Securities regulators are still contemplating whether to ban mutual fund trailer fees — for now though, they say that funds intended for fee-based accounts should not carry trailers.

In the latest edition of the Ontario Securities Commission’s (OSC) Investment Funds Practitioner, the regulator indicates that it is problematic for an investment fund series that is intended for fee-based accounts to include embedded trailer commissions.

“This type of dual compensation structure is inconsistent with a critical attribute of the fee-based series, namely the negotiation of the dealer’s compensation, which is intended to provide investors with heightened transparency of the cost of the dealer’s services and a clear expectation of the services to be rendered in exchange for the negotiated fee,” it says.

The commission says that having a trailing commission embedded in a fee-based series “blurs the lines between the attributes of a fee-based series and the embedded fee series and is potentially misleading for investors.”

And, it also notes that staff in the OSC’s Compliance and Registrant Regulation Branch indicate that “this practice may raise the issue of double charging by dealers, which is contrary to a dealer’s general duty to deal fairly, honestly and in good faith with its clients.”

The OSC says that it has informed fund managers that new funds with fee-based series should not have an embedded trailing commission. And, as the prospectuses for existing funds come up for renewal, it will be asking fund managers to stop taking new investments in the series, and switch investors out of the series, or remove the dual compensation structure.

“We continue to review and monitor developments on mutual fund fee structures and dealer compensation models and will provide further guidance as needed,” it concludes.