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News Release

CSA/SRO Compensation Surveys Fail to Justify Ban on Embedded Fees

Key to investor protection lies in quality of enforcement; not quantity of rules.

Toronto, ON – January 5, 2017 – In light of research issued by Canada’s regulators in late December, The Investment Funds Institute of Canada (IFIC) today called on the Canadian Securities Administrators (CSA) to reconsider whether there is evidence of a market failure sufficient to justify prohibiting embedded commissions.  The CSA released Notice 33-318 Review of Practices Firms Use to Compensate and Provide Incentives to their Representatives (‘the Review’) on December 15, 2016. The CSA also announced that a consultation on whether to prohibit embedded commissions will be launched on January 10, 2017.

“Until now, CSA members have pointed to academic research here and abroad as their evidence of a market failure sufficient to justify restricting Canadian investors’ choice of fee payment methods,” said Paul C. Bourque Q.C., IFIC president and CEO.   “We commend the CSA for undertaking practical compliance surveys that looked at compensation practices in the context of Canada’s robust regulatory environment.   The Review’s results confirm the industry’s position that almost every form of compensation holds the potential for conflict of interest but that, in the case of investment funds in Canada, actual compensation-related conflicts of interest that could result in client harm are already thoroughly addressed through CSA and SRO rules.”

The Review identified twenty-seven compensation practices currently in use in Canada.  It found that, in every one of the eighteen that housed a potential for conflict of interest, the conflicted activities are already prohibited under the existing rules, either as an unsuitable investment recommendation, a contravention of the duty to act honestly, fairly and in good faith, or a contravention of National Instrument 81-105 (the Mutual Funds Sales Practices Rule).

A concurrent MFDA paper, Review of Compensation, Incentives and Conflicts of Interest, found few violations and acknowledged that the concerned firms responded to follow-up by the MFDA’s Enforcement Department.  Similarly, IIROC issued Notice 16-0297, Managing Conflicts in the Best Interest of the Client – Status Update on December 15 which indicated that it expects any issues identified through its review could be addressed through additional guidance or amendments to existing rules.  IFIC finds it noteworthy that one the three chief concerns identified by IIROC was the potential that higher advisor compensation for fee-based accounts could incent representatives to move clients from commission-based accounts to fee-based even when that might not be in the clients’ best interests – the exact effect that regulators would produce were they to proceed with a ban on embedded commissions.

“None of the findings of these compensation reviews support the case for a ban on embedded commissions.  If regulators have concerns about specific sales misconduct, existing rules give them the enforcement tools they need to address the concerns they have identified.   As a result, we are asking the CSA to reconsider whether a prohibition on embedded commissions is the only option,” Bourque concluded.

About IFIC

The Investment Funds Institute of Canada is the voice of Canada’s investment funds industry. IFIC brings together 150 organizations, including fund managers, distributors and industry service organizations, to foster a strong, stable investment sector where investors can realize their financial goals. By connecting Canada’s savers to Canada’s economy, our industry contributes significantly to Canadian economic growth and job creation. The organization is proud to have served Canada’s mutual funds industry and its investors for more than 50 years.

About Paul C. Bourque, Q.C.

Paul Bourque assumed the position of President and CEO of IFIC on July 18, 2016 after serving as Executive Director of the British Columbia Securities Commission.  Previously, Paul was an Associate Partner with Deloitte Inc. leading the national securities and regulatory investigation practice.  He has held senior positions with a number of securities regulators and law enforcement agencies including the Investment Industry Regulatory Organization of Canada (IIROC), the Alberta Department of Justice, and the Ontario Securities Commission.  Paul is a practising member of the law societies of British Columbia and Upper Canada and a non-practicing member of the law society of Alberta.


For more information:

Jan Dymond, V.P. Public Affairs,, 416-309-2306