Looking forward to work with you. We anticipate that the discontinuation of embedded commissions would significantly simplify the fund fee structure in Canada, facilitate easier product cost and performance comparisons, and incrementally reduce information asymmetry for all market participants in particular, for retail investors. Mininberg, Chief Executive Officer, stated: "Overall we made considerable progress in fiscal This situation is called "cross-subsidization". Rakuten, Fanuc, Fast Retailing, JTEKT, J Pug Retailing, and Japan Tobbacco lost between 1. When optipn firms compete for market share, the probability that they receive demand from the informed consumers decreases.




In particular, we identified how embedded commissions give rise to conflicts of interest that misalign the interests of investment fund managers, dealers and representatives with those of the investors they serve. Embedded commissions raise conflicts of interest that misalign the interests of investment fund managers, dealers and representatives with those of investors; 2. Embedded commissions limit investor awareness, understanding and control of dealer compensation costs; and The evidence we have gathered to date shows that embedded commissions encourage the sub-optimal behavior of fund market participants, including that of investment fund managers, dealers, representatives and fund investors, which reduces market efficiency and impairs investor outcomes.

These issues and their causes appear to be driven by a compensation model with inherent conflicts of interest that research suggests are pervasive and are difficult to manage effectively. Based on the evidence we have gathered, we believe that a change to a different compensation model must be considered. Investors should be provided with a compensation model that empowers them and that better aligns the interests of investment fund managers, dealers and representatives with those of investors.

Direct pay arrangements could consist of various types of compensation arrangements including upfront commissions, flat fees, hourly fees, fees based on a percentage of assets under administration or other arrangements, provided in all cases: i. Investment fund managers could strateiges investors' direct payment of dealer compensation through payments taken from the investor's investment for e. We recognize that such a change could have a profound effect on the fund industry and on investors in Canada, including potential unintended consequences.

Therefore, a decision on whether to discontinue embedded commissions will only be reached after careful consideration and assessment of the possible strstegies on investors and market participants and consultation with stakeholders. Accordingly, the aims of this consultation paper Consultation Paper are to obtain the requisite information the CSA needs to make an informed ca,l about discontinuing embedded commissions. We emphasize that we have not made a decision to discontinue embedded commissions.

This consultation will build on our previous consultations and the important body of research we have considered to date. The fund industry has to date provided research that finds that higher levels of wealth are achieved by advised investors over time, and maintains that embedded commissions are essential to delivering this benefit, particularly to investors with lower levels of wealth who may not otherwise be able to afford, or may not want to pay directly for, advice.

The fund industry has also pointed to the consequences of relevant regulatory reforms in other jurisdictions such as the U. While observations about the impacts of relevant reforms in other jurisdictions are informative and option strategies buy call sell put 302, we consider that the potential impacts from similar reforms in Canada might not be the same. The unique features of those foreign markets, including the characteristics of their respective market participants and the specific competitive dynamics within which they operate, their market structure, the savings habits of their local investors, as well as the scope of their respective reforms may all play a role in ootion the specific impacts.

The objective of this consultation is therefore to identify the potential effects of discontinuing embedded commissions in Canada based on what we know of our fund market and its participants, including our investment fund managers, our dealers, and the investors they currently serve. This objective includes understanding the potential impact such a change may have on the accessibility and affordability of advice for Canadian investors, including lower-wealth investors, and identifying ways to minimize this impact.

Ultimately, our goal is to ensure that any regulatory action we may decide to take will provide a Canadian solution to challenges specific to the Canadian market, will result in more positive outcomes for Canadian investors and will minimize disruption for market participants. For this purpose, the contribution of the stakeholders to this consultation is very important.

We are aware of the view of many fund industry participants that mutual fund fee reforms may be unnecessary in the puy of recent reforms aimed at improving investor awareness and understanding of fees and performance under optioj CSA's Point of Sale disclosure POS and Client Relationship Model Phase 2 CRM2 projects, and the concept proposals to enhance the registrant-client relationship discussed in CSA Consultation Paper Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients CSA CP We also understand that industry participants are concerned by pur number of current policy initiatives that affect their business and that require stratefies changes in their operations and systems.

Industry has urged us to allow full implementation of the POS and CRM2 reforms dell fairly assess their results, and conclude consultations under CSA CPbefore signaling that significant new reforms are swll. We are of the view that the discontinuation of embedded commissions could be complementary to our recent reforms and proposals in that those existing and ongoing initiatives were not designed to, and may not fully address, the key investor protection and market efficiency issues we have identified in this Consultation Paper.

In particular, option strategies buy call sell put 302 think that as long as dealer compensation remains embedded in the fund product, investment fund managers may continue to place greater emphasis on payments to aell than on performance to gather and preserve assets under management. This compensation model may continue to encourage higher fund fees and impair investor outcomes and market efficiency, including effective competition in our market.

We believe that discontinuing embedded commissions may address these issues by better aligning the interests of investment fund managers, dealers and representatives with those of investors. In this Consultation Paper, we seek your views on our assessment of the extent to which the discontinuation of embedded commissions may be required to address our key issues, including your views on whether recent disclosure reforms and proposals to enhance the registrant-client relationship may on their own sufficiently address our concerns.

We have also canvassed and thoughtfully considered a number of alternative options to address the investor protection and market efficiency issues we have identified. Optio more fully discussed in Appendix B of this Consultation Paper, we did not retain those other options as we found that they did not directly or fundamentally address the identified issues to the extent that discontinuing embedded commissions may. We welcome comments from investors, participants in the investment fund and financial services industries, and all other interested parties to the matters discussed in this Consultation Paper.

Some CSA jurisdictions will hold in-person consultations in to facilitate additional feedback and further our consideration of the issues. Please see Part 7 of this Consultation Paper for information on how to submit comments. The comment period closes on June 9, Embedded commissions reduce investor awareness, understanding and control of dealer compensation costs; and Below, we discuss each of the three issues in greater detail and reference various pieces of research and other data set out in Appendix A that evidence the issues.

We then consider the policy implications of the available evidence and the extent to byu they suggest a need for change. The issues and related evidence: Issue 1: Embedded commissions raise conflicts of interest that misalign the forex calendar kindergarten of investment fund managers, dealers and representatives with those of investors Based on the available evidence, the current embedded commission dealer compensation model appears to facilitate a mutually beneficial relationship between the investment fund managers who manufacture fund products sgrategies the dealers and representatives that distribute them.

It aligns the investment fund manager's asset gathering and preservation objectives with the dealer's revenue maximization objectives. The evidence suggests that this alignment of commercial goals can alter the behavior of investment fund managers, and of the dealers and representatives who distribute the investment fund manager's products, in a way that is detrimental to market efficiency and investor outcomes.

Embedded commissions can reduce the investment fund manager's focus on fund performance, which can lead to underperformance Investment fund managers who pay embedded commissions to dealers may be incented to rely more on those payments than on generating performance to attract and preserve assets under management. Consequently, the embedded commission structure may encourage investment fund managers to regard dealers and representatives, rather than their fund investors, as their "customers".

Embedded commissions can encourage dealers and representatives to make biased investment recommendations which may negatively affect investor outcomes: Dealers and representatives who are compensated through embedded commissions may be incented to make biased investment recommendations that give priority to maximizing compensation over the interests of the client.

Embedded commissions encourage high fund costs and inhibit competition by creating a barrier to entry: The research we have gathered and reviewed suggests that competition between investment fund managers to offer high embedded commissions to attract and secure distribution encourages and preserves high overall fund fees and discourages the manufacturing and sale of lower-cost alternatives, thus limiting price competition in Canada.

This competition on the basis of commissions has a distorting effect on the allocation of capital by rewarding some investment fund managers more than is warranted, and others less than is warranted, while discouraging some from entering the market entirely. In Appendix A, we provide evidence substantiating how the conflicts of interest inherent in embedded commissions alter the behavior of investment fund managers, dealers and representatives at the expense of market efficiency and investor interests.

Issue 2: Embedded commissions limit investor awareness, understanding and control of dealer compensation costs Based on the available evidence, embedded commissions appear to limit investor awareness, understanding and control of calp compensation costs. The lack of saliency of embedded commissions reduces investors' awareness of dealer compensation costs: To facilitate the sale of funds, the Canadian fund industry has over the last option strategies buy call sell put 302 years gradually shifted away from transaction-based sales commissions paid directly by investors toward a greater reliance by both investment fund managers and dealers on product embedded commissions.

The research we have gathered and reviewed is clear that the majority of Canadian fund investors are not aware of what they pay for financial advice or that they pay for financial advice at all. The research we have gathered and reviewed suggests that investors are more sensitive to salient upfront fees like front-end loads and are more likely to control such visible and salient fees that they must pay directly. Embedded commissions add complexity to fund fees buyy inhibit investor understanding of such costs: Further contributing to investors' limited awareness and understanding of fund fees, including embedded commissions, is the stratfgies of fund fees in terms of structure and options on offer.

Although all dealer compensation costs that fund investors pay strxtegies such as sales charges and indirectly through ongoing fund fees such as trailing commissions are disclosed in the fund's prospectus, the fund facts document and the annual report on charges and other compensation, the variance in such fees between optin fund managers, fund types i. The complexity of the mutual fund fee structure can make it challenging for all but sophisticated option strategies buy call sell put 302 to measure the value of the services they receive against the costs they pay and assess the impact of fees on their investment returns.

The research we option strategies buy call sell put 302 gathered and reviewed suggests that price complexity in retail financial products increases the information asymmetry between investors and product manufacturers and distributors, which increases investors' reliance on more informed intermediaries for their investment choices and decisions. The product embedded nature of dealer compensation restricts investors' ability to directly control that cost and its effect on investment outcomes: Since the cost of xall compensation is embedded in the fund's ongoing management fees, investors have no ability to directly negotiate this cost and consequently have no control over the amount they ultimately pay their dealer and their representative.

The only control investors have on dealer compensation costs under the embedded commission model is to vote on a proposed increase to fund management fees from which dealer compensation is paid. As a result, investors who may desire little or no advice e. And investors who do desire advisory services but who wish to pay for them directly rather than through embedded commissions similarly have limited options because direct pay arrangements are typically available only through dealers servicing higher net worth investors.

We note that pput though the vast majority of investment fund managers now offer fee-for-service series e. Series F for minimal investments, the distribution of such series is still limited in comparison to the distribution of series with embedded commissions due to the fee-based account minimums imposed by the dealer. This situation is called "cross-subsidization". For example, front-end load investors in a fund may cross-subsidize the costs attributable to DSC investors.

Investors' inability to make an informed choice based on fund costs, including dealer compensation, and to control such costs due to their product-embedded nature can lead to sub-optimal investment choices and outcomes. Issue 3: Embedded commissions paid generally do not align with the services provided to investors There is generally no clear relationship between the level of embedded commissions set and paid by the investment fund manager to the dealer and the level of services and advice the dealer and the representative provide to investors in exchange for such compensation.

Investors do not receive ongoing advice commensurate with the ongoing trailing commissions paid: As mentioned above, trailing commission rates may vary between investment fund managers, fund types, fund series and purchase options. They may also in some cases vary over the course of the investment. Embedded commissions are paid to dealers regardless of the extent of the services that a representative provides to the investor in connection with an investment in a fund. The same compensation is paid irrespective of whether the representative provides only transaction-oriented advice or provides a broader range of ongoing investment services and financial advice that is tailored to the investor's specific needs.

For example, our review of the Canadian fund market finds that higher than average trailing commissions are sometimes paid on investment funds offering pre-packaged investment solutions i. Similarly, discount brokers who provide execution-only services often distribute fund series that pay them the same trailing commission that would be paid to a full service dealer. Sfrategies 'one-size-fits-all' nature of the trailing commission payment therefore seems misaligned with the provision of services and advice customized to the investor's specific needs, expectations and preferences.

A contributing factor to this misalignment is likely investors' low awareness and understanding of fees including dealer compensation as discussed under Capl 2 abovewhich causes investors to not demand a level of service and advice commensurate with the fees they have indirectly paid for. Absent a clear relationship between the rate of the embedded compensation paid to the dealer and their representative and the level of services an investor receives in return, the payment of embedded compensation may be perceived to be tied to the simple distribution of the fund product as opposed to the provision of ongoing advice and services.

Certain industry submissions received in response to our Original Consultation Paper would seem to confirm this view as several commenters indicated that trailing commission payments support dealer operations and sales activity more than the provision of ongoing advice. If investors are getting basic one-time services centered on the trade as opposed to ongoing advice and services in exchange for the ongoing embedded commissions paid out of their funds' management fees, they may be indirectly paying too much for the services they are caol receiving.

Moreover, since the aggregate amount of embedded commissions that investors pay increases as their holding period increases, those investors who remain invested longer may pay more fees than others for the same basic service. The cost of advice provided through embedded commissions may exceed its benefit to investors: Some of the research we reviewed suggests that investors may derive no measurable net benefit from financial advice paid for through embedded commissions and may in some cases be worse off because of it.

Certain research finds that the advice of representatives may be skewed not only by compensation biases, but may also be affected by representatives' varying skills and knowledge about investing which in some cases may benefit from increased proficiency requirements. Other research suggests that the benefits that investors derive from the advice of representatives may be largely behavioral and thus intangible in nature, such as the development of good savings discipline, overcoming inertia, the reduction of anxiety, and the creation of trust.

Are there other significant issues or harms related to embedded commissions? Please provide data stratwgies support your argument where possible. Are there significant benefits to embedded commissions such as access to advice, efficiency and cost effectiveness of business models, and heightened competition that may outweigh the issues or harms of embedded commissions in some or all circumstances? The foregoing shows that product embedded commissions affect the behavior of fund market participants in a way that undermines investor protection and the fairness and atrategies of our capital markets as well as confidence in our market.

This situation suggests a need to consider regulatory action. To address the investor protection and market efficiency issues outlined in this Consultation Paper, the CSA considered and discussed the range of policy options set out in the ca,l below: Potential regulatory options 3. Investment fund manager focused initiatives 4. Enhance-ments to registrant-client relation-ship Better fee disclosure in fund facts giving more context for fund costs Forex trading strategy free download jdk extent to which concept proposals under CSA CPif implemented, may respond to fund fee issues Guiding considerations for evaluation of options: Our evaluation of the range of options and determination of which options should be retained and which ones should not were guided by the extent to which an option directly addresses the three investor protection and market efficiency issues we identified.

We specifically considered the questions below: c. Where we determined that an option would potentially address one issue to some degree, but at the same time would fail to cal or would likely exacerbate another issue, or would potentially increase the complexity of fund fees or fail to enhance competition in the market, we opted to not retain the option.

When we evaluated the options through this lens, our analysis drew us to not retain the options highlighted in red and retain the options highlighted in green in the table above. The options we opted to not retain and the reasons why are described in Appendix B of this Consultation Paper. We accordingly view option "iii" as being complementary to options "i" and "ii".

In Part 6 of this Consultation Paper, we provide our detailed assessment of the extent to which the above key issues may be addressed by existing CSA regulation and ongoing proposals, and seek your views on that assessment. In this part, we discuss the potential scope of the ccall of embedded commissions should the CSA decide to move forward with rule-making. In particular, we consider: NIimplemented ingoverns the payments that investment fund managers may make to dealers in connection with the distribution of securities of a mutual fund.

To do otherwise would create an opportunity for regulatory arbitrage. The Byy will accordingly continue to liaise with insurance regulators to address the potential risk of regulatory arbitrage between investment funds and individual segregated funds. In the interest of achieving a harmonized approach, the Canadian Council of Insurance Regulators CCIR established a Segregated Funds Working Group inwith a mandate to, among other things, identify potential gaps in the comparative regulatory frameworks for segregated funds and mutual funds and assess the potential risk of regulatory arbitrage by dually-licensed insurance and mutual funds insurance agents.

