Citing conflict of interest concerns, securities regulators are launching a review of chargebacks at mutual funds with a view to possibly overhauling sales practice rules.
Staff at the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) are reviewing the use of chargebacks – when dealers require representatives to prepay commissions or fees if a customer redeems a newly purchased fund within a set period – when selling mutual funds .
This practice has raised concerns among regulators because it creates an incentive for sales representatives to ensure customers keep their funds until the chargeback period expires, rather than basing their advice solely on the investor’s best interests.
This issue was highlighted by the Canadian Council of Insurance Regulators and the Canadian Insurance Regulatory Organizations in a consultation document issued last year in connection with compensation practices related to the sale of segregated funds.
Earlier this year, the same regulators announced that they were developing guidance on the types of controls required to prevent harm to investors from seg fund chargebacks.
Today, the CSA indicated that while the practice is not believed to be as common in mutual fund sales, it nonetheless raises the same concerns regarding conflicts of interest and investor protection.
“CSA strives to improve investor protection. The information obtained from this review will help us determine whether further regulatory reform is necessary to align certain mutual fund sales practices with customer interests,” said Stan Magidson, chair of the CSA and chair and CEO of the Alberta Securities Commission, in a release speech.
Regulators have indicated that the results of the chargeback review, together with the earlier review of proprietary funds sales practices, will impact possible changes to mutual fund sales practices rules or other regulations.
