Securities regulators update on trailing commission ban and offering memorandum prospectus exemption

CSA releases guidance for investment fund managers to improve liquidity risk management

Securities regulators update on trailing commission ban and offering memorandum prospectus exemption

Fund organizations will be prohibited from paying trailing commissions to dealers who do not make a suitability determination, such as order-execution-only (OEO) dealers, effective June 1, 2022.

The ban will apply to all funds that pay trailing commissions, including funds sold under the deferred sales charge (DSC) option, the Canadian Securities Administrators announced in a news release. The CSA urged fund organizations and dealers to adopt measures to ensure that investors with DSC holdings would not have to pay redemption fees because of the new prohibition and to clearly convey these planned measures. The CSA said that it would be vigilant to inappropriate sales of DSC products prior to the effectivity date of the prohibition.

According to the CSA, this effectivity date will enable dealer firms and representatives to make the necessary changes to adhere to the new rules, to reassess internal compensation arrangements and to impose new fee charging systems. Fund organizations will also have enough time to offer a no-trailing commission mutual fund series for order-execution-only investors, said the CSA.

“Where possible, investment fund managers and OEO dealers are strongly encouraged to accelerate their transition away from mutual fund series with trailing commissions,” said Louis Morisset, CSA chairman and president and chief executive officer of the Autorité des marchés financiers, in the news release.

The CSA has likewise released guidance to assist investment fund managers in establishing and maintaining effective liquidity risk management frameworks, as required under securities legislation. The guidance specifically contemplates National Instrument 81-102 Investment Funds but may also be helpful for other types of investment funds, said the CSA.

The guidance considers both normal and stressed market conditions, such as the COVID-19 pandemic, and acknowledges that investment funds are variable in size, structure, investor base and other aspects. What constitutes material risk for one fund may not be so for another fund, said the CSA.

“Taking a preventative and proactive approach to liquidity risk management is critical to ensuring such risks are appropriately managed,” said Morisset in a news release.

The CSA also seeks comment to the proposed amendments to the offering memorandum prospectus exemption by the deadline of Dec. 16. The changes aim to clarify disclosures for issuers and to provide investors with more complete and pertinent information.

The changes include requiring issuers with real estate activities to submit an independent appraisal of the real property in certain situations and requiring issuers that are collective investment vehicles to provide improved disclosures about their decision-making process and the composition and performance of their portfolio.

“The CSA recognizes that the offering memorandum prospectus exemption has evolved since it was introduced, with larger issuers from various sectors using it to raise capital,” said Morisset in the release.

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