Bye Bye DSCs!

OSC joins other provincial regulators in banning the controversial fees in mutual funds 

Ian Tam, CFA 11 May, 2021 | 1:59AM
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Last Friday, the Ontario Securities Commission (OSC) announced that it would join other provincial regulators in banning the use of deferred sales charges (DSCs) for mutual funds, effective in June 2022. From Morningstar’s perspective, this is welcome news and in line with our mission of empowering investor success.

DSCs are a form of commission paid to advisors by investors when the units of the fund are sold before a set holding period (usually 5 to 7 years). The approach was used for mutual funds sold to individuals with lower starting amounts and advertised with no up-front commissions paid by the investor. The issue arose when an investor decides to sell the fund prior to the end of the required holding period, triggering a charge of upwards of 5% of assets. On the other side of the coin, advisors are paid up-front commissions by fund companies for placing clients in DSC funds. This questionable practice leads to less than ideal outcomes for a subset of unknowing investors.  

In our letter to the OSC Aron Szapiro and I noted a handful of reasons why Ontario should follow suit (including unfortunate outcomes for investors) along with highlighting the benefits of using a harmonized approach across Canada. As such, we are thrilled with the announcement from the OSC. The ban on products using DSCs across Canada comes into effect June 1st, 2022. From that day forward, no further sales of funds with DSCs will be allowed. Existing funds sold with a DSC option will be allowed to play their course.

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About Author

Ian Tam, CFA  is Director of Investment Research at Morningstar Canada. 

 

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