Enhancing investor protections: CSA adopts final rules for the upcoming trailing commission ban

Do you know how much you pay in fees for your investments? If you don’t, you’re not alone. According to 2019 research from the Canadian Securities Administrators, less than half of Canadian investors are aware they pay fees for the operation, management and/or administration of their investment account. The same is true of indirect fees (such as trailing commissions made by investment funds to dealers for ongoing advice and other services).

Understanding the fees you pay for your investments is an important part of personal finance. With mutual funds, for example, these fees can impact the overall returns in a portfolio or influence when you buy, sell or hold an investment. This is particularly important as many investors now face shorter time horizons and heightened needs for liquidity due to continued economic uncertainty caused by the COVID-19 pandemic.

With these concerns in mind, we have developed a robust policy response to the investor protection and market efficiency issues resulting from the lack of transparency on the fees paid by investors on their mutual fund investments. Our recently published final rules to prohibit the payment and acceptance of trailing commissions where no suitability determination was required (OEO trailer ban), together with new conflict-of-interest rules that are being implemented under our Client Focused Reforms, will bring greater transparency to the fees paid by investors when they buy mutual funds.

What is the OEO trailer ban and why is it important?

We expect that the implementation of the OEO trailer ban will lead to an increased use of more transparent and salient fees (such as trading commissions, transaction fees, or other directly-charged fees) for the purchase and holding of mutual fund securities through dealers who are not required to make a suitability determination, which may better align with the costs of the services such dealers provide.

When will the OEO ban take place?

The OEO trailer ban takes effect on June 1, 2022. This is at the same time as rules adopted by all provinces and territories, except Ontario, that implement a ban on deferred sales charges (DSC) on mutual funds. DSCs are charged when an investor redeems his or her shares in a mutual fund, rather than when the initial investment is made. The OEO trailer ban affects all funds that pay trailing commissions, including funds sold under the DSC option.

The effective date considers the need for dealer firms and representatives to transition their systems and processes to comply with the new rules, reassess their internal compensation arrangements and implement new fee charging systems. Additionally, the date provides fund organizations with sufficient time to make a no-trailing commission mutual fund series available for OEO investors.

What comes next?

Once the OEO trailer ban is in effect, dealers who are not required to make a suitability determination will no longer be able to accept trailing commissions for mutual fund securities including those purchased under the DSC option and fund managers will no longer be able to pay trailing commissions to such dealers.

We strongly encourage investment fund managers and OEO dealers to accelerate their transition away from mutual fund series with trailing commissions in advance of the applicable ban. We also expect them to take any necessary measures to ensure that investors with DSC holdings will not be required to pay redemption fees as a result of actions taken to comply with the OEO trailer ban, and to clearly communicate the measures that they intend to adopt.

Along with the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, the CSA’s goal is to enhance investor protection and ensure that registrants treat investors fairly and recommend suitable products for them. Together, we will be highly attuned to inappropriate sales of DSC products ahead of the ban.  

For investors looking to purchase a mutual fund, always ask about the fees and charges and how they will impact your portfolio going forward.