There has been much buzz in the industry on the topic of embedded commissions, resulting from the Canadian Securities Administrators (CSA) publication of Consultation Paper 81-408 in January 2017. This consultation paper resulted in 142 formal comment letters from industry stakeholders between January and June 2017. The CSA has now published its new proposals for enhancing investor protection, in two publications issued on June 21, 2018. It is no longer contemplating a prohibition on embedded commissions, and is instead seeking feedback on a comprehensive set of new policy changes and controls for dealers.
In CSA Staff Notice 81-330, the CSA proposes policy changes in connection with embedded commissions, which will include:
- a withdrawal of its proposed prohibition on embedded commissions
- a prohibition of the deferred sale charge option for mutual fund sales
- For discount brokers: a prohibition of the payment of trailing commissions.
In a related project, the CSA’s Proposed Amendments to National Instrument 31-103, outlines enhanced conflict of interest mitigation rules which includes guidance for dealers and representatives requiring that “all existing and reasonably foreseeable conflicts of interest, including conflicts arising from the payment of embedded commissions, either be addressed in the best interests of clients”. These proposed changes to NI 31-103 and its companion policy have been issued for a 120 day comment period.
In addition to the Conflict of Interest proposals, the amendments to 31-103 include updated expectations for Know your Client, Know your Product and Suitability Assessments, which if implemented, will require changes to dealers’ current policies and procedures in areas including:
- The basis for suitability assessments
- Specific communication and documentation for communicating with clients regarding unsuitable products
- A new compliance training program to cover obligations regarding conflicts of interest, the Know Your Client/Know Your Product obligations, and the obligation to make a suitability determination. (This training program must include examples of how to identify conflicts of interest and how to address them in the best interests of clients.)
- A new product knowledge training program to cover specific elements of securities available through the dealer firm including structure, features, returns and risk, the initial and ongoing costs and the impact of those costs.
- Specific procedures and controls to be documented in the firm’s Policy and Procedure Manual.
- Restrictions on referral arrangements
- Prohibitions against specific types of financial dealings with clients. (Investment Dealers will find these similar to IIROC rule 43, with restrictions prohibiting financial advisors, and other registrants from participating in loans with clients or acting as power of attorney, trustee or beneficiary for clients,. As with IIROC’s rule, exceptions are allowed for immediate relatives if written permission is provided beforehand.)
Dealers and other stakeholders have until October 31, 2018 to provide feedback on the proposed amendments to NI 31-103.
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