OSC to implement ban on deferred sales charge option, harmonizing rule across Canada

TORONTO – The Ontario Securities Commission (OSC) is moving to ban deferred sales charges (DSC) on mutual funds in Ontario. Under the rule, the payment of upfront sales commissions by fund organizations to dealers will be prohibited, harmonizing the DSC ban across Canada.

OSC staff 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 Sales Charge Option for Mutual Funds, published in February 2020. Comments also expressed concerns that the OSC’s proposed rule would create a two-tiered regulatory approach in Canada and would be burdensome for industry to implement and monitor.

In moving forward with the ban on DSCs, the OSC also considered the decline in the use of the DSC option in Ontario, as well as advances in industry innovation. Recent innovation in the industry has provided Ontario investors with access to affordable investment options, as well as access to investment products and advice with more affordable and transparent compensation models.

The payment of upfront sales commissions to dealers gives them an incentive to sell mutual funds that impose redemption fees on investors if they sell their holdings before a certain time period. Under the ban, no new sales will be permitted using the DSC option.  DSC redemption schedules for sales made prior to the effective date of the ban will be allowed to run their course in Ontario.

The OSC anticipates a ban on the DSC option will be effective on June 1, 2022, to harmonize with the Canadian Securities Administrators’ (CSA) DSC ban announced in February 2020. This coincides with the CSA ban on trailing commissions for order-execution-only dealers, which will also take effect June 1, 2022.

The final amendments to National Instrument 81-105 Mutual Fund Sales Practices are expected to be published later this spring. OSC Staff Notice 81-731 Next Steps on Deferred Sales Charges can be found on the OSC’s website.

The mandate of the OSC is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in the capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.  Investors are urged to check the registration of any persons or company offering an investment opportunity and to review the OSC investor materials available at http://www.osc.ca.

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