June 1, 2022.
Subject to ministerial approval – the amendments were delivered to the province’s Minister of Finance on June 3, 2021 – the amendments to National Instrument 81-105 Mutual Fund Sales Practices, changes to Companion Policy 81-105 Mutual Fund Sales Practices and changes to prospectus disclosure rules will prohibit the payment of DSC sales commissions to dealers.
Explored two separate proposals
The OSC says it explored two separate proposals aimed at addressing the investor protection issues from the use of the DSC option in the sale of mutual fund securities. One proposal sought to ban the DSC option while the other sought to restrict its use. “After carefully considering the comments received in response to both options which overwhelmingly expressed support for a harmonized Canada-wide ban on the DSC option, we have concluded that an outright ban on the DSC option is the best path forward,” they write
The OSC says the time between the publication of its notice announcing the changes and the effective date in 2022 will be sufficient for dealer firms and representatives who make use of the DSC option to transition their practices and operational systems. “For some dealer firms, this may also require a reassessment of their internal compensation arrangements,” the OSC adds. “We believe this should also give investment fund managers enough time to revise their mutual funds’ simplified prospectuses and fund facts documents to reflect the discontinuation of the DSC option in Ontario.”
In making its announcement, the OSC made two concessions: First, they say mutual funds purchased under the DSC option prior to the effective date will not need to be converted to another sales charge option. “The redemption schedules on those existing DSC holdings as of the effective date will be allowed to run their course until their scheduled expiry.”
Next, they note that there is an overlap of approximately 11 months between the date the DSC ban comes into effect and the effective date of client-focused reform rules. “There will also be a five month overlap period between the effective date of the DSC ban and the client-focused reforms’ enhanced suitability provisions, including the requirement to put the client’s interest first, which come into effect on December 31, 2021,” they write, adding that the Canadian Securities Administrators (CSA) has decided to grant relief form the enhanced client-focused rules when it comes to the sale of DSC products during the DSC transition period. “The OSC,” the notice states, “is supportive of similar blanket exemptive relief.”