What DIY investors should know about the OEO trailer ban

Most mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition companies pay a trailing commission (or trailer fee) each year to your advisor’s firm. They pay this commission for as long as you hold the fund. The rate of the trailing commission is set by the fund company.

The Canadian Securities Administrators (CSA)Canadian Securities Administrators (CSA) The Canadian Securities Administrators (CSA) is an umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize regulation of the Canadian capital markets+ read full definition have imposed a ban on the payment of trailer feesTrailer fees Trailer fees are paid to salespeople monthly or quarterly for giving investment advice and other services to clients. The size of a trailer fee differs from one fund to the next and between fund companies.+ read full definition to dealers that do not make suitability determinations or provide advice.

As of June 1, 2022, order-execution-only dealers (OEO dealers or discountDiscount When something sells for less than its normal price.+ read full definition brokers) can no longer accept trailing commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition in respect of mutual funds holdingsHoldings Shares or other interests in a business. Also refers to investments in a portfolio.+ read full definition in accounts of self-directed investors (DIY investors). And now DIY investors cannot buy mutual funds with trailer fees through a discount brokerDiscount broker A stockbroker who charges lower fees to buy and sell investments, as opposed to a full-service broker. Does not provide investment advice.+ read full definition. Some discount brokers stopped offering trailer fee-paying mutual funds before June 1, 2022. Instead, they offered investors trailer fee-free version of mutual funds (where available).

Impact on existing mutual fund holdings in DIY investor accounts

The ban, that took effect on June 1, 2022, applied to holdings of trailer fee-paying mutual funds held by DIY investors. Discount brokers and mutual fund managers were working on switching these holdings before June 1, 2022.

If you were a DIY investor with trailer fee-paying mutual funds in your discount brokerBroker A registered person who brings together someone who wants to buy investments with someone who wants to sell. Brokers often charge a fee or commission for buying and selling investments for you.+ read full definition accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition, you did not have to take any action or pay any fees before the ban came into effect.

You should have received written communication explaining what would happen to your holdings. The optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition for your holdings would have included:

1. Being switched to a trailer fee-free series or class of the same mutual fund. The management fees would be lowered by an amount equal to the trailer fee that you previously paid. This means you end up with the same fund at a lower cost.
2. Being switched to a trailer fee-free series or class of the same mutual fund with differences in distributionDistribution A payment you get from a mutual fund or company stock. Funds must distribute any capital gains to shareholders at least once a year. This payment can take the form of cash or additional units. Some companies offer Dividend Reinvestment Plans (DRIPs).+ read full definition policy or currency. This means that the series or class that were switched has a lower management feeManagement fee A charge that you pay for having an investment professional manage an investment fund. The fee pays the managers for their time and skills. It may also cover things like communicating with investors and doing all the paperwork needed to run the fund.+ read full definition equal to the amount of the trailer fee you previously paid, but it might also have some minor differences in distribution features such as a different targeted payout rate or no targeted payout rate.
   In either case, there should be no taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition consequences for switches. Investors would have received tradeTrade The process where one person or party buys an investment from another.+ read full definition confirmations, or similar notification, outlining the details of these transactions.
3. Some mutual fund companies may have decided to provide a management fee rebate in an amount equivalent to the trailer fee instead of conducting a switch. DIY investors with management fee rebates can continue to hold those mutual funds in their account.
4. If a trailer fee-free equivalent of your mutual fund is not available, and a management fee rebate is not being provided, discount brokers can rely on regulatory exemptions. These exemptions can be used to provide self-directed investors with a rebate equal to the trailer fee they paid (dealer rebate). This allows for DIY investors to continue holding these mutual funds in their account.

If you held trailer fee-paying mutual funds purchased under the deferred sales chargeDeferred sales charge A sales fee that you pay when you sell an investment. Also called a “back-end load.” The fee often goes down the longer you hold onto the investment+ read full definition option, it was expected that any redemption fees triggered by a switch would be waived by the mutual fund companyMutual fund company An investment company that pools money from investors and invests it in a mix of investments, such as stocks, bonds, and money market investments. Most mutual fund companies offer a choice of more than one fund.+ read full definition.

If you think you still have trailer paying mutual funds in your discount brokerageDiscount brokerage A brokerage firm that charges lower fees to buy and sell investments, as opposed to a full-service brokerage. Does not provide investment advice.+ read full definition account following the date of the ban, and you are not receiving a management fee rebate or dealer rebate in respect of those holdings, you should contact your discount broker or mutual fund managerFund manager A fund manager is responsible for investing the pool of money that people have put into the fund. The manager chooses investments that match the fund’s goals for risk and return.+ read full definition. They should be able to assist you making sure your holdings are dealt with in a manner that assures compliance with the ban.

Transferring trailer fee paying mutual funds to DIY accounts starting June 1, 2022

On June 1, 2022, investors transferring trailer fee-paying mutual fund securities from full-service accounts to self-directed accounts at discount brokers will see additional information on what will happen to their holdings. This information will be in account opening documents or client transfer forms, or both.

Generally, the same actions for current holdings will also apply to transfers of trailer fee-paying mutual fund securities. This means investors will either:

• be switched to a trailer fee-free class or series of the same fund, or,
• receive a management fee rebate or a dealer rebate in an amount equivalent to the trailer fee.

Again, there should be no tax consequences of such switches. And investors will receive trade confirmations outlining the details of these transactions.

Timelines for transfers to DIY accounts starting June 1, 2022

Beginning June 1, all discount brokers will have 45 days to determine what action to take once transfers of trailer-paying mutual funds to self-directed accounts are received.

All trailers received by discount brokers during the 45 days will be rebated to the investor through dealer rebates.

No action is required by DIY investors. And DIY investors do not need to pay any fees for a switch, management fee rebate or dealer rebate.

For mutual fund securities purchased under a deferred sales charge option, if a switch would trigger a redemption feeRedemption fee A fee that some mutual funds charge when you sell or redeem units. Unlike a deferred sales load, you pay this fee to the fund (not to a broker). It covers the costs of redeeming your units.+ read full definition, a dealer rebate will be used to avoid that outcome.

Some discount brokers may not be able to provide a switch for DIY investors until June 30, 2023. Until then, those brokers will provide investors with dealer rebates in the amount of the trailer fee. After June 30, 2023, those discount brokers will switch the trailer fee-paying securities, where possible.

What investors should know about the DSC ban

As of June 1, 2022, deferred sales charges (DSC) are banned. This means the deferred sales charge option, including the low load option, are banned. Fund companies can no longer pay upfront sales commissions to dealers in connection with the sale of mutual funds. Those payments can give dealers an incentive to sell mutual funds that may not be in your best interest as an investor.

Under the DSC option, there was no requirement to pay an initial sales charge for a mutual fund purchase. Instead, an investor could be required to pay a redemption fee (or DSC) to the investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition fund manager when selling their units or shares.

DSC holdings before June 1, 2022

If you bought a mutual fund with the DSC option before June 1, 2022, you will not see any changes. The redemption fee schedules on your DSC holdings can run its course. If you hold your fund until the end of the redemption fee schedule, you won’t pay a fee when you sell your units or shares. But you will be charged DSCs on holdings sold before the expiry of the redemption fee schedule.

If you have a pre-authorized purchase plan for mutual fund purchases under the DSC option or low load option, set up before June 1, 2022, you should speak to your advisor to change your trading instructions.