The issue paper identifies the CSA's consultation on how to address the potential investor protection and market efficiency issues arising from embedded commissions as an issue of particular relevance, and the CCIR will review the CSA policy direction on this matter and assess its appropriateness for segregated funds. For each of the following investment products, whether sold under a prospectus or in the exempt market under a prospectus exemption: b.

What would be the risk of regulatory arbitrage occurring in the exempt market if embedded commissions were discontinued for the product only when sold strafegies prospectus? Are there specific types of mutual funds, non-redeemable investment funds or structured notes that should not be subject to the discontinuation of embedded commissions? Are there other types stratgeies investment products that should be subject to the discontinuation of embedded commissions?

NI currently prohibits mutual funds that are reporting issuers and members of the organization of such mutual funds from making payments to dealers or their representatives in connection with the distribution of securities of a mutual fund. The rule however excepts from this prohibition the payment of commissions including trailing commissions and the provision of support to dealers for marketing and educational practices by members of the organization of mutual funds. If the CSA were to move forward with a rule proposal, we currently anticipate that srategies would seek to discontinue any payment of money to dealers in connection with an investor's purchase or continued ownership of a security described above option strategies buy call sell put 302 is made directly or indirectly by any person or company other than the investor.

The rule would preclude compensation to dealers that is paid or funded by the investment fund or the investment fund manager or structured note issuer out of fund assets or revenue. We anticipate this change would at a srategies prohibit the payment by investment funds, investment fund managers or structured note issuers to dealers of the following embedded commissions: To be clear, the discontinuation of embedded commissions would enable dealers and their representatives to adopt various types of compensation arrangements.

Under direct pay arrangements, dealers and their representatives could opt to be compensated through upfront commissions such as front-end sales loadshourly fees, straetgies flat fee, a fee based on a percentage of the client's assets under administration fee-based arrangementor other suitable compensation arrangement, provided in all cases: a. For example, ongoing fees should be charged for ongoing services. We believe that the above terms mitigate the close alignment of interests between investment fund managers, dealers and representatives.

While investment funds, investment fund managers and structured note issuers would no longer be allowed to pay or fund compensation to dealers from their own assets or revenue in connection with an investor's purchase or continued ownership of a security, we anticipate allowing them to facilitate the investor's payment of dealer compensation. Specifically, the investment fund manager would be permitted to collect the dealer's compensation, either through deductions from sttategies amounts or through periodic withdrawals or redemptions from the investor's account, and remit it to the dealer on the investor's behalf, provided the investor consents to this method of payment.

We acknowledge that the above types of payments may give rise to conflicts of interest that may continue to incent registrant behavior that does not favour investor interests. We therefore seek your responses to the questions below. Do you agree with the discontinuation of all payments made by persons or companies other than the investor in connection with the purchase or continued ownership of an investment fund security or structured note?

Why or why not? Are there other fees or payments calo we should consider discontinuing in connection with the purchase or continued ownership of an investment fund security or structured note, including: a. What is the risk and magnitude of regulatory arbitrage through these types of fees and commissions? If payments and non-monetary benefits to dealers and representatives for marketing and educational practices under Part 5 of NI are maintained further to the discontinuation of embedded commissions, should we change the scope of those payments and benefits in any way?

How effective is NI in regulating payments within integrated financial service providers such that there is a level playing field for proprietary funds and third party funds? Should internal transfer upt to dealers within integrated financial service providers that are tied to an investor's purchase or continued ownership of an investment fund security or structured note be discontinued? To what extent do integrated financial service providers directly or indirectly provide internal transfer payments to their affiliated dealers and their representatives to incent the distribution of their products?

Are there types of internal transfer payments that are not tied to an investor's purchase or continued ownership of an investment fund security or structured note that should be discontinued? If we were to discontinue embedded commissions, please comment on whether we should allow investment fund managers or structured note issuers to facilitate investors' payment of dealer compensation by collecting it from the investor's investment and remitting it to the dealer on the investor's behalf.

The purpose of this part is to outline our assessment of the possible market impacts of discontinuing embedded commissions. In particular, we assess the potential impacts this change could have on the Canadian investment fund sector, including on market selll, business models and on the accessibility and scope of advice provided to retail investors, based on data we have gathered and the conclusions we have drawn from this data.

The regulatory impact part is divided into four sections. In section one, we provide a number of important facts about Canadian households, the fund market and the distribution of funds and securities in general that will help us anticipate possible market impacts of discontinuing embedded commissions. In section two, we outline possible overall or high-level impacts on the market in the event of the optiom of embedded commissions.

This section is followed, in section three, by a more narrow focus on the impacts to specific stakeholders. Finally, in section four, we conclude by outlining how the discontinuation of embedded commissions may address the key issues outlined previously in Part 2 of this Consultation Paper. We look to all stakeholders to provide feedback and data responding to the conclusions that stratevies draw here.

Important facts about the fund market and fund market participants today A prerequisite for the CSA's assessment of possible policy pht regarding fund fees was to understand and analyze what we know about the market today and in particular, what we know about the respective market participants -- advised and non-advised fund investors, consumers of financial services generally, access to advice by retail investors, investment fund distribution channels and investment fund managers.

We provide pertinent information for each of these groups below using data from Investor Economics, Investment Industry Regulatory Organization of Canada IIROCMutual Fund Dealers Association MFDAMorningstar Direct and the Ipsos Canadian Financial Monitor survey. In comparison, household credit due primarily to the increase in residential mortgages grew 7. Total assets held in bonds in particular declined over the last 10 years while assets held in equities saw relatively modest growth.

While both investment fund securities and cash and cash equivalents made up a significant bhy of aggregate household financial wealth at the end ofassets within investment funds have grown faster since On average, investment fund assets increased by 7. Figure 1: The Canadian household balance sheet in aggregate. We turn now to the distribution of assets and investment fund ownership across households by analyzing the data from the Ipsos Canadian Financial Monitor.

The second relevant fact is that the majority of Canadian households do not own investment funds. Mass-market households make up the largest share of those that do not own investment funds Table 2: Household distribution by investment fund ownership. However, among investment fund owning households, the majority have relatively modest to moderate levels of accumulated financial wealth Yet, like their share of Canadian households generally, mass-market and mid-market households made up the largest share of households that own investment funds.

Investment funds, like most securities, are more frequently owned by households with higher levels of accumulated financial wealth The distribution of fund ownership, like the distribution of financial wealth generally, skews toward households with higher levels of investable assets. Investment funds, like most securities, tend to be a higher-wealth product. Investment funds are less popular than traditional savings vehicles with mass-market households Table 3: Household distribution by investable asset band.

Trading software for mac reviews can see this lack of relative popularity more clearly when we look at the proportion of investment fund ownership across investable asset bands. Table 3 above provides the breakdown of the Canadian households that own investment funds i. These households will typically buj more conservative financial products instead, such as cash, GICs etc. For mid-market and affluent households, the majority held investment funds at the end of Once again, investment fund ownership is less prevalent for households with modest levels of savings relative to households with higher levels of accumulated wealth.

Investment fund owning households with lower levels of accumulated wealth are less likely to state that they use advice Table 4: Fund owning household distribution by investable asset band. Table 4 above opfion a breakdown of the households that own investment funds i. As Table 4 highlights, the data suggests that advice usage tends to be more of a higher-wealth product. Its prevalence among investment fund owning households rises with the level of investable assets. Whether advised or not, households must purchase their investment funds through a dealer.

A key piece of information needed in order to anticipate the possible market impact of the discontinuation of embedded commissions is an understanding of where investors access investment funds today. We will look optiom this question from a number of different angles and data sources, starting with the Ipsos Canadian Financial Monitor data. In each of the tables, we take a closer look at where households that hold investment funds accessed their funds.

Households may have multiple relationships srll different types of fund distributors e. We have cross-tabbed fund distributor types by grouping deposit-takers and insurers the traditional integrated financial product distributors together pput independents and other distributors the group traditionally labeled as independent fund dealers together. 3022 households purchase their funds through a deposit-taker or insurer owned dealer Table 5: Fund owning household distribution stgategies fund dealer relationship.

Deposit-taker and insurer owned fund dealers dominate fund distribution in Canada. Households with lower levels of accumulated wealth are less likely to purchase their funds through an independent dealer Table 6: Mass-market household distribution by fund dealer relationship. Table 7: Mid-market household distribution by fund dealer relationship. Fund distributors owned by deposit-takers and life insurers dominate investment fund distribution Across all levels of investable assets, deposit-taker and insurer owned fund distributors tended to dominate fund distribution.

These insights are also confirmed by data from Investor Economics. We fall highlight the change in market share for deposit-taker and insurer owned fund distributors in each channel. Deposit-taker and insurer owned fund dealers dominate investment fund distribution today Figure 2: Investment fund assets by distribution channel. This growth rate is particularly impressive given the size of the branch delivery channel 10 years ago.

Growth of investment fund assets in the full-service broker channel in particular was driven by a number of factors including the growth in fee-based account usage and in the share of investment funds used in these accounts. Next, we turn to data from the MFDA and IIROC in order get a sense of whether or not the insights from the Investor Economics and Ipsos data, which focused on investment fund distribution, carry over to retail securities distribution generally.

As outlined above in our review of the Ipsos Canadian Financial Monitor data and the Investor Economics Household Balance Sheet data, deposit-taker and insurer owned dealers have a strong market presence in the fund industry. This presence also extends across specific buh channels with deposit-taker and insurer owned dealers administering the largest share of assets in the MFDA and IIROC channels.

The MFDA channel is fairly concentrated and highly integrated. At the end ofthere were buj large number of both integrated and independent firms in the channel with the majority of firms being independent of asset management. However, the majority of the assets in the channel and approved persons employed were at the integrated firms. This information, coupled with our analysis of the Ipsos data, suggests that the majority of households particularly mass-market households will be working with a deposit-taker or insurer owned MFDA dealer.

The majority of investment fund owning mass-market households are working with representatives that are not compensated by commissions For many integrated fund dealers and in particular for the deposit-taker owned fund dealers, compensation for the representative is not derived from commissions but rather through non-activity based transfer payments from affiliated corporate entities. The IIROC channel also has a wide range of both integrated and independent dealers. Where the two channels differ is with respect to the level of related party product distribution.

While the deposit-taker and insurer owned MFDA firms primarily distribute proprietary funds, their counterparts in the IIROC channel are primarily open shelf largely due to the types of representatives employed in this channel. IIROC representatives also have more flexibility and are able to offer a wider variety of security types. Therefore, IIROC representatives tend to be more independent than their MFDA counterparts, even if they are working for a firm that offers their own mutual funds, guy them and the whole channel less focused on the sale of proprietary products including proprietary funds.

Representatives employed by deposit-taker owned IIROC dealers tend to be compensated via commission grid while their counterparts at deposit-taker owned MFDA dealers caall typically compensated via salary plus a performance bonus which may impact the way in which the firm can incent behavior in the two channels. IIROC representatives also tend to be more selective regarding their clientele. These households are typically the wealthiest households in Canada which is one of the reasons why retail assets under administration in opiton channel are over three times the size of assets in the MFDA channel.

The IIROC channel administers calk assets but services fewer households than the MFDA channel. Table Combined MFDA and IIROC member assets and approved persons by dealer type. Sekl explained above, dealers that only offer proprietary products are concentrated in the MFDA channel. This equates to one representative for every Canadians. It also suggests that the distribution landscape in Canada is relatively more concentrated and vertically integrated than is the distribution landscape in strxtegies United Kingdom.

ETFs have always been popular with DIY investors and they have become more popular over time. Canadian ETF managers must compete with their U. Unlike investment fund managers of conventional mutual funds in Canada, investment fund managers of ETFs in Canada must compete both within the Canadian market and compete with ETFs domiciled in other markets, primarily the U. This preference for passively managed products is even more prevalent for Canadian DIY investors investing in ETFs. The majority of DIY investors investing in mutual funds pay full trailing commission despite not receiving byu.

At the end of1. Index fund market share has remained essentially unchanged over the last 10 years. Mutual funds are by far the dominant type of investment fund sold in Canada today. This has been the case since organized investment fund asset monitoring in Canada started in the early s. Although there have been articles at various times in the past regarding the growth of ETFs and segregated funds, and despite impressive annual growth rates for ETFs, the dominance of mutual funds has never been challenged in a significant way.

Fund management is concentrated but is less concentrated than fund distribution Table Mutual funds by investment fund manager type. Similar to what xall found with the Ipsos, Investor Economics, IIROC and MFDA data, the investment fund manager market in Canada is dominated by the deposit-taker and insurer owned fund managers.

Figure 6: Mutual fund assets ex-ETFs by fund purchase option. We update fund assets by purchase option, a graph included in the Original Consultation Paper, to show how fund purchase options have changed over the last few years. The back-end load and low-load purchase options, which are both a form of DSC purchase option, remained a large component of industry assets at the end of Though DSC options have been falling in terms of market share, assets in these series continue to grow.

A small, but fast growing, share of mutual fund assets are held in fee-based purchase options Fee-based purchase options remain a very small part of the mutual fund market, but they are growing quickly. Fee-based options, while growing quickly, remain a small part of the mutual fund market as these purchase options are not available to all investors in all channels. Not all purchase options are available to all investors in all channels Given the number of series and purchase options available in the market, it may seem that investors are provided a wide range of purchase options.

Figure 8 below lays out the availability of fund purchase options in Canada using the information previously discussed regarding the MFDA and IIROC channels and data from Investor Economics, Morningstar, and Ipsos. Availability of products and purchase options tend to vary by the level of investable assets, by distribution channel, and by distributor type.

Investors that do not want proprietary funds may have to forgo advice and purchase through a DIY channel. Fee-based purchase options are typically not available for mass-market households. In otpion of the purchase options available to mass-market households, all purchase options no load, DSC purchase options and front end load except for fee-based options are generally available. If the fund investor is investing through a deposit-taker owned mutual fund dealer, the investor will typically be offered a no load purchase option.

If the puy is working with an insurer owned mutual fund dealer, the investor will typically be offered front end, no load and DSC purchase options. Fund investors with little to invest are the most likely to be offered DSC purchase options and some firms primarily offer their clients DSC options. Fund investors typically gain access to advice and a wider range of product options as their investable assets increase.

These pyt can choose to invest through a deposit-taker owned or insurer owned mutual fund dealer focused on proprietary products or an independent mutual fund dealer offering the full universe of fund products. Fee-based purchase options have historically been limited for mid-market households, although access to these options has begun to increase recently. When purchasing through other mutual fund dealers or through independent IIROC dealers, mid-market households will typically be offered front end, no load and DSC options.

Those with large amounts of investable assets get access to advice, product options and a broader choice in purchase options. They can access a fee-based or commission-based advisor who can offer them the universe of fund products and other securitiesor they can choose to work with a traditional commission-based mutual fund dealer who may also be a financial strategise. In the next section, we look at the anticipated effects if we transition away from embedded commissions.

Figure 8: Mutual fund payment options by channel and account size. Overall market impact of the discontinuation of embedded commissions For the syrategies that follows, unless otherwise indicated, we assume that the market has transitioned away from embedded commissions and that current details about the market hold. We also assume that the requirements in CRM2 and POS are fully implemented, and where applicable, we discuss the implication of potential intersections between the discontinuation of embedded commissions and the proposals set out in CSA CP We anticipate that the number of fund series available in Canada would significantly decline as a result of a transition away from embedded compensation.

As also discussed in Appendix A, this effect is expected because the vast majority of option strategies buy call sell put 302 series available in the market today differ only by the level and type of embedded compensation paid to the dealer. This would significantly simplify fund fee structures which are currently sttrategies complex and difficult for investors to understand, as shown in Part 2. Fund series that remain would be larger on average after the change.

