Mutual fund chargebacks to face CSA scrutiny

Citing concerns about conflicts of interest, securities regulators are launching a review of mutual fund chargebacks with an eye to possibly revising the sales practices rules.

Staff of the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) are undertaking a review of the use of chargebacks — when dealers require reps to repay upfront commissions or fees if a client redeems a newly purchased fund within a set period — in the sale of mutual funds.

The practice has raised concerns with regulators as it creates an incentive for reps to ensure that clients hold their funds until the chargeback period has expired, rather than basing their advice solely on the best interests of the investor.

The issue was flagged by the Canadian Council of Insurance Regulators and the Canadian Insurance Services Regulatory Organizations in a consultation paper issued last year in connection with compensation practices around the sale of segregated funds.

Earlier this year, those same regulators announced that they are developing guidance on the sorts of controls required to prevent investor harm from the use of seg fund chargebacks.

Today, the CSA indicated that while the practice isn’t believed to be as prevalent in the sale of mutual funds, it nevertheless creates the same concerns about conflicts of interest and investor protection.

“The CSA is committed to enhancing investor protection. The information obtained from this review will help us determine whether further regulatory reform is needed to align certain mutual fund sales practices with the interests of clients,” said Stan Magidson, chair of the CSA and chair and CEO of the Alberta Securities Commission, in a release.

The regulators indicated that the results of the chargeback review, along with an earlier review of proprietary fund sales practices, will inform possible changes to the mutual fund sales practices rule or other regulations.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.