Fraser McDonald Quoted in Lawyers Daily Article on Ontario Government’s Opposition to Canadian Securities Administrators’ Proposal to Ban Upfront Commissions on Mutual Fund Sales


Wednesday, September 19, 2018 @ 9:22 AM | By Ian Bums

Published in The Lawyer’s Daily (, part of LexisNexis Canada Inc.

The umbrella group for Canada’s provincial securities commissions is proposing to prohibit certain upfront payments to dealers in the mutual fund market, but there’s a problem: The Ontario government is against the idea.

The Canadian Securities Administrators (CSA) is seeking input on a proposal to prohibit investment fund managers from paying upfront sales commissions to dealers, which they said would lead to the discontinuation of deferred sales charges (DSC) on mutual funds. A deferred sales charge creates a schedule for the client wherein if they don’t hold the mutual fund for a requisite time period, usually five to seven years, they are charged a fee.

According to the CSA, these DSCs give rise “to a conflict of interest that can incentivize dealers and their representatives to make self-interested investment recommendations to the detriment of investor interests.”

“These proposed amendments, together with enhanced registrant conduct requirements proposed under our client-focused reforms, comprise the CSA’s policy response to the investor protection and market efficiency concerns examined in our consultations on embedded commissions,” said CSA chair and president Louis Morisset.

If the changes are adopted, mutual fund dealers would be required to negotiate with, and charge directly to, clients any upfront sales commissions for mutual fund purchases. According to the CSA, almost 20 per cent of mutual funds in Canada have a DSC option, whereas it is only about one per cent in the United States and the European Union.

Eric Brousseau of Polley Faith LLP said the CSA has raised issues in the past about how the DSCs are disclosed and the fact their disclosure is “a bit complex for regular investors.”

“It’s basically buy now, pay later for mutual funds,” he said. “I think the concern, and it’s a fair concern, is that it creates an incentive that misaligns the interests of dealers and their clients, and so the way to correct that is to effectively abolish it. It’s the loss of an option, but one that maybe is overused in Canada, and there will be other options to fill the gap.”

Brousseau said the goal of the regulators’ actions is to bring more transparency in the market, which is “always laudable.” He noted the concern people who hold mutual funds with DSCs may be tempted to hold onto an underperforming fund simply because they’ll be penalized.

“It’s always in investors’ interests to know up front how their money is being used and what the fund fees are,” he said. “The industry has always been creative and I’m sure it will find ways to realign its own incentives and continue to make money in ways that will comply with securities legislation across Canada.”

Fraser McDonald of Allen McDonald Swartz LLP said there is merit to the CSA’s concern these types of upfront charges incentivize behaviour that is in conflict with the best interest of mutual fund clients.

“The age-old question in these scenarios is whether it is a better regulatory approach to deal with it by way of disclosure,” he said. “They’ve done that for quite some time and they’ve just decided that’s not working, and more stringent disclosure requirements won’t address what they see as their concerns.”

However, the proposals ran into a bit of a wall when Finance Minister Vic Fedeli said Ontario is opposed to the plan. Fedeli said the changes will “discontinue a payment option for purchasing mutual funds that has enabled Ontario families and investors to save towards retirement and other financial goals.”

“Our government does not agree with this proposal as currently drafted,” he said. “The CSA’s proposed amendments result from a process initiated under the previous government. We will work with other provinces and territories and stakeholders to explore other potential alternatives to ensure fair, efficient capital markets and strong investor protections.”

As Canada does not have a national securities regulator, all policies proposed by the CSA need to be adopted by the different provincial regulators. McDonald said the government is arguing that the changes would take away an option away from smaller investors because they’ll have to pay a commission up front as opposed to having a deferred sales charge.

“The argument is that these types of arrangements make it more attractive for advisers and dealers to take on clients will smaller portfolios,” he said. “I think that’s what they’re getting at; they think this will have the impact of removing options for smaller, newer investors.”

McDonald said the rules ultimately have to be approved by Fedeli, and if he does not do so it would have the practical effect of skewing the entire process because other provinces would “not be likely to move on a proposal like this without the country’s largest securities jurisdiction.”

“I just think it would create too much friction in the market,” he said. “You’d have to have different products for different jurisdictions. I just don’t think it would be practical. I think it will go ahead.”

The CSA’s consultation period on the recommendations ends Dec. 13.

About Allen McDonald Swartz LLP

Allen McDonald Swartz LLP provides strategic counsel, sophisticated business law advice and exceptional client service to Canadian and international clients. The firm’s lawyers — Jennifer Allen, Henry Bertossi, Brad Elberg, Fraser McDonald, Eden Oliver and Jillian Swartz — are all Bay Street veterans and provide their clients with experience and expertise that match BigLaw. Their clients include entrepreneurs, high-net-worth individuals, family-owned businesses, private and public companies, multi-national enterprises, law firms, independent committees, charities and not-for-profit organizations. The lawyers at AMS advise clients on mergers and acquisitions, reorganizations, privacy and anti-spam, financings, securities compliance and regulatory work, capital markets transactions, governance and business-critical commercial arrangements. The firm’s lawyers have experience across a diverse range of industries, including agribusiness, alternative energy, automotive, consumer products, event planning & hospitality, manufacturing, professional services (including dental, medical, and veterinary), media, sports & entertainment, technology, mining & natural resources and private equity.