Our Letter About Fund Fees in Ontario

What we sent to the regulator on their proposed restrictions for deferred sales charges in mutual funds

Ian Tam, CFA 3 July, 2020 | 1:48AM Aron Szapiro
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British Columbia Securities Commission

Alberta Securities Commission

Financial and Consumer Affairs Authority of Saskatchewan

Manitoba Securities Commission

Ontario Securities Commission

Autorité des marchés financiers

Financial and Consumer Services Commission

New Brunswick Superintendent of Securities

Department of Justice and Public Safety, Prince Edward Island

Nova Scotia Securities Commission

Securities Commission of Newfoundland and Labrador

Superintendent of Securities, Northwest Territories

Superintendent of Securities, Yukon

Superintendent of Securities, Nunavut


The Secretary

Ontario Securities Commission

20 Queen Street West

19th Floor, Box 55

Toronto, Ontario M5H 3S8


Me Anne-Marie Beaudoin

Corporate Secretary

Autorité des marchés financiers

800, square Victoria, 22e étage

C.P. 246, tour de la Bourse

Montréal (Québec) H4Z 1G3


RE: Proposed OSC Rule 81-502 restrictions on the use of the deferred sales charge option for mutual funds


Ladies and Gentlemen:

Morningstar Research, Inc. welcomes the opportunity to comment on the proposed OSC rule 81-502 and dated Feb. 20, 2020, its companion policy, and its related consequential amendments.

Morningstar Research, Inc. is a leading provider of independent investment research, and our mission is to create products that help investors reach their financial goals. Because we serve individual investors, professional financial advisors, and institutional clients, we benefit from a broad perspective on the impact of the proposed rule and its possible effect on the advice that investors receive.

We appreciate the actions of all the Canadian securities commissions that have banned the deferred sales charge option to be made effective in June 2022. We feel wholeheartedly that the discontinued use of the DSC option provides flexibility, greater transparency, and ultimately better odds of success for the retail investor, outlined through our comment letter dated June 5, 2017, on CSA Consultation Paper 81-408 (consultation on the option of discontinuing embedded commissions).

The Ontario Securities Commission should harmonize its approach to DSCs with all the other provincial regulators. Failing to do so, as the Commission proposes, leaves a large number of investors in Ontario without the protections enjoyed by investors in other provinces. Further, the lack of harmonization will undoubtedly bring on additional administration costs for fund providers to account for different provincial regulations, which must ultimately be borne by retail investors. Morningstar’s recommendation is still to ban the use of the DSC option throughout Canada, inclusive of Ontario.

The proposed limitations in OSC Rule 81-502 on the use of the DSC option certainly help to reduce conflicted sales practices and liquidity risk to investors. In particular, the creation of a separate fund series may make it easier for investors to identify funds with the embedded DSC option. This said, Morningstar believes that eliminating the DSC option will afford the most protection to retail investors, particularly newer investors with lower starting amounts who are not aware of the implications of DSCs. Isolating Ontarians from the same investor protection afforded to other Canadians is an unusual approach with which Morningstar does not agree.

A common counterargument is that low-balance investors may lose access to advice without DSCs, but we observe that these investors now have options of automated and ”robo-advice” platforms from large reputable firms, as well as fee-only advice. Both options provide reasonable advice to small investors and have fees that are made transparent and are easily understood. These options are more widely available to Canadians when compared with just a few short years ago.

We continue to urge the OSC to follow suit with all other provincial regulators in regard to the DSC option such that investors can continue to benefit from having a harmonized regulation system that puts their needs first.  


Very Truly Yours,


Ian Tam, CFA                                                                 

Director of Investment Research, Canada                         

Morningstar Research Inc.             


Aron Szapiro

Director of Policy Research

Morningstar, Inc.


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About Author

Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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