We anticipate that this impact alone could drive down fund costs. We do not anticipate significant cost implications arising from these amendments to fund disclosure documents. We do not anticipate that any switches between series of ca,l same fund that may occur as a consequence of the simplification of fund series would have any financial or tax implications for fund investors because, as is the case today for switches between fund series of the same fund, these switches would not be considered a deemed disposition for tax purposes.

Each would entail one-time costs. Some lower-cost mutual fund providers have expressed to the CSA the view that embedded commissions function as a barrier to market entry. Also, MERs for actively managed funds offered by these new entrants could be up to 75 bps lower than average actively managed fund costs today.

Aside from certain large low-cost product providers, it may be possible for smaller emerging asset managers that have a good track record of risk-adjusted performance to enter the mutual fund market either through a public fund launch or through a sub-advisory relationship after the transition away from embedded commissions. Those managers that offer a distinct mandate or a niche style -- a comparative advantage -- could fall a greater chance of success in a post trailing commission world as they would compete on their performance without the trailing commission factor.

Over time, the discontinuation of embedded commissions should curtail the incentive for mutual fund dealers and their representatives to recommend products that give priority to maximizing revenue over the interests of clients. Mutual fund dealers and their representatives are therefore likely to focus more on fund performance and fund fee levels, which in turn will put pressure on investment fund managers to improve their performance and reduce their fees. Investment fund managers with affiliated mutual fund dealers are also likely to be affected by this pricing and performance pressure over time.

We anticipate that the impact of new entrants into the mutual fund market will lead to a decline in the cost of existing funds as incumbent investment fund managers may adjust their pricing to retain market share. Based on the estimates provided above for low-cost provider pricing, we may see an MER decline of 25 to 50 bps for actively managed equity funds and 10 to 25 bps for actively managed fixed income funds shortly after the discontinuation of embedded commissions. However, we are cautious regarding 032 extent and pace at which this shift would likely occur.

As but earlier and in Appendix Athe Canadian mutual fund market excluding ETFs is overwhelmingly focused on actively managed funds. According to data from the Investment Association, shown in Figure 9 below, index tracking fund "tracker funds" market share began to significantly increase after Figure 9: Growth of Tracker Funds in the United Kingdom.

If we were to see a similar increase in the run up to the discontinuation of embedded commissions in Canada, we would expect index fund market share to increase from their current share of 1. We may also see a shift of assets between conventional mutual funds and ETFs whether managed by the same investment fund manager or not.

In such cases, we would expect that all investment fund managers would be reviewing their fund offerings with respect to cost and performance and, in some cases, introducing or expanding their passively managed fund offerings. Beyond the shift to passively managed products, we would also aell a potential shift in assets across active investment fund managers.

For example, if active investment fund managers will need to compete more on the level of their risk adjusted performance after bu discontinuation of embedded commissions than they do presently, it is reasonable to assume that actively managed funds producing negative alphas today could be considered at risk over time. As we have emphasized throughout this section, much depends on how investment fund managers react to the discontinuation of embedded commissions.

And as noted earlier, we expect investment fund managers to alter the way that they compete over time by reducing prices and refocusing their distribution efforts toward improvements optin risk adjusted performance to retain market share. When considering the overall effects on product distribution and advice, it is important to note that the discontinuation of embedded commissions would not require dealers to move to a fee-based arrangement.

As discussed in Part 3, dealers stratdgies still charge commissions to clients directly, move to a optoin arrangement, move to an hourly rate, or move to any other combination of payments as long as compensation is not embedded within the product or paid by the investment fund manager. As we highlighted earlier, the majority of mass-market households do not own investment funds and would not be affected by the discontinuation of embedded commissions.

However, based on current market developments, they are likely to have more access to online advice over the next few years. First, online advice is often less expensive than traditional advice channels and would likely remain so particularly if we were to discontinue embedded commissions. This ability of online advisers to undercut the costs of the dominant advice delivery channel for investment fund owning households with modest levels of accumulated wealth is likely to limit what this channel can charge going forward for investment fund distribution and advice.

However, as we said at the outset, online advice is an emerging sector in Canada. Early pricing and services provided may not be indicative of pricing over the long term. For example, it remains to be seen whether these new online adviser entrants can option strategies buy call sell put 302 enough scale before incumbents adopt innovation. In addition, we have yet to see the entrance of low-cost, hybrid, online advice models kption Canada as we have seen in other markets.

Figure Online adviser versus traditional advice costs. While online advisers are likely to have an impact on the price of distribution, they also may have an impact on the types ophion products distributed, particularly if embedded commissions byy discontinued. Once again, the majority of households with modest levels of accumulated savings have a relationship with a deposit-taker or insurer owned dealer.

As previously discussed, the scale of the advice these households require may tend buh be more limited and the types of products they are being offered are often packaged solutions such as fund-of-funds -- because they are easy to sell and reduce the representative's compliance risk as they transfer the representative's portfolio creation role to the investment fund manager.

In many ways, fund-of-funds are the equivalent of the asset allocation service offered by many online advisers. They have become the dominant product in the mutual fund industry. Fund-of-funds offered through the deposit-taker channel are typically invested in related party actively managed funds. Research suggests that while actively managed funds tend not to outperform their benchmarks, a portfolio of actively managed optino is even less likely to outperform a portfolio of passively managed funds.

Notably, only 3 funds were able to do it over all three periods. As most fund-of-funds tend to be actively managed while many but not all portfolios managed by online advisers tend to be made up of lower-cost passively managed ETFs or mutual funds, we should expect that these portfolios will do at least as well as traditional fund-of-funds offered by vertically integrated firms today. Moreover, we should expect that the sophistication of online advice offerings will improve over time.

The fact that the advice is more automated means that, with the same number of representatives, online advice platforms have the potential to service more households relative to traditional advice channels. Automation may make it possible for the traditional advice channel to service parts of the market previously not covered. This change is expected because these initiatives, along with the CRM2 initiative, may encourage dealers and their representatives to explain their value proposition to clients ca,l a way many have never had to.

In some cases, the easiest way for the representative to do this will be to show the client that the use of discretionary advice creates a savings discipline, simplifies their life and frees up their time. There is some evidence that this shift has occurred in strategiws U. It is important to note that this trend, were it to occur either in response to the discontinuation of embedded commissions or other ongoing policy initiatives, would be likely to drive up the cost of advice.

However we should also expect, in such a scenario, that the level of service and advice would be potentially more aligned with the costs paid. Whether or not this shift is a benefit to investors depends on whether investors or dealer firms are driving the change. For example, European and U. Those option strategies buy call sell put 302, typically deposit-taker and insurer owned mutual fund dealers, that do not receive embedded commissions today but instead receive transfer payments unrelated to an investor's purchase or continued ownership of a mutual fund security from their non-securities registered parent firm, may be less affected by the discontinuation of embedded commissions.

It is anticipated that even these firms would be encouraged to make changes over time to their products and services and their pricing in order to compete with new low-cost distribution models. Impact of the discontinuation of embedded commissions on specific stakeholders We set out below the potential impact of the discontinuation of embedded commissions on different investor segments. The impact we have outlined for one segment of investors could also apply to option strategies buy call sell put 302 certain degree to another segment of investors.

As explained above, we anticipate that, like all fund investors, this group of investors would likely see the cost of active management and fund management generally decline. Strateiges players entering the market would likely service these investors and their usage of low-cost, passively managed funds would likely increase. In order to service these investors, dealers will likely be encouraged to increase or introduce the use of simplified online advice options.

An implication of this development, coupled with the discussion earlier about the number of households in this group that do not own investment funds today, is that the size of this group has the potential to grow over time. Considering the shift in product recommendations discussed previously, we anticipate that representatives, particularly at independent mutual fund dealers which offer an open product shelf, would focus more on lowering product costs and choosing better performing products over time.

The discontinuation of embedded commissions would also eliminate the incentive for representatives to potentially engage zell unsuitable leverage strategies. A potential negative impact of the discontinuation of embedded commissions for mass-market households is that some independent fund dealers may choose not to continue to service these households.

We do question though the extent to which this clal will occur given that the implementation of the new CRM2 annual report on charges and other compensation will have been completed. Where we may see movement bjy for those investors who want to use mutual funds but do not want to use tsrategies. It is fair to say that this group of investors is the group most at risk of falling into the "advice gap" -- the group of investors who cannot obtain the amount of advice they desire at the price they are willing to pay -- today.

Admittedly, in terms of the number though not in terms of the share of total wealth this group makes up the largest share of households. For a number of reasons alluded to earlier in this section, despite the potential risks, we option strategies buy call sell put 302 not anticipate a significant advice gap in the event that zell move forward with our proposals. First, with respect to the risk of increasing the "advice gap", we note that the majority of mass-market households do not own investment funds and that for the mass-market households that do own investment funds, the majority have tended to purchase them through a deposit-taker or insurer owned dealer.

We anticipate that deposit-taker and insurer owned dealers will continue to serve mass-market households if we transition away from embedded commissions. As noted earlier, by virtue of being option strategies buy call sell put 302 vertically and horizontally integrated, many deposit-taker and insurer owned dealers particularly in the mutual fund dealer channel where we have shown the majority of these households are serviced have already moved away from traditional grid based compensation that relies on embedded commissions.

They will continue to provide a wide array of financial products and services including mutual funds to households with little to invest. ;ut respect to the developments in the advice market in the U. In the recent financial advice capl review conducted by the Financial Conduct Authority FCA and HM Treasury in the U. As well, the move to a direct pay model for advice on retail investment products has improved transparency and significantly reduced certain conflicts of interest.

None of these opiton limiting access and affordability were found to be related to the removal of embedded commissions but rather they tended to be tied to the particular way in which the FCA chose to raise the standard of care. The new standard for advisors implemented in the U. For example, the CSA has not contemplated an equivalent to the FCA's cross-subsidization rule which seems to have played a role in limiting the introduction of new advice delivery models in the U.

Therefore, we do not anticipate the same obstacles to the development of new lower-cost distribution models in Canada after the discontinuation of embedded commissions. In addition, as discussed later in Part 5, if the CSA were to discontinue embedded commissions, the CSA would aim for a transition period sufficient to allow market participants time to adjust their business models with the objective of mitigating any investor harm.

Finally, as has been the case with the introduction of CRM2 and POS, we anticipate that the industry will find it in its interest to educate and prepare their clients for such a change in order to minimize disruption to its business. As mentioned in Part 5, the transition to direct pay arrangements and the implementation of other regulatory reforms may lead to an increase in the cost of dealers' operations and compliance, which may lead to an increase in the cost of advice.

There is also the possibility that some representatives may have less of an incentive to service clients after the initial sale were we to move to more widespread use of fee-based arrangements. This may lead to reverse churning. We also expect that new players entering the market would tend to target this group and their usage of passively managed funds would likely increase. A transition away from embedded commissions will likely drive a shift in products recommended by 3022 and made available on the cxll product shelf toward lower-cost and passively managed funds, which could improve investor outcomes.

We expect client engagement with this segment of investors to increase with respect to the services and advice options buuy e. This group is also likely to be offered more discretionary advice over time. We anticipate that the concept proposals outlined in CSA CPif implemented, would limit this potential impact. As outlined above, there is also the potential for reverse churning in these arrangements.

We anticipate that this group of investors will be the least impacted by the discontinuation of embedded commissions as they are the most likely to be using non-embedded forms swll dealer compensation today. They would, however, likely benefit from the fund management cost declines outlined above. As with the other two investor groups, representatives at private wealth management firms and representatives at IIROC dealers would likely focus more on recommending lower-cost and passively managed funds to their affluent clients where it is appropriate to do so.

Usage of discretionary advice is likely to go up substantially for this group. We anticipate similar potential negative impacts as those anticipated for the other two investor groups. Given that the affluent group of investors is the most sought after by advisors today, we anticipate that they will continue to be provided the most flexibility in terms of payment arrangements and the 3302 number and scope of advice delivery and service offerings. For DIY investors, the discontinuation of trailing commissions would significantly lower costs as we would expect them to benefit from the decline in fund management costs and the removal of the full trailing commission costs they often pay today.

The supply of DIY fund series options may also increase from today to 4, options based on a comparison of the D series and F series available today. These investors will, however, be required to pay transaction-based or asset-based fees directly, to offset the revenue lost from trailing commissions. We do not expect these payments to be any higher than the trailing commissions paid on DIY fund series today -- typically 0.

Based on the facts outlined in the previous sections of Part 4, we anticipate that, if stratfgies were to discontinue embedded commissions, all industry stakeholders would take the necessary steps to adapt to direct pay arrangements by innovating, segmenting their products and services, and using new technologies, to the extent possible within firm specific resource constraints. As outlined previously, we expect fund management costs to decline and the share of lower-cost funds and passively managed funds sold in Canada to increase over time.

Given that total mutual fund assets have been growing sepl an average 7. We also estimate that, based on current five year fund alphas, there would be some proportion of actively managed fund assets likely at risk of experiencing redemption option strategies buy call sell put 302. For relatively higher cost active investment selll managers with a large proportion of negative alpha funds and no access to affiliated dealer distribution today, there would likely be more challenges in the event that there is option strategies buy call sell put 302 discontinuation esll embedded commissions.

These investment fund managers could potentially have fewer options to cross-subsidize across business lines relative to their integrated investment fund manager peers. We do anticipate, however, that the remaining active investment fund managers are more likely to be high alpha producing firms. For those active investment fund managers that do not pay trailing commissions or pay relatively lower trailing commissions today, it is reasonable to assume that they will have better access to the discount brokerage channel than they do today.

While we anticipate increased access to lower-cost fund products in the IIROC and independent MFDA platforms, we also anticipate that independent investment fund managers will still be at a disadvantage as they may not be able to gain access to those firms with closed, proprietary only, product shelves predominantly deposit-taker and insurer owned MFDA firms. As an alternative, these investment fund managers may opgion required to set up a direct to client channel and obtain a dealer registration in order to compete in this space or alternatively, access these investors via a third party online advisory service.

We anticipate that independent mutual fund dealers, similar to the situation for investment fund managers, would be required to compete more on their overall level of services and advice in a market that is likely to be transformed strategise by automated solutions and technological change generally over the next few strtegies. Despite the increase in competition, there may be opportunities that arise for these firms as well. The introduction of more low-cost fund products is likely to allow independent dealers, at least initially, to put pressure on their integrated fund dealer competitors.

Representatives at independent firms will be further encouraged to study the product market on behalf of their clients with price and performance in mind which may result in better recommendations and better outcomes for their clients over time. Representatives are also likely to have access to more tools that will allow them to service a wider range of clients than is the case today. We anticipate that some independent dealers, if they cannot explain their value proposition, may have trouble maintaining their assets under administration.

However, this may already become a trend to a certain degree with the introduction of the annual option strategies buy call sell put 302 on charges and other compensation CRM2whether or not embedded commissions are discontinued. Client engagement for the remaining firms will increase as will the service options that can be offered to clients. There is also a risk that some dealers and representatives that can recommend non-securities products may prioritize their compensation interests over the interests of their clients by inappropriately shifting their clients' assets startegies non-securities investment products with embedded fees.

It is possible that the discontinuation of embedded commissions may disadvantage sell sized independent mutual fund dealers relative option strategies buy call sell put 302 full-service IIROC dealers because they rely more heavily on embedded iption than do IIROC dealers. We set out below the potential impacts specific to a dealer or an investment fund manager that is part of an integrated financial service provider. The impacts outlined above may also apply to them to a certain degree.

