OSC proposes rule to restrict use of deferred sales charge option

TORONTO – The Ontario Securities Commission (OSC) today published for comment a proposed rule that would restrict the use of the deferred sales charge (DSC) option in the sale of mutual funds. The proposed rule is intended to address negative investor outcomes by limiting the circumstances in which mutual funds with the DSC option can be sold and by giving clients greater flexibility to redeem these investments without penalties.

The rule would prohibit the sale of mutual funds with the DSC option to clients who are aged 60 and over, or who have an investment time horizon that is shorter than the DSC schedule. The rule would also prohibit sales to clients who intend to use borrowed money to finance their purchase and would impose a $50,000 threshold for maximum account size. 

The rule would shorten the maximum term of the DSC schedule to three years, compared to current industry practice where the maximum term can be up to seven years. Additionally, clients would be able to redeem 10 per cent of the value of their investment without redemption fees annually, on a cumulative basis.

In financial hardship circumstances, such as involuntary loss of full-time employment, permanent disability and critical illness, clients could redeem their investment without paying redemption fees.

The rule also proposes restrictions to prevent other investors in a fund from cross-subsidizing costs attributable to DSC investors, and to prevent dealers from collecting multiple upfront commissions on the same source of funds.

The OSC anticipates that the proposed rule would apply from June 1, 2022.

Stakeholders are invited to submit comments in writing by May 21, 2020.

The proposed rule and companion policy, along with a regulatory impact analysis and notice and request for comment, 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 www.osc.ca.

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