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What DIY investors should know about the OEO trailer ban
Most mutual fund 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) have imposed a ban on the payment of trailer fees to dealers that do not make suitability determinations or provide advice.
As of June 1, 2022, order-execution-only dealers (OEO dealers or discount brokers) can no longer accept trailing commissions in respect of mutual funds holdings in accounts of self-directed investors (DIY investors). And now DIY investors cannot buy mutual funds with trailer fees through a discount broker. 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 broker account, 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 options for your holdings would have included:
- 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.
- Being switched to a trailer fee-free series or class of the same mutual fund with differences in distribution policy or currency. This means that the series or class that were switched has a lower management fee 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 tax consequences for switches. Investors would have received trade confirmations, or similar notification, outlining the details of these transactions.
- 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.
- 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 charge option, it was expected that any redemption fees triggered by a switch would be waived by the mutual fund company.
If you think you still have trailer paying mutual funds in your discount brokerage 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 manager. 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 fee, 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 investment 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.