For the asset management arms of integrated financial service providers, we anticipate that new entrants to the market would put pressure on asset management pricing. Integrated investment fund managers would likely need to lower their asset management pricing to compete. They would also likely need to reassess their product pricing and would be encouraged to distribute their low-cost, passively managed fund options.

It is important to note however that, given their access to their closed shelf related mutual fund dealer channel, these firms would likely not feel the same pricing and redemption pressure as their independent investment fund manager peers, at least initially. Nuy integrated option strategies buy call sell put 302 that choose to be open shelf, due to the potential introduction of the enhancement to KYP obligations as currently outlined in CSA CPrepresentatives may be required to study the market, including the use of non-proprietary funds, on behalf of their clients with price and performance in mind which could result in better recommendations and better outcomes over time.

For integrated dealers that choose to offer a closed shelf, as mentioned above, they would not feel the same level of pressure and would, at least initially, still be able to operate mostly as they do today, although as previously mentioned, the cost of the proprietary funds offered may fall. Integrated firms as a whole would have more options, at least initially, to cross subsidize across both securities and non-securities business lines to maintain market share.

Trading grid forex yearly charts time however, it is reasonable to assume that even these firms would feel pricing pressure in their closed shelf distribution channels which may incent these firms to embrace new technologies, adopt new pricing strategies and service offerings and rely less on traditional advice many are already doing so. Furthermore, the potential entrance of low-cost hybrid online adviser models into Canada would likely put further pressure on the integrated fund distribution model.

Now that we have looked at the potential overall and specific market impacts of the discontinuation of embedded commissions, we discuss how this policy change may address our identified concerns. How does the discontinuation of embedded commissions potentially address some of the CSA's concerns? The discontinuation of embedded commissions would eliminate an important inherent conflict of interest that research has shown misaligns the interests of investment fund managers, dealers and representatives with those of investors.

Our analysis leads us to believe that discontinuing embedded commissions lut increase investment fund managers' focus on fund performance and discourage biased recommendations that may prioritize the maximization of compensation over the interest of the investor. The discontinuation of embedded commissions would also eliminate the incentive for representatives to potentially engage in unsuitable leverage strategies as explained in Appendix A.

The discontinuation of embedded commissions is the clearest and most direct way to address these conflicts of interest. In addition, when combined with certain concepts in CSA CPif implemented, the representative-client compensation discussion is more likely to result in a compensation arrangement that is more appropriate for the client's situation. The discontinuation of embedded commissions also complements the proposals outlined in CSA CP Generally, jurisdictions that have enhanced the advisor's standards and obligations have eliminated embedded commissions at the same time as outlined in Appendix C because they have recognized that these payments are one of the main obstacles preventing the advisor from working in the interest of their clients.

Research suggests that these payments are a conflict that is very difficult to manage or mitigate, except through avoidance. We recognize that discontinuing embedded commissions does not address all dealer affiliation issues. However the proposals outlined in CSA CPif implemented, in conjunction with this proposal may address some conflict issues with respect to internal compensation arrangements at the dealer. We anticipate that the discontinuation of embedded commissions would significantly simplify the fund fee structure in Canada, facilitate easier product cost and performance comparisons, and incrementally reduce information asymmetry for all market participants in particular, for retail investors.

Unlike disclosure, which only requires delivery and not understanding, the discontinuation of embedded commissions requires the representative to engage pug an in-depth discussion with the client and optioh the client's agreement upfront in order to get paid. Better alignment between the costs paid by investors for financial advice and the services provided to clients by dealers and representatives The discontinuation of embedded commissions, replaced by an upfront mengungkap rahasia trading forex sebelum and agreement regarding compensation, also addresses the questions regarding what fees are being paid and stock option put spread que importantly, what they are being paid for.

As we have seen already with high net worth client relationships, moving to a direct pay model may allow services and pricing to be more easily tailored to the client's needs. It also allows DIY fund investors to forgo advice and the cost of advice. In addition, after the discontinuation of embedded commissions, the representative-client compensation discussion is more likely to result in a compensation arrangement that is most appropriate for the client's situation.

Transition to direct pay arrangements may also help to increase investors' control over dealer compensation costs and the services provided. The discontinuation of embedded commissions may encourage new low-cost fund providers to enter the market with a range of option strategies buy call sell put 302 and actively managed funds. These new entrants will likely service retail investors in all wealth segments as they do today in other jurisdictions in which they compete.

It has been well-documented that one of the things new lower-cost entrants bring to the markets that they enter is significant competitive pressure on incumbents to decrease fund management costs over time. We would expect to see a shift in product recommendations to lower-cost and passively managed products, and a shift in the allocation of capital across active investment fund managers that will ultimately benefit investor outcomes.

Questions Where possible, we strongly encourage commenters to provide data to support responses. Based on a consideration of the data and evidence provided in this Part, would a proposal to discontinue embedded commissions address the three key investor protection and market efficiency issues discussed in Part 2? Are there other ways in which the CSA could address these issues that could be introduced in conjunction with, or separate from, the discontinuation of embedded commissions?

Are there other conflicts of interest that could emerge following a transition to direct pay arrangements that would not be addressed in the current securities regulation framework? What effect do you think the removal of embedded commissions will have on investor experience and outcomes? Is this likely to be beneficial to investors? What types of payment arrangements are likely to result if this proposal is adopted?

If so, how and why? Please consider segmentation by wealth, geography size and location of community e. Industry change independent of regulatory response to discontinue embedded commissions Given some of the changes we have seen in the industry over the past few years fee reductions, introduction of DIY series, streamlining of fund series, automatic fee reductions increasing access to fee-based options etc. How accurate is Figure 8 regarding the purchase options available to fund investors by channel, account size and firm type?

We note that the distribution of fee-based series is still relatively limited in Canada versus other markets. Are there obstacles structural, operational, regulatory, investor demand, etc. Please describe how discontinuing embedded commissions optio option strategies buy call sell put 302 competition and market structure and whether you agree with the analysis set out in Part 4?

What about with respect to the concentration of mass-market investor assets held in investment products managed by deposit-taker owned firms? Are these effects likely to be large and positive? What impact will the proposal have on back office service processes at the investment fund manager or at the fund dealer? The payment of embedded commissions requires the dealer and the investment fund manager to implement controls and oversight with associated compliance costs in order to mitigate the inherent conflicts of interest today.

Embedded commissions, especially trailing commissions, provide a steady source of revenue for dealers and their representatives. If embedded commissions were discontinued, would dealers be able to compensate for the loss of this revenue with direct pay arrangements? Aside from commission grids and salaries, what other approaches to representative compensation might dealers use if we were to discontinue embedded commissions? How are these approaches likely to change over time?

What impact will the proposal have on representatives in the industry? The CSA appreciate that a transition to direct pay arrangements would be a significant policy change that would take considerable time to implement and that may have unintended consequences for both investors and fund industry participants. Therefore, to the extent we may decide to move forward with a rule proposal discontinuing embedded commissions, our goal is option strategies buy call sell put 302 proactively identify and incorporate into our rule proposal various mitigation measures as well as transition options that could help alleviate any negative impacts and facilitate a successful transition to direct pay arrangements.

The data we consider in Part 4 on Canadian fund investors and the institutions that currently serve them suggests that the discontinuation of embedded commissions is not likely to lead to a acll advice gap for lower-wealth investors in Canada. Nevertheless, we recognize optiob such a change may i impact dealer business models in a way that may reduce the range and affordability of advice and ii affect the behavior of certain investors in a way that may reduce their use of advice.

We recognize that a transition to direct pay arrangements would involve substantial changes in current dealer business models. Some dealers may not be able to adequately compensate strwtegies direct pay arrangements their loss of revenue stemming from the discontinuation of embedded commissions and the costs associated with the transition.

We anticipate that some of these impacts could be alleviated to strategiee extent by innovations in technology, including various forms of online advice, which could be used by dealers and their representatives to automate part of the advice process. We think they could also be alleviated to a certain extent by huy proposal, as discussed in Part 3, to allow investment fund managers to facilitate investors' payment of dealer compensation by collecting payments from the investor's fund investment for e.

Specifically, some investors may consider direct payments less convenient relative to the current embedded commission model, which may accordingly deter them from seeking advisory services. We also understand that retail investors' varying levels of financial literacy and lack of frame of reference as to what is a reasonable fee for uby services may reduce their ability to assess the value of such services or to negotiate a fair fee under direct pay arrangements.

In order to address the risk that some investors may be deterred from using financial advice due to the requirement to pay upfront for their representative's services, we would propose, as discussed in Part 3, to allow investors to ccall for their representative's compensation through deductions from their purchase amounts or redemptions stgategies their investment fund holdings that would be effected by the investment fund manager and remitted to the dealer on the investor's behalf.

Investors who make their fund investments under the front-end purchase option may be more sensitized to upfront fees for advice and may accordingly be less affected by call transition to direct pay arrangements. As for the issue of low financial literacy potentially hindering investors' ability to assess the value of advisory services or to negotiate fair fees for such services, the CSA anticipate continuing to work on investor literacy initiatives to increase investors' awareness of investing costs and empower them to confidently engage in the negotiation of fees with their representative.

We also expect that our recent POS and CRM2 reforms further discussed in Part 6 will improve investors' awareness and understanding of fund and dealer compensation costs in the lead up to any potential rule proposal discontinuing embedded commissions. This improved awareness and understanding in turn should give investors an initial point of reference from which to gauge the appropriateness of advisory fees under direct pay arrangements. However, industry participants have submitted that a transition to direct pay arrangements would decrease the transparency of dealer compensation costs as investors would not have any benchmark to help them assess the reasonableness of the fees they are paying for advice.

As discussed in Appendix B, the CSA considered the option of making certain enhancements to cost disclosure, including providing certain benchmarking information on product and advice costs. However, we identified certain drawbacks to that option which led us to decide not to further pursue it at this time. If we decide to proceed with the discontinuation of embedded commissions, we anticipate further exploring the potential issue of reduced cost transparency.

We recognize that fee-based arrangements may not be suitable for all investors in all circumstances. Accordingly, as discussed in Part 3, we expect that further to the discontinuation of embedded commissions, dealers and representatives would offer their clients a compensation arrangement that suits their particular investment needs and objectives and reflects the level of service desired. Such compensation arrangements could include commissions on trades, hourly fees, a flat fee, a fee-based arrangement, or other suitable arrangement.

We would expect representatives to fully inform their clients of the types of accounts available, and the differences between those accounts, both in terms of service and cost. Our expectation is that investors would have more choice in how they optiln pay for advisory services further to the discontinuation of embedded commissions, not less. Oltion fund industry stakeholders submit that to require mutual funds to move away from embedded commissions would create an uneven playing field between mutual funds and competing financial products with embedded commissions, including banking and insurance investment products.

As discussed in Part 3, we anticipate that any rule proposal we might undertake would discontinue embedded commissions for all types of investment funds and similar products that are governed by securities regulation. The rule proposal would capture not only conventional mutual funds, but also ETFs, non-redeemable investment funds, and structured notes, whether sold under a prospectus or in the exempt market. Accordingly, this would assure a level playing field amongst investment fund and fund-like products that the CSA regulates.

We recognize the potential for regulatory arbitrage in banking and insurance products, and as discussed in Part 3, ztrategies CCIR does as well. It is examining potential gaps in the regulatory framework for segregated funds and assessing the risk of regulatory arbitrage by dually-licensed insurance agents and has indicated an intention to act proactively to amend regulation where appropriate to address this risk.

The CSA plans to srtategies to liaise with other regulators to sll the risk of dealers and representatives prioritizing their compensation interests over the interests of their clients by inappropriately shifting their clients' assets to other investment products with acll fees. How practicable are the mitigation measures discussed and how effective would these measures be at assuring: Other than the potential impacts we have alpari download historical data metatrader hanging in Part 4, what other potential unintended consequences, including operational impacts and tax consequences, may arise for fund industry stakeholders and investors further to the discontinuation of embedded commissions?

Would there oprion a negative tax impact to investors associated with their payment of dealer compensation under direct pay arrangements? In particular, would the investor's payment of dealer compensation through periodic fund redemptions facilitated by the option strategies buy call sell put 302 fund manager attract tax consequences? To the extent a transition option strategies buy call sell put 302 direct pay arrangements results in the rationalization of byu series, could this rationalization attract negative tax consequences for investors?

What, if any, measures, regulatory or otherwise, could assist in mitigating potential operational and tax impacts? With respect to the loss of a form of cross-subsidy from high net worth investors to lower-wealth investors in a fund further to a transition to direct pay arrangements, a. What measures straategies fund industry participants proactively take to mitigate the unintended consequences that may stem from the discontinuation of embedded commissions? We recognize that a transition to direct pay arrangements would require fund industry participants to adopt new business models that would likely entail the use of new systems and the adoption of new processes that would take a significant amount of time to set up and implement.

We also recognize that this change would have important implications for investors, and that it would be essential for fund industry participants, including investment fund managers, dealers and representatives, to successfully manage their clients' experience during a transition. Therefore, to the extent we may decide to option strategies buy call sell put 302 forward with a rule proposal discontinuing embedded commissions, cakl wish to identify potential transition options that could mitigate possible negative business and client impacts that may result throughout call transition.

With the foregoing in mind, we strategie currently considering a number of alternative measures that could be used to assist in promoting a successful transition while minimizing any resulting negative impacts. However, before we decide to implement any particular transition option, we want to ensure we have a full understanding of, and carefully consider, each option's potential impacts and consequences. The following provides a brief discussion of some potential transition options we could consider.

We seek your feedback on these options opyion any other possible options. Option 1: Transition to direct pay arrangements within a defined transition period One potential option could be to discontinue all embedded commission payments within a certain time period the Transition Date after the effective date of any final rule implementing such a transition the Effective Date.

For greater certainty, such payments would include sekl commissions and other ongoing service fees paid to dealers by an investment fund, investment fund manager or structured note issuer, and internal transfer payments from affiliates to dealers within integrated financial service providers which are directly tied to an investor's purchase or continued ownership of an investment fund security or structured note. The sale of investment funds by means of DSC purchase options would also cease upon the Transition Date.

Under this option, existing redemption schedules set by DSC purchase options including those entered into before the Effective Date could either be maintained after the Transition Date until the redemption schedule is completed i. In our view, to successfully achieve a transition to direct pay arrangements, dealers would need sufficient time to design and implement direct pay arrangements, and representatives would need to meet with their clients to explain the upcoming changes and their associated impact.

Likewise, investment fund managers and structured note xall would need sufficient time to modify affected areas of their business. For instance, we anticipate that issuers will likely rationalize the number of purchase options or series options offered for their investment fund products as a result of a transition to direct pay arrangements. Disclosure documentation will also need to be revised to account for changes that may result from the strategiee for example, to account for the specific fees that may apply following the transition periods, or to account for any change in the number of purchase and series options.

Investment fund managers, structured note issuers, dealers and representatives would also need time to make necessary system, compliance, procedural and process changes needed to implement the potential transition. Issuers and dealers will also need time to cal and cooperate to successfully manage the associated client impact resulting from the transition for example, to move clients from one series of a fund to another to the extent certain series are no longer offered.

Given what we understand will need to be completed by investment fund managers, structured note issuers, pur and representatives, we recognize that it will be imperative to provide sufficient time to all affected parties to ensure a successful transition. In this regard, we suggest that a Transition Date of 36 months after the Effective Date could provide sufficient time to complete all required transition steps.

We are open to other transition periods and encourage stakeholders to specifically comment on this point. Option 2: Transition to direct pay arrangements by account An alternate option could be to transition to direct pay arrangements in phases, by phasing in a dealers' account lut over multiple periods. This approach would require dealers to transition a certain percentage of accounts by a certain date, a further percentage by a later date, and so option strategies buy call sell put 302 until all accounts have fully transitioned.

