Submissions to Government

Canadian Securities Administrators Consultation Paper 81-408 – Consultation on the Option of Discontinuing Embedded Commissions


The Portfolio Management Association of Canada (“PMAC”), through its Industry, Regulation & Tax Committee, is pleased to have the opportunity to provide comments on the Canadian Securities Administrators’ (“CSA”) Consultation Paper 81-408 – Consultation on the Option of Discontinuing Embedded Commissions (the “Consultation”). Capitalized terms used in this letter but not defined here have the same meaning given to them in the Consultation.

About PMAC and our approach to this Consultation

PMAC represents investment management firms registered to do business in Canada as portfolio managers. PMAC members encompass both large and small firms managing total assets in excess of $1.5 trillion for institutional and private client portfolios[1]. Even though PMAC represents firms registered to do business under National Instrument 31-103 – Registration Requirements and Exemptions (“NI 31-103”) as portfolio managers (“PMs”), as of 2016, over 65% of our members are also registered as investment fund managers (“IFMs”).

PMAC is cognizant that the Consultation and impact of any decision by the CSA to discontinue embedded commissions will affect various registration categories and business models to different degrees. Through data collected by PMAC in a 2017 survey, we noted that member firms are compensated for different services based on a wide variety of fee models, but that the most prevalent compensation model is fees charged based on a percentage of an investor’s assets under management.

For the purposes of this letter, PMAC’s response is primarily focused on the implications that the Consultation may have for PMs, their business ecosystem, the securities they invest in, and their clients.  Where we have received more general feedback on the Consultation we believe could be useful to the CSA from a practical or operational perspective, we have also included such information here.

[1] For more information about PMAC and our mandate, please visit our website at:


PMAC advocates for the highest standard of unbiased portfolio management in the interest of the investors served by our members. In fact, that is PMAC’s mission statement: advancing standards. For this reason, we are consistently supportive of measures that elevate standards in the industry, enhance transparency, improve investor protection and benefit the Canadian capital markets as a whole.

PMAC would like to thank the CSA for their work in drafting the Consultation as well as for mandating an extended comment period to allow stakeholders to gather data and ideas around alternative measures and/or the potential effects of discontinuing embedded commissions. Should the CSA determine as a result of the Consultation that discontinuing embedded commissions is the only way to sufficiently manage or mitigate the identified investor protection and market efficiency issues they believe arise through the use of embedded commissions, PMAC believes that the comments solicited under Part 4 – Regulatory Impact and Part 5 – Mitigation Measures of the Consultation will be critical for the CSA to carefully consider to ensure that measures are adopted to minimize disruption and to mitigate any negative impacts to investors, industry and our markets.

PMAC continues to support and champion the ongoing efforts of the CSA to identify opportunities to improve the investor-adviser relationship. We believe that the integrity of the client-registrant relationship is of crucial importance to confidence in the markets, a healthy economy and access to investment advice for all Canadians. We also believe that ensuring broad access to a variety of investment products and investment advice that is provided with the highest levels of integrity and skill is in the best interest of Canadians as a whole. We express our concern with any measures – or the manner of implementation thereof – that could either harm or hamper access to investment choice and advice.

Summary of PMAC’s key recommendations

  1. Consider any new, alternative options to banning embedded commissions put forward to the CSA as a result of the Consultation that would address the CSA’s investor protection and market efficiency concerns with a view to improving outcomes and minimizing the disruptive impact of any such change on investors and stakeholders.
  2. Review the feedback received as part of this Consultation in conjunction with the proposed changes to be implemented as a result of CSA Consultation Paper 33-404 – Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (“CSA 33-404”) as one way to assist in addressing certain investor protection concerns and alleviating the investor expectations gap identified by the CSA.
  3. Regardless of the determination made as a result of the Consultation, focus on bolstering investor education and outreach as a critical way to increase investor knowledge about the importance of investing, the benefits of advice, the nature of the various investor-registrant relationships, including the impact of dealer compensation on investment returns, and products available to help Canadian households meet their savings and retirement goals. Change within the industry without corresponding outreach to investors in general runs the risk of disrupting business without achieving the CSA’s goals of increased alignment between investors and dealers and of increased investor negotiating power and fee transparency.
  4. Where possible, maintain as much investor choice as possible with respect to the ways in which investors can pay for advice. Where feasible, encourage the use of innovative regulatory initiatives and technologies for both online and traditional firms to address the risk of an advice gap. Streamline any regulatory action arising out of the Consultation, CSA 33-404 and any future “CRM3” amendments to minimize the impact of such changes on firms and to allow advisers to focus on servicing their clients.
  5. Work strenuously to harmonize the regulation of compensation models across other applicable regulators to ensure that the possibility for regulatory arbitrage is minimized, especially if other products with embedded commissions continue to be available in other regulatory environments. We believe that a lack of harmonization will lead to regulatory arbitrage to the detriment of the CSA’s goals in the Consultation.
  6. If the CSA decides to discontinue embedded commissions, carefully consider feedback in respect of necessary technical, operational, client communication and other aspects required for stakeholders to effectively transition to the new requirements with minimal disruption. Aspects of such transitional planning include the need for FundServ’s technology to operationalize the redemptions for investors’ fees to avoid a very onerous manual process and to allow sufficient time for meaningful investor education by firms with respect to the nature of the redemptions for fees paid that will appear on their CRM2 reporting. Members anticipate that these redemptions, without proper education and messaging, may affect the performance reporting and confuse clients, resulting in an influx of investor calls.

Each of these recommendations and additional comments are discussed in turn below.

Read the letter.