CSA Notice and Request for Comment: Draft Amendments to Regulation 31-103 Prohibiting Chargebacks in Investment Fund Distribution

CSA Notice and Request for Comment
Draft Amendments to
Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations Prohibition on the Use of Chargebacks in the Distribution of Investment Fund Securities June 26, 2025 Introduction The Canadian Securities Administrators (the CSA or we) are proposing amendments to prohibit the use of chargebacks in the distribution of investment fund securities in order to better align the interests of dealing representatives with the interests of their clients. Chargebacks involve a compensation practice where a dealing representative is paid an upfront commission, fee or compensation when a client purchases securities. Chargebacks occur when the client redeems all or part of their securities before a fixed schedule as determined by the dealer firm, and the dealing representative is required to pay back all, or part, of the upfront commission or compensation received. We are publishing, for a 90-day comment period, draft amendments (the Draft Amendments) to Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (Regulation 31-103). The public comment period expires on September 24, 2025. The text of the Draft Amendments is published with this notice and will also be available on the websites of the following CSA jurisdictions:
www.bcsc.bc.ca www.asc.ca www.fcaa.gov.sk.ca www.mbsecurities.ca www.osc.ca www.lautorite.qc.ca www.fcnb.ca www.nssc.novascotia.ca

Substance and Purpose
The Draft Amendments aim to address the inherent significant conflict of interest arising from the use of chargebacks in the distribution of investment fund securities. The Draft Amendments seek to improve investor protection and maintain investor confidence in our capital markets. Specifically, the Draft Amendments prohibit the use of chargebacks in the distribution of investment fund securities. Background Under a compensation model using chargebacks, a dealing representative is paid an upfront commission, fee or compensation by the dealer firm or another registered firm when a client serviced by the representative purchases securities. If the client redeems all or part of their securities before the end of a fixed schedule as determined by the dealer firm or other registrant (the chargeback period), then the dealing representative is required to pay back all, or part, of the upfront commission, fee or compensation previously received to the dealer firm. The use of chargebacks in the distribution of investment fund securities raises an inherent conflict of interest due to the misalignment of the interests of dealing representatives and their clients. A dealing representative benefits financially by being able to keep the entire amount of the upfront commission if their client does not redeem their securities until after the chargeback period. However, a client may want to, or need to, redeem all or part of their securities before the end of the chargeback period. It is also reasonably foreseeable that when reassessing the suitability of securities held by a client, including upon the required periodic review of know your client information prescribed by securities legislation, a dealing representative may also be influenced to put their financial interests ahead of their client’s interests and recommend that a client continue to hold securities which are subject to a chargeback period. The conflict of interest from the use of chargebacks increases as the amount of the upfront commission increases and the duration of the chargeback period increases. The deferred sales charge (DSC), which is now banned, raised similar investor protection issues. The DSC differs from chargebacks because the DSC was a sales charge option (i.e., where a redemption by a client under a DSC would have triggered a payment by the investor to the investment fund manager) whereas the chargeback is an internal dealer compensation practice (i.e., where a redemption by a client may trigger a payment of all or part of an upfront commission from the dealing representative to their dealer firm). In both scenarios, the interests of different parties, such as the interests of the client and those of a registrant, are inconsistent or divergent. More specifically, chargebacks give rise to an inherent conflict of interest because (i) the dealing representative may be influenced to put their interests ahead of their client’s interests, and (ii) there is a potential detriment to which
the dealing representative may be subject, which may compromise the trust that a reasonable client has in their dealing representative. We are of the view that a dealing representative may attempt to dissuade their client from redeeming all or part of their securities in order to avoid paying back all or part of the upfront commissions that the dealing representative has received from the dealer firm.

While the current use of chargebacks for the distribution of investment funds is limited, we are of the view that it is important at this time to address this significant investor protection issue before chargebacks become entrenched and a widespread industry practice. The proposed ban on chargebacks would apply to all registered representatives, investment fund managers, advisers, dealers and their affiliates in respect of the distribution of securities of investment funds that are reporting issuers. The CSA have consulted with Canadian Investment Regulatory Organization (CIRO) in developing the Draft Amendments. Comments from all registrant categories will be beneficial to the rule development process. CIRO dealer members are registrants under securities legislation, and, as a result, concurrently subject to requirements under securities legislation and self-regulatory organization rules (the CIRO Rules). CIRO may adopt conforming housekeeping amendments, the purpose of which would be to ensure that CIRO Rules remain aligned with requirements under securities legislation. Any conforming housekeeping amendments to CIRO Rules that are subsequently adopted will not solicit comment on the regulatory policy rationale underlying the Draft Amendments. Therefore, we encourage all CIRO members and other interested stakeholders to provide their comments on the Draft Amendments at this time. Questions for comment While the Draft Amendments would prohibit the use of chargebacks in connection with the distribution of securities of investment funds that are reporting issuers, similar inherent conflicts of interest may arise in respect of the distribution of other types of securities.