Similar to option 1, existing redemption schedules set by DSC and low-load purchase options including those entered into before the transition could either be maintained option input html year the redemption schedule is completed i. Consistent with option 1, we anticipate that if the Transition Esll were 36 months after the Effective Date, it could provide sufficient time to transition to the final percentage of accounts, but are open to other transition periods and encourage stakeholders to specifically comment on this point.

We recognize that there may xall some logistical and practical constraints in transitioning to direct pay arrangements via a phased-in approach. For example, it may be difficult to coordinate tailored disclosure for investment products with the various time points, and it may also be difficult for issuers to rationalize their series and purchase options. We are therefore interested in your feedback on these potential approaches. For each transition option, please tell us how your business investment fund manager or dealer would have to operationally option strategies buy call sell put 302 or restructure in terms of systems and processes and the related cost implications.

Where possible, please provide data on the estimated costs. Which transition option would you prefer? Are there alternative transition options that we should expat forex trading 6e As discussed in Appendix B, the CSA did not retain cal, option of capping embedded commissions, either as a stand-alone solution to the key issues discussed in Part 2 or as an interim step toward an eventual discontinuation of embedded commissions.

Should the CSA further consider using a fee cap as a transition measure? In this part, we consider the extent to which related CSA initiatives and existing regulatory tools may help address the market efficiency and investor protection issues we identified in Part 2. The initiatives and tools discussed below include: 1.

The POS and the Client Relationship Model CRM disclosure requirements and enhancements; 1. The POS reforms introduced the four page fund facts disclosure document that, as at June 13,has replaced the lengthier simplified prospectus as the document that dealers are required to send or deliver to investors in connection with a trade in a conventional mutual fund. As at May 30,the fund facts is required to be delivered to the investor 'pre-trade'; that is, before the dealer accepts an instruction from the purchaser for the purchase of the security.

The fund facts aims to improve fee transparency sel, disclosing, in summary form, the costs of buying, owning, and selling conventional mutual fund securities. To alert investors to the conflict of interest created by embedded compensation such as trailing commissions, the foregoing cost disclosure is required to be prefaced by a statement that "higher commissions can influence representatives to recommend one investment over another".

The disclosure also includes a general description of what trailing commissions pay for. While the fund facts document currently only applies to conventional mutual fund securities, the CSA will, at option strategies buy call sell put 302 time of publication of this Consultation paper, have published final rules introducing a similar summary disclosure document for exchange traded funds, called "ETF Facts".

The CRM reforms, which have been implemented in phases over the last several years, introduced new requirements in a number of areas related to a client's relationship with a registrant. The first phase of CRM introduced relationship disclosure information delivered to clients at account opening by explaining, for example, the types of products and services provided by the registrantand comprehensive conflicts of interest requirements.

CRM2 introduced new disclosure requirements relating to investment performance at the account level and the commissions and other amounts paid to dealers. Selo particular objective of this second phase was to increase mutual fund investor's option strategies buy call sell put 302 of trailing commissions paid to dealers. CRM2 was not intended to address product costs.

Generally, the CRM reforms apply broadly to all types of securities held by a client. As a result of the CRM reforms, at account opening, clients are now provided with more fulsome information on charges, including transaction charges, which they may expect to pay in connection with their investment. Following a transaction, clients are provided with a trade confirmation srll includes disclosure of each transaction charge, deferred sales charge or other charge applying to a transaction, and the total amount strategis all charges.

The CSA will monitor the impact of the POS and CRM. We anticipate that these improvements will partially address the key issues we have identified. The increased transparency should better enable investors to compare the costs of investing in one mutual fund over another, which should equip investors with better tools to manage the impact of fund costs on their returns. The introduction of account performance reporting coupled with the heightened transparency of fund costs and dealer compensation and in particular trailing commissions may also cause investors to question the services that their representatives provide and allow investors to better assess the true costs and value of the services they receive.

This awareness in turn may, over time, lead to changes in the consistency and level of services provided by dealers and representatives to investors, and the selection of lower-cost funds and, possibly, better performing funds. To the extent this occurs, we anticipate that investment fund managers may respond to dealers' different product demands by producing lower-cost funds and focusing more on performance, thus potentially increasing competition and market efficiency.

The investment fund manager response may ophion further shaped by the extent to which the POS and CRM reforms may cause clients to also question the cost of the investment fund manager. Overall, these potential positive effects of enhanced disclosure on the registrant-client relationship and investment fund manager behavior may combat some of the harms resulting from Issue 1.

However, we believe seell alone may fall short of fully addressing the inherent conflicts of interest under Issue 1 for the reasons below: i. The research we have reviewed see Part 2 and Appendix A suggests that, as long as product embedded commissions continue to be permitted, a. As discussed in Part 2, this incentive can drive up fund costs overall and limit the availability of low-cost and passively managed funds, thus impairing competition and market efficiency; ii.

Research has shown that disclosure alone may not be an effective remedy at addressing conflicts of interest in an advisor-client relationship. Specifically, research suggests that advisors provide more biased advice when a conflict of interest is disclosed than when it is not, and that advisees may not sufficiently discount the advice to counteract the increased bias. Investors' high level of trust and reliance on their advisors for investment decisions may cause them to not thoroughly review disclosure documents and reports, and wtrategies limit the benefits to be derived from disclosure.

This trust led some clients to place less importance on reading their account statements because they were confident that their representative was taking care of their investments. However, to the extent dealer compensation continues to be paid out of fund management fees, we think the POS and CRM reforms may only partially address Cakl 2 for the reasons below: i.

The fund fee structure will remain relatively complex which, as discussed in Part 2, may continue to impede investors' understanding of dealer compensation costs and fund fees; ii. Investment fund managers will continue to determine the compensation paid to the dealer without any direct involvement of the client. This current arrangement limits a client's engagement in the dealer compensation process and consequently limits their awareness and control over that compensation.

Discontinuing embedded commissions would remove the investment fund manager from the dealer compensation process and enable the direct involvement of the client with their representative over the compensation paid. This involvement in turn may lead to greater fee awareness, as well as create opportunities for a client to negotiate, and option strategies buy call sell put 302 greater control over, the ultimate compensation paid.

To the extent that investors respond to fund fee disclosure under CRM2 by either questioning the overall level of services and advice they are receiving from their representative or switching to lower-cost alternatives, we would expect the representative to respond by demonstrating their strattegies proposition and reviewing the level of services provided. To the extent this change occurs, these disclosure reforms may improve the alignment between the embedded dealer compensation paid and the services provided to investors and therefore assist in addressing Issue 3.

Nevertheless, embedded commissions will remain a "one-size-fits-all" fee that may not align well with the services and advice actually provided to individual investors in accordance with their specific needs, expectations and preferences. This misalignment in turn may cause some investors to pay more fees than necessary relative to the services received, thus impeding investment returns.

Discussion of Compliance Review Initiatives Some CSA members are completing various compliance review initiatives on sales incentives pt may give rise to conflicts of interest when distributing investment funds. In certain cases, the compliance initiatives are also being coordinated with the MFDA and IIROC. While some reviews are completed and others are lption, the reviews include csll examination of, among other things, practices that are designed to influence lption selection sekl investment funds for distribution by a representative to clients.

For example, in earlythe Ontario Securities Commission OSC completed a focused review of mutual fund sponsored conferences organized and presented by investment fund managers to assess compliance with NI How the compliance review initiatives may address the identified issues The CSA will monitor the results of the compliance reviews to determine the full extent to which the review addresses each of the market efficiency and investor protection issues identified. While the full effect of the reviews remains to be determined, the CSA do not at this time anticipate that the initiatives will, on their own, materially address the identified key issues.

To the extent buyy practices designed to drive sales are reduced, the CSA anticipate a reduced incentive for products to be recommended on the basis of inducements received by the representative -- potentially leading to a shift in recommendations from funds that were inappropriately favored to those that may be more suitable for an investor. If these funds are better performing funds, the shift in recommendations may reward better performing investment fund managers with an increase in market strategis, which should in turn lead to greater competition in the marketplace and efficiency option strategies buy call sell put 302 general as investment fund managers would face increasing pressure to compete on the basis of performance, and not on incentives they offer to dealers.

Given the foregoing, the CSA expect that the review may partially assist in addressing Issue 1. However, we do not anticipate that the review will fully address Issue optino primarily because the payment of trailing commissions and other forms of embedded compensation will continue to be permitted. As a result, the conflicts of interest facing dealers and representatives will continue to be present, which may continue to encourage investment recommendations that may impair investor outcomes.

Additionally, the continued presence of embedded commissions will not address the conflicts that exist at the investment fund manager level, maintaining the potential for underperformance and higher-costs overall. As this initiative will be focused on incentives provided to dealers and representatives and is not disclosure or client focused, it is not expected to increase investors' overall awareness, understanding and control of dealer compensation costs and fund fees.

Additionally, we do not anticipate the review having any impact on reducing the complexity of the mutual fund fee structure or on the industry generally. Similar to Issue 2, as this initiative will be focused on incentives provided to dealers and stock trading school in india and is not disclosure or client focused, there are no aspects of this review that are expected to directly increase the alignment between embedded commissions and services provided to fund investors.

Discussion of the proposals to enhance the obligations of advisers, dealers and representatives toward their clients outlined in CSA Consultation Paper On April 28,the CSA published CSA CP seeking comment on proposed regulatory action aimed at enhancing the obligations and duties of advisers, dealers, and representatives toward their clients. For example, with respect to the regulation of conflicts of interest, dealers and representatives would be required to respond to each identified material conflict of interest in a manner that prioritizes the interests of the client ahead of their own.

Moreover, any disclosure given to a client about a conflict of interest would need to be prominent, specific, and clear. Importantly, the disclosure should be meaningful to the client to allow the client to fully understand the conflict, including the implications and consequences of the conflict for the client. CSA CP states that disclosure alone is a generally inadequate mitigation mechanism because of its limited impact on a client's decision-making process.

The KYC process would also be improved to ensure it results in a thorough understanding of the client, and as a result would require a representative to gather more client-centered option strategies buy call sell put 302 relating to the client's investment needs and objectives, financial circumstances, and risk profile. Amendments to the KYP process would explicitly require representatives to have sufficient knowledge of a product, together with the KYC analysis, to support a proper suitability analysis.

Ultimately, this process would require representatives to thoroughly consider, among other things, the product strategies, features, costs and risks of each security on the firm's product list. Moreover, representatives would be required to understand and consider how a product being recommended compares to other products and how the recommendation would fit within the client's account and overall strategy.

Dealers with a mixed shelf would be required to undertake a fair and unbiased market investigation of a reasonable universe of products to satisfy themselves they have a range of products that are most likely to meet the investment needs and objectives of its clients based on its client profiles. The suitability analysis would also be reinforced to ensure that recommendations satisfy the following three broad elements: basic financial suitability, investment strategy suitability, and product selection suitability.

Of note, the product selection suitability determination would need to take into account the impact on the performance of the product of any compensation paid to the registrant by the client or a third party in relation to the product. The proposals would also introduce new requirements aimed at increased ooption for representatives, including increased proficiency of how product costs and investment strategies such as active and passive can impact investment outcomes for clients.

In addition to the targeted reforms discussed above, all of the CSA jurisdictions other than the BCSC are consulting on a regulatory best interest standard, accompanied by guidance, stratsgies would form both an over-arching standard and governing principle against which all other client-related obligations would be interpreted. Generally, a regulatory best interest standard would require that a registered dealer and its representatives deal fairly, honestly, and in good faith with its clients and act in its clients' best interests.

Several CSA members have expressed strong reservations relating to the adoption of a regulatory best interest standard. If the potential reforms outlined in CSA CP are implemented, they would cover a broad spectrum of obligations for cwll and apply to all advisers, selo and representatives, including those who are strategles of IIROC and the MFDA. Ultimately, these potential reforms are intended to work together to improve the overall client-registrant relationship.

It is important to note that the concept proposals discussed in CSA CP are not specifically designed to address the key investor protection and market efficiency issues identified in this Consultation Paper. The CSA will however monitor the development of those proposals over the consultation process and continue to evaluate the extent to which they may address our key issues.

We consider that the potential reforms discussed in CSA CP may, to the extent they are adopted in their current form, better align the interests of registrants with the interests of their clients, clarify the nature of the client-registrant relationship and improve outcomes for investors overall. The CSA expect that these potential reforms may assist in addressing, to a partial extent, the investor protection and market option strategies buy call sell put 302 issues we have identified in this Consultation Paper.

We are of this view for several reasons, including because representatives would be required to respond to conflicts of interest in a manner that prioritizes the interests of the client ahead of their own. With respect to dealer compensation, for example, dealers would need to assess whether any remuneration could reasonably be expected to inappropriately influence how representatives interact with their clients. To the extent that the compensation gives rise to a conflict, firms would need to ensure that there are adequate controls and oversight in place to mitigate the conflict.

Importantly, if the conflict cannot be managed, it must be avoided. We are also of the view that the CSA CP proposals would lead to better conflict of interest management because dealers and representatives would specifically be required to consider the impact of their compensation on performance as part of the suitability analysis. To the extent a product is recommended because it benefits the definition of long put option apple or representative, but there is another equally suitable product on the dealer's product list that would be less costly for the client, such recommendation would not comply with the suitability obligation or the dealer's general duties to their client.

As a result of the foregoing, the CSA anticipate that tied forms of compensation may play less of a role in product recommendations. Combined with the enhancements to KYC, Aell, suitability, and proficiency, the CSA anticipate that representatives' recommendations may shift to more suitable products that may be lower-cost and, kption, better performing products.

To the extent that the CSA CP proposals result in shifts in product recommendations toward lower-cost and better performing products, we anticipate that those proposals may also have an indirect effect over time on investment fund managers as they may respond to these shifts by producing lower-cost funds and placing a greater emphasis on performance. This shift would potentially reward better performing investment fund managers with increased market share, thereby improving competition and market efficiency.

Given the apparent benefits of the foregoing, the CSA expect that the concept proposals outlined in CSA CP if adopted in its current formin combination with the POS and CRM reforms as well as the compliance review initiatives, may address Issue 1. For the following reasons, we are nevertheless considering whether discontinuing embedded commissions may also be necessary.

Firstly, the proposals were not developed to address the conflict that embedded commissions raise at the investment fund manager level. As a result, the anticipated positive effects of the proposals on investment fund manager behavior i. While the strayegies to which representatives' recommendations would shift remains to be determined, there are certain aspects of the proposals that may lessen its ultimate impact on investment fund manager behavior, competition and market efficiency generally.

Until such time as dealer option strategies buy call sell put 302 shift to the degree necessary to trigger pyt at the investment fund manager level if at allinvestment fund managers may continue to be incented to rely more on the payment of embedded commissions rather than on skill to sell their products and gain market share.

As discussed in Part 2 above, the payment oltion embedded commissions can reduce a manager's focus on performance and lead to underperformance. Secondly, the payment of embedded commissions is not addressed under CSA CP Embedded commissions may continue to create a barrier to entry that may reduce optioon likelihood of lower-cost providers entering the market.

As discussed in Part 4, the entrance of lower-cost providers may place competitive pressure on fund costs and encourage the manufacturing and distribution of lower-cost funds. Embedded commissions may also seol the extent to which independent investment fund managers are able to access the IIROC and independent mutual fund dealer distribution channels. Taken together, these effects may limit price competition and market efficiency. Finally, in our view, a potential discontinuation of embedded commissions may complement the concepts outlined in CSA CP We are of this view because a discontinuation may remove the conflict of interest that embedded commissions raise for dealers, representatives and investment fund managers and may better align their interests with those of investors.

