In its submission to regulators, IFIC highlights the potential negative impacts of the CSA’s proposed ban on DSCs and trailers paid to brokers and suggests alternative approaches.
In September, the CSA published for comment proposed amendments to the Mutual Funds Facility (NI 81-105) to introduce a ban on deferred sales charges and a ban on trailers where no suitability assessment has been carried out. The comment period ends today.
Like the Ontario government, which has said it does not support the proposed reforms, IFIC does not support a DSC ban because it limits investor choice.
“The DSC option plays an important role for some investors and certain types of investment strategies,” says IFIC in his letter. “Investors with small amounts of money to invest on a regular basis who want personalized investment advice continue to benefit from DSC.”
IFIC further states: “It would be an unusual regulatory solution to make regular investing more costly for smaller investors,” and adds that the DSC option discourages investors from investing short-term and reacting impulsively to market volatility.
The proposed DSC ban could also result in regulatory arbitrage if applied only to mutual funds and not to other products such as segregated funds, the letter states.
Regarding the conflict arising from DSC, IFIC argues that disclosure, governance and compliance reviews adequately address this conflict, and that disclosure is further improved by CRM2 and the proposed customer-centric reforms.
Read: IFIC CEO criticizes customer-centric CSA reforms
Therefore, instead of banning DSC, regulators should focus on compliance with supervisory, suitability and disclosure obligations in relation to DSC options, IFIC says.
IFIC is also critical of the proposed ban on trailers paid by fund organizations where no suitability assessment is carried out, arguing that investors should have a choice in accessing and paying for investment services, and should pay for the services they receive. To this end, trailers don’t just pay for advice, the letter notes, but can also include trading and access to capital markets, trading support and robust compliance programs.
Where the ban covers investment fund managers, IFIC makes a regulatory distinction.
“The investment fund manager represents the issuer submitting the report,” we read in the letter. “There is no direct connection with the end customer and no insight into the nature of the relationship between the participating dealer and the customer.”
Therefore, the proposed rule should prohibit dealers who have not made a suitability assessment from seeking or receiving payment for advice, IFIC argues.
Details, including practical implications for managers and dealers if the proposals are implemented, can be found in the article IFIC letter of request to regulators.
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