On May 7 the Ontario Securities Commission (OSC) announced that it will join in on the ban on deferred sales charge (DSC) sales of mutual funds, which the rest of the Canadian Securities Administrators (CSA) announced in February 2020. The ban is expected to be effective June 1, 2022 and will be achieved through a prohibition on the payment by fund organizations of upfront sales commissions to dealers. Like The Beatles in their Yellow Submarine, the CSA will be all together now in their ban of DSCs. The CSA’s multilateral ban, not including the OSC, was discussed in our February 2020 Bulletin.

The OSC reported that it received support for a harmonized DSC ban from industry stakeholders who commented on the OSC’s Proposed Rule 81-502 Restrictions on the Use of the Deferred Sale Charge Option for Mutual Funds, published in February 2020 (the Proposed Rule). The Proposed Rule would not have banned DSCs, but rather imposed restrictions on the use of DSCs. Among other things, the restrictions would have limited redemption schedules to three years and dealers would have been prohibited from selling funds with a DSC option to clients who were either aged 60 or over or had an investment horizon shorter than the DSC schedule.

The OSC received 34 comment letters on the Proposed Rule. Approximately 70% of commenters advocated for a complete ban of DSCs and urged the OSC to harmonize the rules with the CSA. Commenters expressed concern that the Proposed Rule would create a two-tiered regulatory approach, which would create compliance issues, be costly and burdensome to implement and monitor, and cause market inefficiency. Commenters also expressed concern that even with the restrictions under the Proposed Rule, there would still be negative investor outcomes with the DSC option. The OSC also noted that mutual funds with the DSC option have been in net redemptions since 2016 and had a total net outflow of $3.34 billion in Canada during 2020. During the same time, there was a total net inflow of $23 billion into mutual funds with no-load options. The OSC also noted that with advances in industry innovation, Ontario investors have access to affordable investment options, including no-load funds and exchange-traded funds that are available to investors of all account sizes. Approximately 25% of the commenters expressed support for the Proposed Rule and provided suggestions on the proposed restrictions.

One of the arguments in favour of DSCs is that they help smaller investors access financial advice that they would not otherwise be able to receive. DSCs help pay for upfront commissions paid by fund mangers to advisers. The argument is that, with the upfront commission, the adviser can afford to deliver appropriate advice and guidance to investors over several years. This would be the case even for clients with smaller accounts, where the adviser might otherwise not be able to afford to service that client.

With the announcement on May 7, the OSC also published OSC Staff Notice 81-731 Next Steps on Deferred Sales Charges. The OSC will now bring forward final amendments to National Instrument 81-105 Mutual Fund Sales Practices that will prohibit fund organizations from paying upfront sales commissions to dealers. The prohibition on the payment by fund organizations of upfront commission to dealers will result in the discontinuation of all forms of the DSC option, including low-load options. The redemption schedules for mutual fund investments purchased under a DSC option before June 1, 2022 will be allowed to run their course until their scheduled expiry.

May 31, 2021