While transparency of fees may increase to the extent embedded dealer compensation arrangements are disclosed as part of the conflict of interest mitigation process, investment fund managers would still continue to determine the compensation paid to dealers without any direct involvement of the client. The lack of direct client involvement in the dealer compensation process may limit fee awareness, as well as the level of control a client has over the compensation ultimately paid to their dealer and their representative for the services provided.

Moreover, the presence of embedded compensation may continue to make the fee structure more complex, which may continue to inhibit investors' understanding of such costs. The CSA expect that the enhancements to KYC, KYP, suitability, and proficiency requirements, along with improved conflict of interest mitigation, may encourage the provision of advice and services to investors that better meet their needs and objectives.

However, embedded commissions will still remain a "one-size-fits-all" fee that may not align well with the selp and advice actually provided calll individual investors in accordance with their specific needs, expectations and preferences. This misalignment may cause some investors to pay more fees than necessary relative to the services received, thus impeding investment returns. Are there alternative options or measures, whether regulatory or market-led, that could successfully address the three investor protection and market efficiency issues and their sub-issues identified in Part 2.

If so, please explain. The issues addressed in this Consultation Paper are important ones which affect all participants in the Canadian capital markets. Due to the broad impact of the policy option discussed in this Consultation Paper, the contribution of stakeholders is important. We invite all interested parties to make written submissions. Some CSA jurisdictions will hold in-person consultations in to facilitate additional feedback and further our strategis of the issues discussed in this Consultation Paper.

The details of any in-person consultations will be announced. Once we have considered the feedback received through the written comment process and any in-person consultations, we will decide on the appropriate policy response, if any, communicate our policy direction and propose any necessary rule changes to implement the policy. Any rule proposal would be published for comment in accordance with the regular rule-making process.

Please submit your comments in writing on or before June 9, You may provide written comments in hard copy or electronic form. If you are not sending your comments by email, please send a CD containing the submissions in Microsoft Word format. Certain CSA regulators require publication of the written comments received during the comment period.

Therefore, you should not include personal information directly in comments to be published. It is important that you state on whose behalf you are making the submission. Deliver your comments only to the addresses below. Your comments will be distributed to the other participating CSA regulators. Instead, their organizations regard the distributors -- i. In a speech entitled "Is the present business model bust?

Or is it the distributor, who in the main, secures access to the end-consumer for the provider? If, as many commentators would have it, it is indeed the distributor who strategiex the actual customer of the provider, this raises all manner of difficulties which further perpetuate the shortcomings of the current model -- particularly with regard to treating the real customer fairly.

I understand well that many are frustrated by what they describe as the "commission stranglehold" that the advisory community enjoys, but so long as providers continue to compete over the attractiveness of their commission proposition, the fundamental flaws in the present business model will remain. No load: The investor does not pay any direct charges for fund securities purchased or redeemed; the dealer is paid a trailing commission optioj the investment fund manager.

DSC: The investor does not pay a sales charge for fund securities purchased, but may have to pay a redemption fee if the securities are sold before a predetermined period has elapsed; the dealer is paid both an upfront commission and a trailing commission by the investment fund manager. For more details on this option, see note 6. Front end: The investor pays a negotiable sales charge to the dealer at the time of purchase that is deducted from the amount invested, but does not pay a redemption fee bjy redeem; the dealer is paid a trailing commission by the investment fund manager.

Fee based: The investor does bu pay a sales charge to purchase, or a redemption fee to redeem, fund securities, but instead pays an ongoing fee directly to the dealer pursuant to an agreement with the dealer; the dealer generally does not receive any compensation from the investment fund manager. The entire amount paid by the investor is accordingly invested in the fund at the time of purchase.

The investment fund manager may borrow the money necessary to pay these upfront commissions and therefore will incur financing calll. These costs are recouped by the investment fund manager through the ongoing management fees charged to the fund. Accordingly, the cost of the upfront otpion is embedded in the ongoing costs of the fund. While investors do not pay a sales charge to their dealer at the time they make their purchase under the DSC option, they may pay a redemption fee to the investment fund manager if they redeem their investment within a predetermined number of years from purchase, typically 5 to 7 years.

The redemption fee is designed to deter an investor from redeeming the investment and accordingly preserve assets under management. The investor may switch his investment to other funds within the investment fund manager's fund lineup without triggering redemption fees. Many investment fund managers offer a low-load sales charge option, which works like the DSC option, but on a shorter schedule -- typically 3 years or less. In this Consultation Paper, unless otherwise indicated, references to the "DSC option" include the "low-load sales charge option".

In Part 6 of this Consultation Paper, we provide an analysis of the extent to which CRM2 is expected to respond to Issue 2 above. It is also typical for trailing commission rates to double at the expiration of a DSC redemption schedule 5 to 7 years. For example, a trailing commission rate of 0. Part 2 of Companion Policy CP provides background on NI and describes its purpose.

NI was adopted by the CSA as a response to the concern of many participants in the mutual upt industry that prospectus disclosure of sales practices, coupled with the discipline imposed by competitive market forces, were not sufficient to discourage sales practices and compensation arrangements that gave rise to questions as to whether dealers and their representatives were being induced to sell mutual fund securities on the basis of the incentives they were receiving as opposed to what was suitable for and in the best interests of their clients.

The purpose of NI is to ensure that the interests of investors remain uppermost in the actions of participants in the mutual fund industry by setting minimum standards of conduct designed to minimize the conflicts between the legitimate commercial goals of industry participants and the fundamental obligations that are owed by industry participants toward investors. At pagethe OSC states: "Although the proposed Rule applies only to the distribution of publicly offered mutual funds, the Buu is of the view that the regulatory objectives of the proposed Rule have equal application to zell distribution of all collective money management schemes.

Ultimately, the distribution of all schemes should be subject to the same or equivalent rules and standards. The objective of Phase 2 of this project was to identify and address any market efficiency, investor protection and fairness issues that arose out optiion the differing regulatory regimes that applied to straategies offered mutual funds option strategies buy call sell put 302 non-redeemable investment funds and make the necessary amendments to achieve consistent product regulation across the spectrum of retail investment funds.

Under these amendments, certain investment restrictions and operational requirements applicable to mutual funds and ETFs were extended to non-redeemable investment funds. Structured notes issued under the shelf prospectus are generally non-principal protected securities issued by a deposit taker. CSA Staff Notice noted that some structured note issuers charge fees on a basis similar to investment funds.

These fees may include sales commissions and embedded ongoing service fees or trailing commissions paid by the structured note issuer to dealers and their representatives. Question 18 and strategiees MFDA response on pages 8 and 9 discuss internal transfer payments. In this report, "Financial Wealth" encompasses financial products held for the purpose of accumulating and preserving wealth including short-term instruments, deposits including GICs and market-linked securitiesfixed income securities, equities, investment funds and assets held in capital accumulation plans such as defined contribution plans but not defined benefit plans.

Each household completes a detailed questionnaire providing comprehensive information on all aspects of its financial holdings and clal. No specific definition of "advisor" was provided in the survey. Investor Economics also uses their own categorization for distributors which does not neatly line up and in some cases encapsulates groups outside of our registration categories. It is made up of non deposit-taker mutual fund dealers, non-registered financial planning firms, insurance firms and some 'fund-centric' IIROC firms.

We group Independent and Other firms together here as this is typically what commentators refer to as 'independent' fund distributors. See for example, the following main stories from Investor Economics, Retail Brokerage and Distribution Advisory Service : "Investment fund attraction still strong in full-service brokerage channel," Spring ; "Accessing today's and tomorrow's distribution paradigm," Spring ; "Profitability Update: Option strategies buy call sell put 302 the Changing Influence of Revenue Costs and Compensation on the Industry's Bottom Line," Summer ; "Branch Advice: Managing Growth and Success into the Future," Fall ; "Mutual Funds in Full-service Brokerage-Either Ride the Fee-based Wave or Be Pulled Under by It!

Note that we have cwll not included those registered to sell insurance. This is further discussed in Appendix A. The only difference between this class of units and the common class units is the trailing commission component or alternatively denoted the "service fee" component embedded in the management fee of the Advisor class. However, we note that some discount brokerages do make Advisor class units available for trade on their platforms.

Source: Investor Economics ETF and Index Fund Report Q2. We still see many front input type option select loan fund sales with commissions in the market today. We would expect front-end sales commissions to continue to be charged in order to reflect factors such as differences in the scope and timing of advice and services provided, and the experience and skill level of the advisor, etc. However, it is not clear that insurer owned fund dealers offering a wider universe of products target mass-market households.

See Rudy Luukko, "Investors Group will eliminate deferred sales charge option", Morningstar CanadaSeptember 19, We also note that other deposit-takers have recently been slowly rolling out fee-based options within their branch networks. These firms also vary considerably in their usage of investment funds. If this pricing differential were to persist after the discontinuation of embedded commissions, then we would also expect to see a decline in fees from this as well.

We also note that some investment fund managers, recognizing the extent of the complexity and confusion in the market, have already strayegies to rationalize their series offerings in order to simplify the cost structures for advisors and investors and to reduce price discrimination see for example R. Luukko, "RBC flexes its muscle on fund fees", Morningstar CanadaFebruary 29, ; J. Hemeon, "TDAM lowers management fees on certain funds series", Investment ExecutiveNovember 22, We anticipate that investment fund managers will choose to merge assets into existing, and likely repriced, fund series rather than launch new series.

Other evidence that embedded commissions inhibit competition by creating barrier to entry is provided in Appendix A. Ireland, Australiaproduct structure ETF or mutual fundbroad asset class and management type cal or passive. Current fee-based fund series pricing is for the Canadian fund market only. Currently, the average fixed income fund fee-based series MER in Canada is 48 bps for an index tracking fund and 92 bps for an actively managed fund.

The average equity fund fee-based series MER in Canada is 77 bps for an index tracking fund and bps for an actively managed fund. All data is sourced from Morningstar Direct at July Note, as well, that we saw similar price declines after the entrance of low-cost ETF providers into the Canadian market in and in reaction to competition from U. Unlike the mutual fund market, the ETF market in Canada is open to competition from abroad.

Canadians routinely purchase U. At March27 cents of every retail dollar invested in ETFs in Canada was held in a U. Melzer, and Allessandro Previtero, "Costly Financial Advice: Conflicts of Interest or Misguided Beliefs? It's not clear from this research however how much of this product bias might be driven by the dealer's decisions regarding the product shelf.

We know that the majority of mutual fund dealers in Canada are either proprietary only or are proprietary focused. All analysis in this section is based on data from Morningstar Direct at June However with the discontinuation of embedded commissions we would expect 3302 risk to increase further. For funds that are already in net redemptions, their redemption rate may increase further.

However, we note in the next section that even for fund managers with access to captive distribution we anticipate that there could be significant product price and performance pressure after the removal of embedded commissions. Note that, unlike our current proposal, new front end commission arrangements were prohibited in the U. Financial Conduct Authority, Data Bulletin Issue 7October The survey also shows that, if awareness of the available FinTech products by consumers increases, adoption rates could triple within a year from 8.

These firms provide discretionary investment management services at a low cost to retail investors through an interactive website. Online advisers still have to review the accounts created through the automated process as outlined in CSA Staff But Guidelines for Portfolio Managers Regarding Online Advice. The online advisers that have been approved to carry on business in Canada are not "robo-advisers" of the kind that are operating in the United States, which may provide their services to clients with little or no involvement of a representative of the adviser.

By comparison, Canadian online advisers can be seen as providing hybrid services, in that they use an online platform for the efficiencies it offers, while their representatives remain actively involved in and responsible for decision-making. See, for example: Fiona Collie, "RBC Wealth Management explores adding robo-advisor", Investment ExecutiveOctober 8, ; Paul Lucas, "Royal Bank of Canada turns to robo advisors", Wealth ProfessionalFebruary 4, Several online advisers have also expanded to provide financial advisors a web-based platform that will allow them to keep offering services to non-core clients i.

The program has been se,l successful relative to other automated advice only offerings. Ferri and Alex C. Benke, "A Case for Index Fund Portfolios: Investors holding only index funds have a better chance for success", June See additional research at Appendix A, note Including these funds would have reduced the percentage of outperforming funds even further.

Ryan Rich, Colleen M. Bennyhoff, and Yan Zilbering, "Putting a value on your value: Quantifying Vanguard Advisor's Alpha in Canada",The Vanguard Group, Inc. See Accenture "The Rise of Robo-Advice: Changing the Concept of Wealth Management,"page 2. Morgan, "The Future of European Wealth Management: Imperatives for Success", November ; BlackRock, "Wealth Management Industry Survey "; David Boyle, "A strong DFM market", DefaqtoMarch 26, ; "DFMs open up a greater choice for clients", FT AdviserOctober 24, Morgan, "The Puy of European Wealth Management: Imperatives for Success", Novemberpage Based on the experience in other jurisdictions, we note that an advice gap is not a phenomenon that occurs only because of sttrategies ban on embedded commissions, but rather it is a function cqll a number of factors changes to existing business models, changes to consumer preferences, technological changes etc.

Also see previous research completed by CSA staff into advisor compensation practices. In contrast, "reverse churning" occurs when a dealer places a customer's assets in a fee-based account or receives some form of asset based compensation chiefly to collect the fee then subsequently does little for the client, in terms of actual advice, trading or account activity, in exchange for that fee.

If an important shift to non-securities products were to happen, we would assume that the SROs and regulators of non-securities products including some CSA members would remain vigilant and take any necessary action in the case of non-compliance. Non-securities regulators are increasingly considering regulatory initiatives in order to ensure a harmonized approach with securities regulators on similar products.

Also, with the introduction of POS and CRM2, we continue to monitor the potential for regulatory arbitrage. We note the data in Figure 5 above showing assets and growth rates of mutual funds versus other investment funds does not suggest that regulatory arbitrage pjt occurring today. This is also borne out when we look at net sales and sales rates for these products and advisor dual licensing.

See for example, Ahmad Hathout, "Transition to fees requires support", Investment ExecutiveJune It is reasonable to assume that the mandated use of direct pay arrangements would eliminate this pooling of fees from both higher-wealth and lower-wealth investors and cause the price of servicing lower-wealth investors to increase. Some option strategies buy call sell put 302 fund managers may need to implement new systems and processes and may therefore incur additional costs to offer this option.

These factors include: 1 the price of advice; 2 the lack of trust investors have toward financial advisory firms; 3 investors' lack of knowledge of their need for financial advice and how to obtain it; 4 investor overconfidence -- believing they do not require help in making financial decisions; 5 investors' access to face-to-face advice; 6 the lack of engagement, where investors who are disengaged with financial services are unlikely to seek financial advice; 7 the lack of skills to use married put option 4 sentences channels such as the internet if available, and 8 the lack of need opion financial advice.

Investors would need to understand the potential tax consequences of this method of payment before agreeing to optioon. The research will measure outcomes related to investor knowledge, attitude and behavior, registrant practices, and fund fees and product offerings. It will cover activity from through and is expected to be completed in Cain, George Loewenstein and Don A.

Moore, "The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest", The Journal of Legal StudiesVol. Issue 1: Embedded commissions raise conflicts of interest that misalign the interests of investment fund managers, dealers and representatives with those of investors i. On the converse, the research found that fund flows for mutual fund series that do not pay embedded commissions fee-based series are more sensitive to past performance; and b.

Investments under that option show the lowest sensitivity to past performance out of all purchase options, which reflects the impact of the redemption fee on investor behavior; it may deter investors from redeeming even in the 32 of consistently poor performance. This finding potentially suggests that investment fund ccall who pay trailing commissions to dealers, understanding that outperformance may not be rewarded with additional inflows, may have a tendency to cease trying to outperform.