1. Should securities of investment funds that are non-reporting issuers also be subject to the
   proposed ban on the use of chargebacks? Why?
2. Are there other types of securities that should be subject to the proposed ban on the use of
   chargebacks? Why?
   Summary of the Draft Amendments
   The Draft Amendments prohibit the use of chargebacks in the distribution of investment fund securities. Effective Date We are proposing that the Draft Amendments will come into force six months after the final publication date.

Local Matters
An annex is being published in any local jurisdiction that is making related changes to local securities laws, including local notices or other policy instruments in that jurisdiction. It also includes any additional information that is relevant to that jurisdiction only. Request for Comments We welcome your comments on the Draft Amendments including the questions posed in the notice. Please submit your comments in writing on or before September 24, 2025. Please send your comments by email in Microsoft Word format. Address your submission to all of the CSA as follows:
British Columbia Securities Commission
Alberta Securities Commission
Financial and Consumer Affairs Authority of Saskatchewan Manitoba Securities Commission Ontario Securities Commission Autorité des marchés financiers Financial and Consumer Services Commission of New Brunswick Superintendent of Securities, Department of Justice and Public Safety, Prince Edward Island Nova Scotia Securities Commission Securities Commission of Newfoundland and Labrador Superintendent of Securities, Northwest Territories Superintendent of Securities, Yukon Superintendent of Securities, Nunavut Deliver your comments only to the addresses below. Your comments will be distributed to the other participating CSA jurisdictions. Me Philippe Lebel Corporate Secretary and Executive Director, Legal Affairs Autorité des marchés financiers Place de la Cité, tour PwC 2640, boulevard Laurier, bureau 400 Québec (Québec) G1V 5C1 Fax: 514 864-8381 Email: consultation-en-cours@lautorite.qc.ca The Secretary Ontario Securities Commission 20 Queen Street West 22nd Floor Toronto, Ontario M5H 3S8 Fax: 416 593-2318 Email: comments@osc.gov.on.ca

We cannot keep submissions confidential because securities legislation requires publication of a summary of written comments received during the comment period. All comments received will be posted on the website of each of the Alberta Securities Commission at www.asc.ca, the Ontario Securities Commission at www.osc.ca and the Autorité des marchés financiers at www.lautorite.qc.ca. Therefore, you should not include personal information directly in comments to be published. It is important you state on whose behalf you are making the submissions. This notice will also be available on the following websites of CSA jurisdictions:
www.bcsc.bc.ca www.asc.ca www.fcaa.gov.sk.ca www.mbsecurities.ca www.osc.ca www.lautorite.qc.ca www.fcnb.ca www.nssc.novascotia.ca Questions Please refer your questions to any of the following:
Autorité des marchés financiers
Gabriel Chénard
Senior Policy Analyst
Supervision of Intermediaries
Autorité des marchés financiers
Tel.: 514 395-0337, ext. 4482
Toll-free: 1 800 525-0337, ext. 4482
Email: gabriel.chenard@lautorite.qc.ca
British Columbia Securities Commission
Kathryn Anthistle
Senior Legal Counsel, Legal Services
Capital Markets Regulation Division
British Columbia Securities Commission
Tel: 604 899-6536
Email: kanthistle@bcsc.bc.ca
Alberta Securities Commission
Ali Zaheer
Senior Regulatory Analyst
Alberta Securities Commission
Tel: 403 297-2422
Email: ali.zaheer@asc.ca
Financial and Consumer Affairs Authority of
Saskatchewan
Curtis Brezinski
Compliance Auditor, Capital Markets
Securities Division
Financial and Consumer Affairs Authority of
Saskatchewan
Tel: 306 787-5876
Email: curtis.brezinski@gov.sk.ca

Manitoba Securities Commission
Chris Besko
Executive Director
Manitoba Securities Commission
Tel: 204 945-2561
1 800 655-5244 (Toll Free Manitoba only)
Email: chris.besko@gov.mb.ca
Ontario Securities Commission
Irene Lee
Senior Legal Counsel,
Investment Management Division
Ontario Securities Commission
Tel: 416 593-3668
Email: ilee@osc.gov.on.ca
Stephen Paglia,
Vice-President
Investment Management Division
Ontario Securities Commission
Tel: 416 593-2393
Email: spaglia@osc.gov.on.ca
Kat Szybiak
Senior Legal Counsel
Investment Management Division
Ontario Securities Commission
Tel: 416 593-3686
Email: kszybiak@osc.gov.on.ca
Elizabeth Topp
Associate Vice-President
Investment Management Division
Ontario Securities Commission
Tel: 416 593-2377
Email: etopp@osc.gov.on.ca
Financial and Consumer Services Commission of New Brunswick Clayton Mitchell Registration and Compliance Manager Securities Division Financial and Consumer Services Commission of New Brunswick Tel: 1 866 933-2222 Email: clayton.mitchell@fcnb.ca