In a submission to regulators, IFIC highlights potential negative outcomes from CSA’s proposed ban on DSCs and trailers paid to brokers, and suggests alternate approaches.
In September, CSA published for comment proposed amendments to the mutual funds instrument (NI 81-105) to implement a ban on deferred sales charges and prohibit trailers where no suitability assessment is made. The comment period ends today.
Like the Ontario government, which has said it doesn’t support the proposed reforms, IFIC isn’t onside with the DSC ban because it limits investor choice.
“There is a role for the DSC option for certain investors and certain types of investment strategies,” says IFIC in its letter. “Investors with small amounts to invest on a regular basis who want personalized investment advice continue to be well served by the DSC option.”
IFIC further says, “It would be an unusual regulatory outcome to make it more costly for smaller investors to invest on a regular basis,” and adds that the DSC option discourages investors from short-term investing and impulsive responses to market volatility.
The proposed DSC ban could also result in regulatory arbitrage if applied only to mutual funds and not other products, such as segregated funds, says the letter.
As far as the conflict that arises from DSCs, IFIC says that disclosure, supervision and compliance reviews properly manage that conflict, with disclosure further enhanced by CRM2 and proposed client-focused reforms.
As such, instead of a DSC ban, regulators should focus on compliance with supervision, suitability and disclosure obligations as they relate to the DSC option, says IFIC.
IFIC also critiques the proposed ban on trailers paid by fund organizations where no suitability determination is made, saying investors should have choice in how they access and pay for investment services, and should pay for services received. To that end, trailers don’t pay only for advice, notes the letter, but might also cover trading and access to capital markets, trading support and robust compliance programs.
Where the ban extends to investment fund managers, IFIC makes a regulatory distinction.
“The investment fund manager represents the reporting issuer,” says the letter. “It does not have a direct relationship with the end client and has no visibility into the nature of the relationship between the participating dealer and the client.”
Thus, the proposed rule should prohibit dealers that don’t make a suitability determination from soliciting or receiving payment for advice, says IFIC.
For full details, including practical implications for managers and dealers if the proposals were implemented, read IFIC’s submission letter to the regulators.