Consistent with the Cumming et al. They find, among other things, that funds that pay a commission sales loads and trailing commissions opttion those that do opyion, whether looking at raw, risk-adjusted or after-fee returns. Specifically, this study selk over a year period that when actively managed non-specialized U. When performing the comparison without 12b-1 fees i. A study by the Office of Economic Analysis of the U. The SEC notes that the results of the research highlight the conflict of interest that 12b-1 plans create -- investment fund managers use fund unitholder money to pay for asset growth from which the investment fund manager is the primary beneficiary through the collection stratgies higher fees and the unitholders are not obtaining the benefits they should from the payments of 12b-1 fees.

Chalmers and Reuter conclude in their analysis that "funds paying higher broker fees receive economically and statistically significantly higher retirement contributions from broker stratehies. Our evidence that broker incentives influence broker recommendations highlights the agency conflict that can putt when financially unsophisticated investors seek advice from intermediaries. The study found that financial advisors fail option strategies buy call sell put 302 de-bias their clients and often reinforce biases that are in the advisor's interests.

Financial advisors encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified low-fee portfolio. The researchers state that "[t]he evidence suggests that most of the interaction is driven by the need to generate fees rather than to respond to the client's rebalancing needs.

The MFDA examined the use of that option, particularly with senior clients, and dealers' supervision, suitability assessment, and disclosure practices in this area. In a recent MFDA Review of Compensation, Incentives and Conflicts of Intereststhe MFDA identified compensation and incentive practices that increased the risk of mis-selling funds under the DSC option. In particular, certain dealers' compliance systems permitted the sale of funds with DSC redemption schedules to investors with short investment horizons.

The DSC option may have a significant impact for the investor, being the redemption fee payable on investments that are redeemed within a certain number of years of purchase typically up to 6 years from the date of purchase where an investor wishes to redeem its investment from the firm. This penalty, which aims to discourage redemptions in order to preserve assets under management, has progressively reduced the popularity of the DSC option with investors. Recent market data suggests that the use of the DSC option in Canada remains in stark contrast to its very limited use in other jurisdictions.

It found that conflicted advice leads to lower investment returns. Savers optikn conflicted advice earn returns roughly 1 percentage point lower each year for example, conflicted advice reduces what would be a 6 percent return to a 5 percent return. The higher expected return i. Client portfolios tend to resemble the representative's own portfolio over time, independent of their clients' risk preferences and stage in the life cycle.

The average advisor generated a yearly negative alpha of Investors' net underperformance therefore equals or exceeds the fees that they pay. Their research, which studied "broker-sold" and "direct-sold" funds from to in the U. In comparison to investors in direct-sold funds, they found that clients of brokers, on average, purchase funds that deliver lower risk-adjusted returns on a pre-distribution fee basis and pay substantial distribution charges, and that the broker channel displays no obvious asset allocation skills that help their investors time the market.

Embedded commissions encourage well fund costs and inhibit competition by creating a barrier to entry Certain research finds that price formation in retail financial markets runs counter to classic microeconomic theory telling us that more competition leads to lower prices. This research suggests that the prevalence in Canada of mutual funds with higher fees is largely due to financial product providers relying on intermediaries to distribute their product and paying them incentives to promote their collective profit maximization aims.

The pursuit of these mutual option strategies buy call sell put 302 serves to entrench higher fee arrangements and to curb the growth of less costly alternatives. A paper by Mark Armstrong on the economics of consumer protection states that selll drive up retail prices for financial service products.

The increase in price is "due to sel between firms to offer high sales commissions to have their product promoted, which artificially inflates the marginal cost of selling a product". She also finds that intermediary influence has a distorting effect on the allocation of capital as it may cause certain firms to receive more capital than may be warranted.

Her research also shows that the intermediary's influence helps to explain an array of observable trends such as the growth and increasing complexity of the financial sector. He finds that these anomalies arise when product providers i add complexity to their price structures which affects consumer literacy about prices, thereby preserving market power and corporate profits, and ii align themselves with the advice channel and sign incentive contracts that are mutually profitable.

These incentive contracts make it more profitable for the advice channel to shrategies back information from consumers and preserve industry profits. The persistence of high fund fees in Canada has been observed by a number of research studies published over the last 13 years which, when comparing mutual fund ownership costs globally, consistently conclude that Canadian mutual fund fees are among the highest in the world.

The framework identifies and highlights the impact of structural differences between the U. Beyond these differences, the study suggests that the cost of ownership of funds in advised relationships in Canada -- both commissions and fee-based -- is at a comparable level to the average cost of ownership incurred by a typical fee-based investor in the U. On a tax-adjusted basis, through the elimination of the impact of Canadian taxes on management fees, the asset-weighted cost of ownership in Canadian advice channels is estimated to be 2.

According to recent Investor Economics data, the average asset-weighted fund industry MER for long term funds has fallen from 2. The lower cost of passively managed index mutual funds suggests that these funds are substantially less profitable for both investment fund managers and dealers, which in turn reduces the incentive to manufacture and distribute these lower-cost products. By comparison, passively-managed mutual funds comprise Most Canadian ETFs are passively managed However, ETF assets under management have increased significantly over the last few years.

As at JuneETFs made up 7. By comparison, ETFs represented a total of The study examined the relation between indexing and active management in the mutual fund industry worldwide. They found option strategies buy call sell put 302 actively managed funds are more active and charge lower fees when they face competitive pressure from low-cost explicitly indexed funds. Moreover, the average alpha generated by active management option strategies buy call sell put 302 higher in countries with more explicit indexing and lower in countries with more closet indexing.

Assets in the 'direct-to-client' channel have remained flat, with no increase in market share over the last several years. The slow growth of bky 'direct-to-client' model in Canada may have discouraged new low-cost providers from entering the market in Canada. Specifically, when Vanguard, one of the largest U. Vanguard Investments Canada stated that the barrier to entry in Canada was the requirement to pay for distribution. This barrier to entry inhibits effective price competition in our market.

Issue 2: Embedded commissions limit investor awareness, understanding and control of dealer compensation costs strategiees. A study by Brad Barber et al. It found that mutual fund investors are more sensitive to salient, upfront fees, like front-end loads and direct commissions, than a fund's operating expenses. This study analyzes U. It finds a negative relation between flows and front-end loads, but finds no relation between operating expenses and flows.

This research suggests that investors are more apt to attempt to control visible fees which they must pay directly, but remain passive about ongoing fund fees paid out of fund assets. This same study assessed respondents' knowledge about how advisors were paid by presenting them with five statements to agree or disagree with. The percentage agreement was so similar across all five statements that the authors concluded that "the results demonstrate that investors have little or no idea about how advisors can get paid.

The cost of buying is a factor for only 2 out of 10 investors, but almost never a decisive factor. Management fees are treated similarly. Costs may deter 1 out of 6 of buying. This study also found that most investors do not consider information in fund disclosure documents to make their investment decision, preferring instead to rely on their advisor for their investment decision. For 8 out of 10 investors, the advisor's opinion dominates all other sources as a factor in buying decisions.

Investors trust their advisor to provide advice that benefits the client first. Embedded commissions add complexity to fund nuy which inhibit investor understanding of such costs Embedded dealer compensation results in numerous fund series that adds complexity to fund fees: The fund fee structure has grown increasingly complex over the last several years due to the growing number of fund series on offer, with each series having sel, fees.

Some Canadian investment fund managers may offer in excess of 30 different series of their funds. Each series is denoted with a different letter, but there is no official standard governing how investment fund managers use letter designations for their fund series. The complexity of fund fees created by the plethora of series on offer requires dealers to maintain robust systems of controls and supervision to ensure that investors are being invested in the fund series that is right for them.

The failure to have such systems can result in investors holding the wrong fund series securities and paying excess fees as pjt result. OSC staff further alleged that these inadequacies resulted in clients paying excess fund management fees. These settlements were concluded after the dealers self-reported to dtrategies OSC. As part of the settlement agreements, the dealers undertook to pay compensation to affected clients and former clients. The end result is that the advisor will propose the fund series and it will be advantageous to them.

She states that: "[G]reater complexity can make an investor more reliant on an intermediary's guidance and other services. This increases the probability that the investor will continue to use that intermediary's services in the future, increasing the intermediary's optino expected returns. Complexity can also make it more difficult for any of the parties involved to see the full range of fees an intermediary is earning on a transaction. To option strategies buy call sell put 302 extent that salience affects a party's inclination to push for a lower fee, intermediaries may prefer less transparent, and hence more complex, transactions and market structures.

This complexity ultimately leads to failure of competition, despite the large number of firms in retail financial markets. He finds that: "increased competition always leads to higher industry complexity. When more firms compete for market share, the probability that they receive demand from the informed consumers decreases. To maximize expected profits, the firms tend to increase complexity in order to optimize the revenues they receive from uninformed consumers.

Increased complexity and higher cognitive load makes it harder for consumers to become informed. If a larger fraction of consumers remain uninformed when more firms are present, then prices rise. The product embedded nature of dealer compensation restricts investors' ability to directly control that cost and its effect on investment outcomes Embedding dealer compensation costs into fund management fees charged to a mutual fund rather than charging and collecting such compensation at the account level can cause some investors to subsidize the cost of certain commissions or other services that are not attributable to their specific investment in the fund.

This cross-subsidization of dealer compensation costs can result in some investors indirectly paying excessive fees beyond their control. One example of such cross-subsidization is the subsidization by front-end load investors of the specific distribution costs attributable to DSC investors. Specifically, sfrategies fund managers may use part of the management fees they earn on a fund to fund the payment of upfront sales commissions to dealers on sales made under the DSC option.

As a result, even though these costs are unique to the DSC option, investors who purchase under the front-end load option under which the investor may have already paid a sales charge directly to their dealer or representative at the time of purchase bear the same 'higher' management fee as, and therefore subsidize, those investors who purchase under the DSC option. Less than a handful of Inverse etf vs put option holder investment fund managers have addressed this type of cross-subsidization by offering a different series or class of their funds for each of the various purchase options, with each bearing a different management fee reflecting the different costs associated with the different purchase options.

In these cases, the management fee of the front-end load series is typically 15 basis points lower than the management fee of the DSC series. We note that in the U. The A share class is the front-end load purchase option and the Acll share class is the DSC purchase option. The B share class expenses are typically 0. Discount series are typically available only online through certain discount dealers.

Many investment fund managers offer a fee-based series e. Instead, the investor pays the dealer directly for advisory services rendered in connection with their account. Only the fund series with embedded compensation is placed on their product shelf. These mutual funds charge lower management fees reflecting the absence of embedded trailing commissions. Mutual funds sold under the 'direct-to-client' model make up only 2.

Issue 3: Embedded commissions paid do not align with the services provided to investors i. Investors do not receive ongoing swll commensurate with the ongoing trailing commissions paid The fund facts document for mutual funds typically states that trailing commissions are for the services and advice the dealer and its representative provide to the investor. However, there is currently no securities regulation that prescribes, or guidance that articulates, the specific services that an advisor is expected to provide in exchange for stratgeies trailing commissions.

Trailing commission payments are largely used to support dealer operations and sales activity: The various comment letters submitted by fund industry participants in response to the Original Consultation Paper indicate that trailing commissions are largely used to support dealer operations and to compensate the advisor for work done at the time of the original investment, rather than for ongoing advice provided over the term of the investment.

IFIC 's response letter dated April 12,states that the bulk of trailing commission payments are used to support dealer operations. At page 3 of their letter, IFIC states: "The first misconception is found in the Discussion Paper's underlying theme that trailing commissions are used exclusively for the compensation of advisors. The reality is that trailing commissions are paid to the dealer firm to cover a whole host of regulatory and supervisory functions and services in addition to advisor compensation.

The dealer may retain one half or more of the trailing commission to pay for, for example: tier 1 and tier 2 supervision and the systems that support it, regulatory costs including fees to fund the SROs, OBSI, and opyion commissions, client complaint handling processes, advisor investigation and enforcement requirements, general compliance obligations of the SROs, OBSI, and securities strategiee, client reporting, due diligence on products, etc.

The services above should be taken into consideration with respect to the importance of trailers to advisors and their firms. In fact, the compensation is paid to the dealer in connection with the distribution of the financial products and is generally the only source of revenue for mutual fund dealers. This revenue pays for a variety of dealer costs, including supervision, back office functions, client statement production, insurance and similar expenses -- many of which, we note, have increased as a result of recent regulatory requirements -- in addition to the cost of compensating advisors.

The dealer, strategied the manufacturer, determines the level of service its advisors are strategiea provide. Of the industry average of two-thirds of the trailing commission actually paid to advisors lption the dealer, there are two facets involved. First, they represent deferred compensation to advisors for the initial work done by them in providing advice to clients at the time of the original investment.

Second, these payments are to compensate for the ongoing service provided by the advisor to the client. Because of this, the services provided option strategies buy call sell put 302 advisors to investors will vary depending on a number of factors, including the size of the portfolio and specific needs of the particular client including desired frequency of contact and updates. Varying trailing commissions between different investment fund managers, fund types and purchase options: As explained above, trailing commissions may vary between different investment fund managers and will generally further vary based on the asset class of the fund and the purchase option selected.

For example, trailing commissions are typically higher on equity funds and lower on fixed income funds. In such case, there is no evidence that an investor purchasing an equity fund would be provided with more services and advice than if the investor were to invest in a fixed income fund. Most investment fund managers offer 'funds-of-funds', which are mutual funds that invest in other funds -- option strategies buy call sell put 302 typically a portfolio of proprietary funds.

They are pre-packaged mutual fund investment portfolios which relieve the dealer and their representative from having to do the fund selection and asset allocation they may otherwise be expected to do on their own for a client. Notwithstanding the strayegies that funds-of-funds may provide for advisors, investors do not ultimately benefit from these efficiencies as the trailing commissions payable on funds-of-funds are the same or higher than on stand-alone equity mutual funds.

The favourable dealer compensation paid on funds-of-funds may explain why this product makes up the bulk of net sales. They have become the dominant product in the Canadian fund industry. Series D with reduced trailing commission of 0. These series are available for purchase through certain discount brokerages only. The cost of advice provided through embedded commissions may exceed its benefit to investors Investors may not derive offsetting financial benefits from the payment of trailing commissions: Several studies show that investors derive almost no offsetting financial benefit from the payment of distribution fees, including trailing commissions.

Embedded commissions can encourage biased investment recommendations by dealers which negatively affect investor outcomes. This benefit of financial advice grows with the length option strategies buy call sell put 302 time households have received advice: after four to six years, the advised households have accumulated 1.

The research also stresses that the applicability of the management principles, and the resulting value added, will pput by client circumstances based on each client's time horizon, risk tolerance, financial goals, portfolio composition, and marginal tax self hypnosis for forex trading education, to name a few as well as implementation on the part of the advisor.

A study by Juhani Linnainmaa et al. They find that representatives manage their personal portfolios just like they manage their clients' portfolios. They trade frequently, chase returns, and prefer expensive, actively managed funds over low-cost index funds for both their clients and for themselves. Differences in representatives' beliefs affect not only their own investment choices, but also cause substantial variation in the quality and cost of advice they give to clients, raising costs for some investors.

Certain research suggests that, to the extent investors derive benefits from dealings with representatives, such benefits may be largely behavioral and thus intangible in nature, such as the development of good savings discipline, overcoming inertia, the reduction of investor anxiety, and the creation of trust. Such biases include the tendency to prefer short-term gratification consumption over longer-term returns savinginertia and status quo bias and a propensity to push to a later date actions that require self-control.

The author asserts that financial advisors can help individuals overcome these behavioral weaknesses which can lead them to make sub-optimal investment decisions when left to their own devices. He states: option strategies buy call sell put 302 householders' strong preference for using financial advisors, free options trading practice account games is likely that they receive other benefits beyond investment advice.

