CSA Staff Notice 81-332: Next Steps on Proposals to Prohibit Certain Investment Fund Embedded Commissions

CSA Staff Notice 81-332
Next Steps on Proposals to Prohibit Certain Investment Fund Embedded Commissions December 19, 2019 Introduction On September 13, 2018, the Canadian Securities Administrators (CSA or we) published for comment draft Regulation to amend Regulation 81-105 respecting Mutual Fund Sales Practices that would prohibit

• the payment of upfront sales commissions by fund organizations to dealers, and in so doing,
  discontinue sales charge options that involve such payments, such as all forms of the deferred sales charge option, including low-load options (collectively, the DSC option), and
• trailing commission payments by fund organizations to dealers who do not make a suitability
  determination, such as order-execution-only (OEO) dealers (collectively, the 2018 Consultation). The purpose of this notice is to provide an update on next steps. Background On January 10, 2017, we published for comment CSA Consultation Paper 81-408 Consultation on the Option of Discontinuing Embedded Commissions (the Consultation Paper), in which we identified and discussed key investor protection and market efficiency issues arising from mutual fund embedded commissions. The Consultation Paper sought specific feedback, including evidence-based and data-driven analysis and perspectives, on the option of discontinuing embedded commissions as a regulatory response to the identified issues and on the potential impacts to both market participants and investors of such a change, to enable the CSA to make an informed policy decision on whether to pursue this option or consider alternative policy changes. Further to our evaluation of all the feedback received throughout the consultation process, including written submissions and in-person consultations, the CSA decided on a policy response which we announced in CSA Staff Notice 81-330 Status report on Consultation on Embedded Commissions and Next Steps (CSN 81-330) published on June 21, 2018. The CSA proposed the following policy changes:

1. implement enhanced conflict of interest mitigation rules and guidance for dealers and
   representatives requiring that all existing and reasonably foreseeable conflicts of interest, including conflicts arising from the payment of embedded commissions, be addressed in the best interests of clients or avoided;
2. prohibit all forms of the DSC option and their associated upfront commissions in respect of
   the purchase of securities of a prospectus qualified mutual fund;
3. prohibit the payment of trailing commissions to, and the solicitation and acceptance of trailing
   commissions by, dealers who do not make a suitability determination in connection with the distribution of securities of a prospectus qualified mutual fund. In addition to announcing the CSA’s policy decision and providing a summary of the consultation process and the feedback received, CSN 81-330 provided an overview of the regulatory concerns that our proposed policy changes aim to address, and also discussed why we are not proposing to ban all forms of embedded commissions. The CSA published the 2018 Consultation for a 90-day comment period and requested feedback on transitional issues including a proposed transition period of 365 days from the date of final publication of the amendments. The CSA considered comment letters and feedback from stakeholders. Next Steps The securities regulatory authorities of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, Nova Scotia, Prince Edward Island, New Brunswick, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon (the Participating Jurisdictions) will publish for adoption final amendments in early 2020 to ban the DSC option. The Ontario Securities Commission will not be adopting final amendments to ban the DSC option. All members of the CSA will publish for adoption final amendments later in 2020 to ban payments of trailing commissions to dealers who do not make a suitability determination. Transition With respect to the ban of the DSC option, the Participating Jurisdictions anticipate that

• there will be a transition period of at least two years,
• on the effective date of the DSC ban, Participating Jurisdictions will not permit new sales
  using the DSC option in the Participating Jurisdictions, and
• DSC redemption schedules for sales made prior to the effective date of the DSC ban will
  be allowed to run their course in the Participating Jurisdictions.

The Participating Jurisdictions will provide more information when the final amendments are published, including any transitional provisions that may be required to allow the continued use of the DSC option after the Client Focused Reforms enhanced conflicts of interest requirements come into effect. With respect to the ban of OEO trailing commission payments, the CSA anticipate that there will be

• a transition period of at least two years, and
• additional adjustments to respond to stakeholder comments.
  Questions
  Please refer your questions to any of the following:
  Autorité des marchés financiers
  Gabriel Chénard
  Senior Policy Analyst, Investment Funds
  Tel: 514 395-0337, ext. 4482
  Toll-free: 1 800 525-0337, ext. 4482 gabriel.chenard@lautorite.qc.ca British Columbia Securities Commission Melody Chen Senior Legal Counsel, Corporate Finance Tel: 604 899-6530 mchen@bcsc.bc.ca Kathryn Anthistle Senior Legal Counsel Legal Services, Capital Markets Regulation Tel: 604 899-6536 kanthistle@bcsc.bc.ca Alberta Securities Commission Chad Conrad Legal Counsel, Corporate Finance Tel: 403 297-4295 chad.conrad@asc.ca

Brandon Rasula
Legal Counsel, Corporate Finance
Tel: 403 355-6298 brandon.rasula@asc.ca
Financial and Consumer Affairs Authority of Saskatchewan Heather Kuchuran Deputy Director, Corporate Finance Securities Division Tel: 306 787-1009 heather.kuchuran@gov.sk.ca The Manitoba Securities Commission Wayne Bridgeman Deputy Director, Corporate Finance Tel: 204 945-4905 wayne.bridgeman@gov.mb.ca Ontario Securities Commission Stephen Paglia Manager, Investment Funds and Structured Products Branch 416 593-2393 spaglia@osc.gov.on.ca Irene Lee Senior Legal Counsel, Investment Funds and Structured Products Branch 416 593-3668 ilee@osc.gov.on.ca Nova Scotia Securities Commission Chris Pottie Deputy Director, Registration and Compliance Tel: 902 424-5393 chris.pottie@novascotia.ca Financial and Consumer Services Commission (New Brunswick) Jason Alcorn Senior Legal Counsel and Special Advisor to the Executive Director Tel: 506 643-7857 jason.alcorn@fcnb.ca Office of the Superintendent of Securities, Prince Edward Island Steven Dowling Tel: 902 368-4551 Office of the Superintendent of Securities, Newfoundland Renée Dyer

Tel: 709 729-4909
Office of the Superintendent of Securities, Northwest Territories Tom Hall Tel: 867 767-9305 Office of the Superintendent of Securities, Nunavut Jeff Mason Tel: 867 975-6591 Office of the Yukon Superintendent of Securities Rhonda Horte Tel: 867 667-5466