The Portfolio Management Association of Canada (PMAC) is pleased to have the opportunity to submit the following comments regarding OSC Notice and Request for Comment – Proposed Ontario Securities Commission Rule 81-502 Restrictions on the Use of the Deferred Sales Charge Option for Mutual Funds (the Proposed Rule)(the Consultation).
PMAC represents over 285 investment management firms registered to do business in Canada as portfolio managers. PMAC’s members encompass both large and small firms managing total assets in excess of $2.8 trillion for institutional and private client portfolios. Of note, close to 70% of PMAC’s members are registered as investment fund managers (IFMs), managing both mutual funds and non-reporting investment funds (pooled funds).
We support Ontario’s decision to ban trailing commissions, which aligns with the policy decision in other Canadian Securities Administrators (CSA) jurisdictions.
However, with respect to the Consultation on the use of deferred sales charges (DSCs), given the lack of harmonization with other CSA jurisdictions, which have implemented a complete ban on the use of DSCs, PMAC does not believe it will be practical for firms to implement the Proposed Rule in Ontario alone, and ultimately, we do not believe the proposed changes will significantly improve investor outcomes. Moreover, as discussed below, there are unintended consequences associated with the Proposed Rule which may, in fact, cause investor harm.
PMAC recommends that Ontario reconsider the decision to deviate from other Canadian jurisdictions and instead, harmonize the DSC ban across Canada.
The reasons in support of discontinuing the use of DSCs are outlined in CSA Consultation Paper 81-408 – Consultation on the Option of Discontinuing Embedded Commissions, and include investor protection and market efficiency issues. All CSA jurisdictions other than Ontario determined that discontinuing the DSC option was the appropriate response to these concerns, and published the changes in Multilateral CSA Notice of Amendments to National Instrument 81-105 Mutual Fund Sales Practices, Changes to Companion Policy 81-105CP to National Instrument 81-105 Mutual Fund Sales Practices and Changes to Companion Policy 81-101CP to National Instrument 81-101 Mutual Fund Prospectus Disclosure relating to Prohibition of Deferred Sales Charges for Investment Funds (CSA Multilateral Notice).
In terms of the impact on the industry, the absence of a harmonized solution to regulate the use of DSCs will ultimately raise costs to investors and regulatory burden for Ontario IFMs and will not be an optimal long-term solution in the best interests of Canadian investors. Based on member feedback, the lack of national application and other aspects of the Proposed Rule make it costly, difficult to implement and burdensome to monitor, thereby increasing market inefficiency.
We have set out responses to the questions included in Annex D of the Consultation in this submission.
The official submission can be viewed in full here