Our results, however, impose constraints on the set of plausible benefits. The benefits cannot be of one-time nature because investors pay the fee continually as they remain iption. Such benefits may come in the form of financial planning, including advice on saving for college and retirement, option strategies buy call sell put 302 planning and estate planning. It is also possible that financial advisors add value by mitigating psychological costs rather than providing financial benefit; that is, reducing anxiety Gennaioli, Shleifer, and Vishny or eliciting feelings of trust Guiso, Sapienza, and Zingales rather than improving investment performance.

Specifically, this research finds that anxious individuals are found to be more likely to seek and rely on advice than are those in a neutral emotional state. The relationships between anxiety and advice seeking and anxiety and advice taking are mediated by self-confidence. Although anxiety also impairs information processing, impaired information processing does not mediate the relationship between anxiety and advice taking. Anxiety motivates individuals to seek advice from others and to be less discriminating between good and bad advice and between advice from advisors with and without a zell of interest.

Evans and David K. Musto, "What do Consumers' Fund Flows Maximize? Evidence from Their Brokers' Incentives", The Journal of CaloVol. Fund portfolios with a weighted-average 12b-1 fee of 0. Funds with 12b-1 fees thus have grown more quickly than option strategies buy call sell put 302 with no 12b-1 fund fees.

These funds relieve the dealer and their representative from performing any asset allocation and rebalancing for the investor as this occurs automatically within the fund's portfolio as time progresses and the investor nears the target date. At pages 15 and 16, Armstrong goes on to state: "This section has described a model where firms attempt to influence a salesman's marketing efforts by means of per-sale commission payments. The salesman gives prominence to the strategiies which pays the highest commission, and in equilibrium this entails steering uninformed consumers toward the more expensive products.

Competition between sellers srategies set the highest commission means that the marginal cost of supply is inflated and equilibrium retail prices are high. Therefore, the outcome for consumers, both informed and uninformed, is poor: worse than the situation without commission payments where the uninformed shop randomly, and far worse than the situation in which consumers pay directly for advice. This model therefore gives some support to consumer policies which restrict the use of commission optjon as a marketing tactic.

At pageJudge states: "Intermediary influence may also distort the allocation of capital in systematic ways. When intermediaries earn greater fees from particular types of transactions, they tend to use their influence to favor that transaction type. The greater the influence an intermediary enjoys, the greater the resultant distortion in the mix of transactions actually consummated, that is, the greater the fee effects.

Thus, when intermediary influence results in institutional arrangements that make parties more reliant on a particular type of intermediary, greater fee effects generally result. And, when certain firm types or sectors of the economy receive capital through pathways that are particularly profitable for financial intermediaries, greater fee effects result in greater capital being allocated to those firms and sectors than is socially optimal.

At the extreme, asset bubbles can result. A closely related effect is that when firms or sectors are funded in ways that are less profitable for intermediaries, those firms or sectors may receive less capital than is socially optimal. Ruckman, "Expense Ratios of North American Mutual Funds", Canadian Journal of Economics February p.

Perspective", Novembera study for The Investment Funds Institute of Canada. This study was subsequently updated in: Investor Economics option strategies buy call sell put 302 Calll Insight, "Monitoring Trends in Mutual Fund Cost of Ownership and Expense Ratios: A Canada -- U. Perspective, Update", Option strategies buy call sell put 302 Update to the study by Investor Economics and Strategic Insight For The Investment Funds Institute of Canada.

The total cost of ownership in the U. In addition, as highlighted by Investor Economics at page 17 of their separate report on option strategies buy call sell put 302 Canadian fund market Investor Economics, Mutual Fund MERs and Cost to Customer in Canada: Measurement, Trends and Changing PerspectivesSeptemberthe total cost of ownership in Canada would be lower if the switch to fee-based compensation led to higher usage of ETFs and index funds.

Investor Economics looks at the average asset-weighted fund industry MER for long term funds which excludes money market funds, funds with performance fees, funds with management fees charged at the account level and labor-sponsored funds. Davis, "Why hasn't indexing taken root in Canada", Morningstar CanadaNovember 23, Fama and Kenneth R. French, "Luck Versus Skill in the Cross Section of Mutual Fund Returns", Journal of FinanceVol. They find "that few active funds produce benchmark adjusted expected returns that stratdgies their costs," indicating that "if many managers have sufficient skill to cover costs, they are hidden by the mass of managers with insufficient skill.

The bottom-decile funds, however, underperform by about twice their reported investment costs. Gruber, "Another puzzle: The growth of actively managed mutual funds", Journal of FinanceVol. We note however certain research finding that some actively managed mutual funds perform sufficiently well to justify the associated fees, but such funds are the minority puut they do not perform sufficiently well to justify the average actively managed fund. For example, Malcolm Baker et al.

Evidence from Their Trades Prior to Earnings Announcements", Journal of Financial and Quantitative AnalysisVol. New Evidence from the Bootstrap Analysis", Journal of FinanceVol. In addition, the report finds that failure tended to be positively correlated with optino i. Matos and Laura T. Starks, "Indexing and Active Fund Management: International Evidence", Journal of Financial Economics, Forthcoming ; Darden Business School Working Paper No. In those cases, the investment fund manager or a related party is registered as a mutual fund dealer and sells its funds directly to the public.

You came into Canada and chose only to use ETFs. What was the business reason you chose not to offer your conventional mutual funds that don't pay trailers in Canada? Well, Vanguard actually looked at coming into Canada for well over 20 years; I'm told this was the seventh business plan that had been put together. Syrategies are a pretty prudent and deliberate organization, to say the least. The original barriers all had to do with paying for distribution. Again, Vanguard doesn't pay for distribution.

So when you look at the structure of the market in Canada, it would be a tough slog to kind of come in and have a business proposition that's based around trying to sell mutual funds without a trailer. See John Heinzl, "What do all those letters mean after mutual fund names? See also FINRA Investor Alert: "Class B Mutual Fund Shares: Do They Make the Grade?

Source: Morningstar Direct, SEDAR at February Otpion are very popular products that account for almost half of all long-term mutual fund assets under management. Claude Montmarquette, one of the authors of that study, later admitted that a survivorship bias exists in the study and that he would like to see a more formal longitudinal study intimately tracking the performance of advised versus non-advised groups over a long period of time.

The study does optioh establish a causal relationship between the payment of trailing commissions and wealth accumulation as it does not identify whether its participants received advice through trailing commissions or other compensation arrangements. The study also does not factor into its findings any liabilities that its participants may have incurred through financial advice, which may offset the total wealth accumulation.

Melzer and Alessandro Previtero, "Costly Financial Advice: Conflicts of Interest or Misguided Beliefs? Schweitzer, "Anxiety, Advice, and the Ability to Discern: Feeling Anxious Motivates Individuals to Seek and Use Advice", Journal of Personality and Social PsychologyVol. In determining how best to address the investor protection and market efficiency issues strategirs, the CSA considered the merits of a number of other policy options option strategies buy call sell put 302 addition to discontinuing embedded commissions and those discussed in Part 6 of this Consultation Paper.

Some of these options were proposed in the Original Consultation Paper, while some options were identified following the consultation. Each option was thoroughly and thoughtfully evaluated. Generally, where we determined that an option would potentially address one issue to some degree, but at the same time fail to address or even exacerbate another issue, we opted not to pursue the option. Other options were not retained because they were found to be inconsistent or redundant with options proposed in CSA CP The primary focus of these enhancements would be to increase investor awareness of the costs associated with their investments and the impact that such costs play on investor returns.

The particular enhancements considered are discussed below. The following diagram illustrates an example of the disclosure contemplated: The foregoing information would be based on data aggregated at the firm level in respect of all accounts for which dealers are required to produce a report on charges and other compensation and investment performance. In these instances the true costs of the services provided may be difficult to compare across different dealers.

One potential way we considered to enhance the disclosure in the fund facts document was to provide more prominent fee disclosure, and greater context about the fees charged and their impact on performance. For example, as shown in the following diagram, the CSA considered requiring an illustration of where a fund's MER falls on a spectrum from "low" to "high" based on industry averages:. In conjunction with the foregoing, the CSA also considered requiring disclosure of the actual dollar amount of fees paid and returns foregone each demonstrated over certain investment periods assuming specified returns.

This disclosure could also have been supplemented with educational statements to alert a potential investor of the impact that fees play on their investments, such as "fees reduce the returns on your investment". As an alternative to the foregoing, the CSA also considered amending the fund facts to provide enhanced disclosure regarding fund MERs and what they calk for.

For example, the CSA considered breaking down the individual components of the MER to give an investor a more complete picture of the fund's expenses. Such information expressed in dollars would include, for example, the portion of management fees paid by the fund that directly compensates the investment fund manager for its services, the portion paid for operating expenses of the fund, and the portion that is used for distribution such as all compensation paid to a dealer, including trailing commissions and sales commission, and marketing and promotional material.

In addition, the CSA considered changing the term "trailing commissions", which is used in the fund facts and stfategies reports provided to investors, to a more descriptive term such as "fees for advice and dealer services". Provided that the disclosure is simple and easy to understand, the CSA anticipate that the enhancements discussed above may lead to greater fee awareness among investors, as investors would be provided with more prominent fee disclosure that would include additional information to help an investor assess the costs and performance of their investment both at the time of sale and ongoing.

Notwithstanding the enhanced disclosure, the CSA chose not to proceed with this option as it does not anticipate that it will have any measurable effect in addressing any of the other investor option strategies buy call sell put 302 and market efficiency issues identified by the CSA, particularly the conflicts of interest stemming from embedded commissions. In our view, and as discussed in more detail in Part 6, we think that disclosure alone may strategiex be an effective remedy for conflicts of interest in an advisor-client relationship.

Moreover, the CSA do not believe it is prudent to pursue additional enhancements to disclosure until such time as the effectiveness of the current POS and CRM2 requirements has been tested through a post-implementation review. The particular initiatives considered are discussed below. Require a separate series or class of funds for each purchase option One option considered was to require investment funds to maintain a separate series or class of securities for each available purpose option i.

When an investment fund has multiple purchase options, part of the management fees earned by an investment fund manager are typically used to fund the payment of sales commissions to dealers on sales made under the DSC option. The cost of these commissions is commonly allocated to the fund as a whole and, by consequence, all investors in the fund regardless of the purchase option they chose.

As a result, investors who purchase under the front end load option who generally make an upfront commission payment optlon to the sel at the time of purchase bear the same management fee as those investors who purchase under the DSC option who do not make such upfront payments because the dealer's commission is paid directly by the investment fund manager. Require trailing commission and other embedded sales commissions to be charged as an expense of the fund Another potential approach was to require all trailing commissions and other embedded commissions such as sales strategie paid on DSC options to be an expense of the fund.

In particular, dtrategies option would require separation of the trailing commission from the management fee and require disclosure of any trailing commission paid as an individual, asset-based fee of the fund. This approach would be similar to the current practice in the U. Similarly, the fund's independent review committee would also be in a position to provide governance and oversight over any potential rate increases.

There would be, however, several drawbacks syrategies this approach that may reduce its effectiveness. This series or class could be made available to investors in a number of ways, including through discount brokerages as well as directly from the investment fund manager. Since DIY investors typically pyt not seek advice, this series or class would have a lower management fee to reflect that no, or nominal, trailing commissions are paid to advisors.

Strrategies advice is not provided to investors in these instances, the CSA understand that any nominal trailing commission paid would cover the costs of administrative, compliance, and technological services provided by the dealer or manufacturer. One potential benefit to this option would be that investors could choose to either: a use an advisor for the purchase of a fund and assume the higher costs associated with this choice; or b not use an advisor and have access to the same fund at a reduced cost.

However, the CSA chose not to proceed with these initiatives as we determined that the costs associated with these reforms would likely outweigh any potential benefit to be received. Moreover, these reforms would fail to directly address some caol the important bug protection and market efficiency issues we have identified, in particular the bias that embedded compensation engenders in sales recommendations and its detrimental effect on investor outcomes and market efficiency.

Moreover, these options would very likely add further complexity to our current fund fee structure through an expected significant increase in the number of new fund series, and fail to have a meaningful impact on competition. Another option considered by the CSA was kption possibility of setting a maximum limit i. Under this option, dealer firms and their representatives would be free to directly charge their clients commissions or fees for their services, ootion as a supplement or a substitute to embedded commissions.

The CSA considered sstrategies this option could also be a possible interim step toward an eventual discontinuation of embedded commissions. A potential way to implement this option would be to limit the trailing commission rate payable from the investment fund manager's management fee revenue. This option could also be complemented by additional disclosure in fund offering documents that would plainly describe the fees charged as "ongoing sales commissions".

In addition to, or as an alternative to, setting a cap on trailing commissions at the investment fund pkt, another potential option considered was 3302 impose stratwgies cap on the aggregate sales charge in terms of a total dollar value that could be paid by an individual investor at the account level over the length of a fund investment. In this way, once the cap is reached, the investor's assets could be switched to a series or class of securities that does not have any ongoing trailing commission or other embedded commission payment, bringing certainty of costs to the investor.

Despite the apparent benefits to this puf, it is not being further considered by the CSA at this time, either as a stand-alone option or as an interim step toward discontinuing embedded commissions call, as the shortcomings demonstrate, many of the issues we have identified would likely continue to persist in the presence of a fee cap. This option would also cause the CSA to take a non-traditional role of setting fee caps for investment products, rather than implementing measures intended to promote market efficiency.

Moreover, the CSA is not prepared to cap commissions due to the potential unintended consequences that may result from a cap. For example, research has shown that a price cap can indirectly cause average prices to rise. However, the majority of mutual fund assets held in the discount brokerage channel still remain in a series that pay a full trailing commission.

As a result, the CSA are of the view that this option could only reach its optimal effectiveness if investment fund managers are required to create, and dealers are required to sell, a discount series. At page 6, Armstrong states: "Although the direct effect of a price cap is to reduce prices, the indirect effect of reduced search lessens each firm's demand elasticity so much that prices on average go up.

This formalizes a claim sometimes made informally, which is that imposing price controls on an oligopoly putt could raise strayegies prices. One intuition for such a claim is that a price cap acts as a focal point for tacit collusion. Below, we give an overview of the relevant reforms that have been implemented or proposed in the U. We also give an account of their impact to date, as assessed further to initial post-implementation reviews.

On April 6, the United States Department of Labor DOL issued a final rule to address conflicts of interest situations in the advisor-client relationship concerning the provision of retirement advice the Fiduciary Rule. Generally, esll among other requirements, those who are considered fiduciaries will need to abide by a fiduciary standard in option strategies buy call sell put 302 provision of investment advice to retirement accounts. Under the Fiduciary Rule, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor e.

Such decisions can include, but nuy not limited to, what assets to purchase or sell and whether to rollover from an employer-based plan to an IRA. The fiduciary can be a broker, registered investment advisor, insurance agent, or other type of advisor. Basic order-taking is not considered a fiduciary activity. To the extent an advisor is considered a fiduciary under ERISA, the advisor will need to abide by a fiduciary standard. The advisor must also, among other requirements, either avoid payments that create conflicts of interest including, for example, trailing commissions or comply with certain exemptions that will mitigate the conflict.

Among the available exemptions is the "Best Interest Contract Exemption" the BIC Exemption. The BIC Exemption allows advisors to continue to receive commission-based compensation provided that they meet certain conditions intended to mitigate the conflict created by such compensation. Generally, advisors must acknowledge fiduciary status, provide advice that is in their client's best interest, avoid making misleading statements, and receive no more than reasonable compensation.

The firm must also ensure it has policies and procedures aimed at mitigating conflicts of interest, must not provide incentives to its employee advisors to make recommendations that are not in the client's best interest, and must ensure all conflicts of interest are disclosed.




Selling Put Options in Smaller Trading Accounts


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