In a submission to the Canadian Securities Administrators (CSA), the Investment Funds Institute of Canada (IFIC) highlights potential negative outcomes from CSA’s proposed ban on deferred sales charges (DSCs) and trailers paid to brokers, and suggests alternate approaches.
In September, the CSA published for comment proposed amendments to the mutual funds instrument (NI 81-105) to implement a ban on deferred sales charges and prohibit trailers where no suitability assessment is made. The comment period ended Thursday.
Like the Ontario government, which has said it doesn’t support the proposed reforms, IFIC isn’t onside with the DSC ban because it limits investor choice.
Ontario takes aim at DSC ban
“There is a role for the DSC option for certain investors and certain types of investment strategies,” says IFIC in its letter. “Investors with small amounts to invest on a regular basis who want personalized investment advice continue to be well served by the DSC option.”
IFIC further says, “It would be an unusual regulatory outcome to make it more costly for smaller investors to invest on a regular basis,” and adds that the DSC option discourages investors from short-term investing and impulsive responses to market volatility.
The proposed DSC ban could also result in regulatory arbitrage if applied only to mutual funds and not other products, such as segregated funds, says the letter.
As far as the conflict that arises from DSCs, IFIC says that disclosure, supervision and compliance reviews properly manage that conflict, with disclosure further enhanced by CRM2 and proposed client-focused reforms.
As such, instead of a DSC ban, regulators should focus on compliance with supervision, suitability and disclosure obligations as they relate to the DSC option, says IFIC.
IFIC also critiques the proposed ban on trailers paid by fund organizations where no suitability determination is made, saying investors should have choice in how they access and pay for investment services, and should pay for services received. To that end, trailers don’t pay only for advice, notes the letter, but might also cover trading and access to capital markets, trading support and robust compliance programs.
Where the ban extends to investment fund managers, IFIC makes a regulatory distinction.
“The investment fund manager represents the reporting issuer,” says the letter. “It does not have a direct relationship with the end client and has no visibility into the nature of the relationship between the participating dealer and the client.”
Thus, the proposed rule should prohibit dealers that don’t make a suitability determination from soliciting or receiving payment for advice, says IFIC.
For full details, including practical implications for managers and dealers if the proposals were implemented, read IFIC’s submission letter to the regulators.
The CSA’s proposed rules around mutual fund sales practices shouldn’t apply to pooled funds, the Portfolio Management Association of Canada (PMAC) says in its submission to the regulator.
PMAC put aside the question of banning deferred sales charges and prohibiting trailers where no suitability assessment is made, saying that only a small percentage of its 250 member firms are compensated that way. Other organizations, including the Investment Funds Institute of Canada, have focused on the proposed ban.
Instead, PMAC said the use of pooled funds is not the same as retail mutual funds and they should be treated differently under the proposed rules.
Pooled funds are generally available only to sophisticated investors, whose clients benefit from other protections, including investment management arrangements, discretionary management under an investment policy statement, and portfolio managers’ duty of care, PMAC said.
“We note that the CSA has not articulated — nor are we aware of — any specific regulatory, market or investor protection concerns arising from the provision of pooled funds to investors that would necessitate the application of NI 81-105 to such funds,” the submission said.
More regulation could increase costs that would be passed on to pooled fund investors, it said, which would be warranted only if there were specific policy concerns.