What happens if DSCs aren’t banned? SROs respond

If CSA’s proposed ban of deferred sales charges (DSCs) isn’t adopted, would the SROs take action of their own?

That was an audience question to a panel at IFIC’s annual leadership conference in Toronto on Thursday.

Recent CSA proposals ban deferred sales charges (DSCs), as well as trailing commissions where no suitability recommendation is made. The Ontario government doesn’t support the proposal. Also proposed are client-focused reforms relating to KYC, KYP, suitability, conflicts and disclosure.

“We’ve done a lot as it relates to DSC,” said panellist Karen McGuinness, senior vice-president, member regulation—compliance at the MFDA, referring to a past MFDA sweep. “We’re not stopping.”

The SRO will be “taking action” where it sees significant harm to investors, she said, regardless of the potential DSC ban.

Marsha Gerhart, vice-president, member regulation policy at IIROC, said she “absolutely” agreed with that position.

A separate panel with regulators from the OSC and Autorité des marchés financiers (AMF) provided clarification on trailing commissions.

Panellist Hugo Lacroix, senior director, investment funds branch at the AMF, said fund managers are asking if they can still use trailing commissions. The answer lies with the client-focused reforms (CFRs), said Lacroix.

“Receiving compensation from a third party is a conflict,” he said, which must be resolved in the best interest of the client, according to the proposals. The CFRs should be considered in aggregate before dealers can accept payment from third parties, he said.

Class action lawsuits have been proposed by Siskinds LLP and Bates Barristers PC alleging investors who hold mutual funds in discount brokerages receive no value for the trailing commissions they pay. The firms have proposed suits against CIBC Trust Corp., Scotiabank’s 1832 Asset Management LP and TD Asset Management Inc. The allegations have not been proven in court.

Lacroix said another industry concern is how the DSC ban will affect young advisors building their books. Consultations will be held with young advisors to discuss transition ideas, he said.

Harmonizing SRO rules with client reforms

The panel featuring the MFDA’s McGuinness and IIROC’s Gerhart also discussed the CFRs, as well as compensation conflicts and the SROs’ regulatory initiatives for the next year.

McGuinness said that SRO rules would have to be harmonized with the proposed CFRs, resulting in amendments to MFDA policy and notices—but it’s too early to anticipate changes, she said.

Gerhart noted that the CFRs pose a challenge for the breadth of products offered on IIROC platforms, since KYP amendments call for comparative analysis of a firm’s offerings versus others on the market. IIROC must consider how the proposals can be scaled to different business models, she said.

While McGuinness acknowledged that the reforms represent a lot of regulation coming down the pipe, she suggested that those who aim for minimum compliance are off the mark. “It breaks down to doing what’s right for the client,” she said.

Read: IFIC president critiques CSA’s client-focused reforms

MFDA examinations will continue to include compensation and sales-incentive practices. Firms generally rely on fund companies to comply with mutual fund sales practices, without considering their own obligations to supervise and address conflicts, she said. Further, the MFDA’s conflict-of-interest rule isn’t restricted to mutual fund activity, she said, and includes compensation for exempt products or referral arrangements, for example.

Gerhart said IIROC would be looking at gifts and payments paid by fund managers to dealers as part of its enhanced testing related to compensation-related conflicts.

The OSC has handed out administrative penalties to a number of dealers this year for offering higher commission fees to its reps for selling proprietary funds, and for excessive spending in their mutual fund sales practices.

Regulatory panellist Felicia Tedesco, deputy director, operations, compliance and registrant regulation branch at the OSC, said sales incentives continue to be a focus for the commission—in particular, business promotion activities. The commission plans to send a sales-incentives survey to a sample of firms with questions on these activities and a request for specific data. The OSC will also be looking at firms’ related policies and procedures to assess compliance, she said.

She added that data from a risk-assessment questionnaire given to firms will be analyzed, with firms ranked for risk and a subsequent review of those that are deemed high-risk.

Other initiatives for 2018-19

McGuinness said she expects an update of the MFDA’s total cost reporting proposal to be published by year-end. Comments have revealed three themes: reporting will be a major undertaking for the industry and should be collaborative with IIROC and CSA, and further research is needed on the best way to convey reports to clients.

Other initiatives this year include continuing education (CE) and data collection.

McGuinness said further consultation on CE is planned with members, advisors and education providers, for input on accreditation standards and compliance’s tracking of CE requirements. “If all goes as planned, our CE requirements could be in place sometime in 2020,” she said.

Data collected from advisors’ books of business in 2016 are being used in regular exams and in a targeted sweep of books with a concentration in exempt or sector funds, and medium-high to high-risk funds, particularly for seniors. New client data will be collected this year to enhance the SRO’s risk-based approach to compliance, she said.

Gerhart said IIROC is rethinking investor protection as Canadians live longer and potentially outlive their savings. Investor protection for seniors is also the focus of safe harbour considerations when a temporary hold is placed on a senior’s account. The SRO is considering when and how safe harbour would be invoked and for how long, as well as how prescriptive the guidance should be.