CSA 93/01 - Mutual Fund Sales Incentives [CSA Notice - Rescinded]
| Published Date: | 1993-01-20 |
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In November 1991, the Canadian Securities Administrators (the "CSA") published a notice relating to the IFIC Code. The CSA notice stated that the CSA accepted the recommendations made by IFIC with respect to domestic and foreign trips. The CSA noted the balance of the recommendations made in the IFIC Code and indicated that they intended to give these recommendations, particularly the recommendations related to soft dollar/reciprocal commission transactions and service fees (trailer commissions), further consideration. Pending such consideration, the CSA stated that they expected the mutual fund industry to follow the IFIC Code. Finally, the CSA stated that the appropriate securities regulatory authorities would consider each lack of compliance with the IFIC Code by the mutual fund industry on a case-by-case basis and would take any action they considered appropriate in the circumstances.
The IFIC Code requires improved prospectus disclosure of sales incentives. It also requires that investors in mutual funds be provided with a separate "point-of-sale" disclosure document at the time of purchasing mutual fund securities advising them of the type of sales incentives applicable with respect to the purchase. The IFIC Code also restricts domestic and foreign conference trips to locations in Canada and the continental United States; permits the payment of service fees (trailer commissions) and the costs of co-operative marketing programs; restricts merchandise awards or gifts paid to a sales representative in a non-affiliated dealer organization to a maximum of $750 in any calendar year; prohibits the direction of brokerage commissions as compensation for mutual fund sales; prohibits the selection of underwriting or selling group participants in public securities offerings and private placements exclusively on the basis of mutual fund sales; and sets out procedures for IFIC to enforce the IFIC Code.
It is the general policy of the CSA not to regulate the compensation of salespersons but to focus upon those matters which promote sufficient disclosure to be made in order that investors are able to make informed investment decisions.
During the past year, the CSA have been monitoring the effectiveness of the IFIC Code and have concluded that all of the disclosure of sales incentives required by the IFIC Code has been effective in alleviating regulatory concerns. Therefore, the CSA have determined that, at present, it is not necessary to take further regulatory action other than implementing, through amendments to policy statements and regulations, the recommendations made by IFIC concerning disclosure of sales incentives in a mutual fund's prospectus and in a point-of-sale disclosure document.
The CSA in analyzing sales incentives, addressed the potential conflict of interest that might occur where domestic and foreign trips are offered to mutual fund salespersons. It has been argued that a conflict of interest occurs between a salesperson's duty to recommend the most appropriate investment for a particular investor and the desire to recommend an investment that leads to earning a domestic or foreign trip, particularly one outside of Canada or the continental United States. The same argument concerning a conflict of interest has also been made with respect to other types of sales incentives.
The CSA have determined that the perceived potential for conflict of interest is best addressed through disclosure of all material facts relating to the granting of sales incentives. The CSA have noted that it is inappropriate to restrict a single form of compensation, such as domestic and foreign trips, where they do not regulate overall levels of compensation. In this regard, the CSA note that the overall levels of sales compensation differ as between similar types of mutual funds under different management and as between different types of mutual funds under the same management. In all cases, investors and the marketplace in general determine acceptable levels of overall sales compensation. Similarly, the full disclosure of sales incentives should, given competitive market forces, allow investors and the marketplace in general to monitor sales incentives and to determine acceptable practices.
The disclosure requirements for sales incentives will be implemented through amendments to National Policy Statement Nos. 36 and 39 and regulations. All dealers, including investment dealers, mutual fund dealers and others, distributing mutual fund securities will be required to provide a point-of-sale disclosure document to investors at the time of their purchase of mutual fund securities, advising them of the type of sales incentives applicable with respect to the purchase. This disclosure document will also be required to refer investors to the mutual fund prospectus for additional information and invite them to discuss sales incentives with their salesperson.
The above-described amendments will require a summary of the sales incentives offered by managers to dealers with respect to the mutual fund securities being distributed under the prospectus to be set out on the inside front cover page of the mutual fund prospectus under the heading "Summary of Dealer Compensation". A complete description of such sales incentives will be required in the body of the prospectus in a separate section entitled "Dealer Compensation". Specifically, with respect to domestic and foreign conference trips offered by managers to dealers as sales incentives, the prospectus will be required to disclose the location of the conference and its approximate cost per attendee if the conference would not comply with the restrictions in the IFIC Code.
With respect to soft dollar/reciprocal commission transactions, substantial comments have been received in response to the CSA request for comments concerning soft dollars published in June 1992. The issues raised by soft dollars generally are currently being considered by the CSA. The CSA have determined that the ultimate resolution of the issue of soft dollar/reciprocal commission transactions should be deferred until the issue of soft dollars generally is resolved. In the interim, the CSA have determined to require enhanced disclosure of these transactions.
Until such time as the amendments to the policy statements are implemented, the CSA will not take any action in respect of any non-compliance with the IFIC Code by industry participants regarding compensation paid for mutual fund sales made on or after January 1, 1993, except with respect to the disclosure requirements relating to the prospectus and the requirements regarding delivery of a point-of-sale disclosure document.
This notice revokes and replaces the prior CSA notices dealing with mutual fund sales incentives dated December 20, 1990 and November 8, 1991.
For further information please contact any of:
Robert Bouchard Susan I. McCallum
Deputy Director Corporate Finance Director Corporate Finance
The Manitoba Securities Commission Ontario Securities Commission
(204) 945-2548 (416) 593-8248
Arnold Hochman Anna Drummond
Deputy Director, Policy Solicitor, Policy
Corporate Finance Corporate Finance
Ontario Securities Commission Ontario Securities Commission
(416) 593-8247 (416) 593-8192
Johanne Duchesne Wayne Redwick
Deputy Director, Financial Operations Deputy Superintendent Corporate Finance
Commission des Valeurs Mobilières du Quebec British Columbia Securities Commission
(514) 873-5326 (604) 660-4800
Ron Sczinski
Director, Securities Analysis
Alberta Securities Commission
(403) 427-5201
January 20, 1993