In its most recent issue of The Investment Funds Practitioner, a newsletter for fund managers and their staff, the Ontario Securities Commission (OSC) has raised questions about the propriety of having trailing commissions paid on a fee-based fund series.
OSC staff maintains that a critical attribute of fee-based fund series is a client's ability to negotiate dealer compensation. If an advisor receives both a fee from the client and a trailing commission from the fund, the OSC suggests that the practice "blurs the lines" and reduces transparency.
"We have consulted with staff in the OSC's Compliance and Registrant Regulation Branch, who further note that this practice may raise the issue of double charging by dealers, which is contrary to a dealer's general duty to deal fairly, honestly and in good faith with its clients under OSC Rule 31-505 Conditions of Registration," says the OSC. "Investment fund managers should be mindful of their duty to act in the best interests of their funds, and ultimately their investors, when structuring and establishing dealer compensation models."
The OSC says it has informed fund companies that new funds with fee-based series should not have an embedded trailing commission. When existing fund prospectuses are reviewed at renewal, OSC staff will ask fund managers how long it will take them to both cease all new investments, and to either move current investors out of the fund or remove the dual compensation structure.