CSA 91/2 - Mutual Funds Sales Incentives [CSA Notice - Rescinded]

Published Date:	1991-11-08

During 1990, concerns were expressed by the Canadian Securities Administrators (the "CSA") that foreign trips offered by various persons including mutual fund managers in connection with the sale of mutual fund securities could create unacceptable conflicts of interest or the public perception of such conflicts and the substantial adverse publicity generated by such trips tended to undermine investors' confidence in mutual funds. Last fall, in response to these concerns, certain members of The Investment Funds Institute of Canada ("IFIC") and various other industry participants, who collectively managed well in excess of the majority of assets under administration, voluntarily banned the sponsoring of trips outside of Canada related to 1991 mutual fund sales. At the same time, these industry participants announced that they intended to form a task force to study all forms of sales compensation provided to persons who sell securities of mutual funds, as well as the methods of disclosing compensation to purchasers and to report to the CSA on the results of their study. In the spring of 1991 IFIC formed a Sales Incentive Committee (the "Committee") which was representative of a broad cross-section of the mutual fund industry including independent mutual fund managers, financial institutions, the life insurance industry and mutual fund dealers. The Committee has now completed its report which has been adopted by IFIC's Board of Governors and submitted to the CSA for their consideration.

The report which is entitled "Recommendations Concerning the use of Incentives in the Sale of Mutual Fund Securities in Canada" (the "Report") contains six separate recommendations regarding improved disclosure of sales incentives, domestic and foreign conference trips, service fees (trailer commissions), co-operative marketing programs, soft dollar/reciprocal commission transactions and underwriting tied to fund sales. It also contains a sales incentive code which sets out guidelines and prohibitions which incorporate the recommendations and procedures through which IFIC can monitor compliance with the sales incentive code. The CSA has reviewed the Report and wishes to take this opportunity to commend the Committee and IFIC on their reasoned response to investors' concerns about various forms of sales incentives used in connection with the promotion and distribution of mutual fund securities. The Report demonstrates that IFIC's members are sensitive to the concerns of the investing public and determined to respond to these concerns.

With respect to sales conference trips, the Report recommends that commencing with 1992 sales of mutual funds securities, fund sponsors and other members of the mutual fund industry be permitted to conduct sales incentives conferences at locations within the continental United States and Canada, provided that: the principal purpose of the conference is a sales, education or other similar business related activity, with scheduled agenda, formal meetings, in-house or professional speakers, etc. as appropriate; a conference involving a location outside Canada does not exceed four days in duration; and sales representatives are not solicited to participate in the sales incentive conference without the prior approval of the representatives' dealer organization. The CSA accept this recommendation as representing a considered approach to the problems posed by foreign trips and one which, along with the enhanced disclosure regarding dealer compensation which the Report recommends be contained in prospectuses and provided by way of separate "point-of-sale" disclosure statements, should serve to reduce or eliminate any potential for conflict of interest. The CSA intend to monitor the effectiveness of the guideline in alleviating public and regulatory concerns.

The CSA have noted the balance of the recommendations contained in the Report and intend to give these recommendations, particularly those related to service fees (trailer commissions) and soft dollar/reciprocal commission transactions, further consideration. In July, 1991 the Consumers' Association of Canada ("CAC") issued a report regarding mutual funds. Certain of the recommendations contained in this report differ from the recommendations of the Committee and the CSA understand that representatives of IFIC would like to discuss these differences with representatives of the CAC. In the interim, the CSA expect that the mutual fund industry will follow the sales incentive code adopted by IFIC. If they fail to do so the appropriate securities regulatory authorities will consider each lack of compliance on a case by case basis and take any action they consider to be appropriate under the circumstances.

The CSA believe that the interests of investors will be best served if sales compensation practices and levels of compensation are regulated by competitive forces and perceived abuses are addressed by the industry's voluntary compliance with guidelines established by its members. The CSA will intervene to regulate incentives offered in connection with the sale of mutual fund securities if competitive forces and industry guidelines such as the sales incentive code fail to adequately protect the consumer.