Queen's Park, Ontario legislature, exterior

The consultation on the Ontario Securities Commission’s (OSC) proposal to retain deferred sales charge (DSC) fund structures has succeeded in pleasing no one. Investors still want DSCs gone altogether, while DSC defenders question the regulator’s proposed restrictions.

The rest of Canada’s regulators are moving ahead with a ban on the DSC structure, but — at the behest of the Ontario government — the OSC is proposing a series of restrictions on their use that are designed to curb the worst negative effects, without eliminating the DSC option altogether.

The proposed restrictions include capping the length of redemption schedules, banning leverage and limiting the use of DSCs to investors under 60 with accounts smaller than $50,000. The consultation period on the proposals closed on July 6.

The comments submitted during the consultation showed strong support among retail investors for simply banning DSCs. Numerous individual investors submitted comments calling on the OSC to join the rest of the Canadian Securities Administrators (CSA) and scrap DSCs altogether.

This view is backed by investor advocacy groups, such as the OSC’s independent Investor Advisory Panel, the Canadian Foundation for Advancement of Investor Rights, Kenmar Associates, the Small Investor Protection Association and CARP, a seniors association.

A handful of industry participants also argued in favour of eliminating DSCs — including the Portfolio Management Association of Canada (PMAC), The Canadian Advocacy Council of CFA Societies Canada, Vanguard Investments Canada Inc. and Morningstar Research, Inc.

Their reasons range from improved investor protection to avoiding added regulatory burden, which would be created if the OSC deviates from the rest of the CSA on this issue.

Industry trade group PMAC wrote: “In terms of the impact on the industry, the absence of a harmonized solution to regulate the use of DSCs will ultimately raise costs to investors and regulatory burden for Ontario [fund managers] and will not be an optimal long-term solution in the best interests of Canadian investors.”

Additionally, PMAC reported that a survey of its members found little to no support for retaining DSCs, with some fund managers saying that “they consider DSCs to be non-client friendly…and should be eliminated altogether, and that firms do not believe that DSCs are an appropriate fee vehicle.”

Industry support for banning DSCs on investor protection grounds stems from long-standing concerns about the conflicts of interest that DSC structures create and the constraints on investor liquidity.

“We feel wholeheartedly that the discontinued use of the DSC option provides flexibility, greater transparency, and ultimately better odds of success for the retail investor,” Morningstar noted in its submission.

Fund giant Vanguard said that the CSA’s decision to eliminate DSCs outright “is an important step towards aligning the sale and distribution of mutual funds with the best interests of Canadian investors.”

Several commenters also noted that the economic and financial market effects of Covid-19 highlight the concerns about locking investors into funds via DSCs.

Yet, the DSC structure still has its defenders.

Industry trade group the Investment Funds Institute of Canada, along with several of the major fund companies — Fidelity Investments Canada ULC, Mackenzie Financial Corp., Invesco Canada Ltd. and AGF Investments Inc., as well as several other industry players — submitted comments in support of preserving the DSC.

Their submissions ranged from calling for the regulator to drop its proposals altogether to preserve DSCs in their current form, to modifying the proposed restrictions on DSCs.

Among other things, these recommendations included increasing the proposed age limit, boosting the maximum-allowed account size and allowing for longer redemption schedules.

The unusual circumstances surrounding the DSC issue — the Ontario government’s insistence on preserving DSCs in defiance of a policy decision by the CSA that was built on years of consultation and debate — also feature in the comments.

In its submission, Kenmar noted that the OSC’s proposals are unusual: rather than seeking to improve investor protection, the proposals aim to determine “how best to retain the toxic DSC-sold mutual fund — an objective of the Ontario [government], not one of the OSC.”

A retail investor who opposes the continued use of DSCs wrote: “While I appreciate the government’s Open For Business intention, it should not support the monkey business associated with retaining the DSC option for Ontario investors.”

Nevertheless, in its statement of priorities for fiscal 2021, the OSC said that it intends to finalize its proposals to restrict the use of DSCs, thereby “limiting DSC sales practices that are harmful to investors in Ontario.”