The Canadian Securities Administrators has finalized amendments to the principal distributor model for mutual fund securities, which are expected to bolster investor protection and confidence.
Changes confirm that a dealer can be a principal distributor solely for mutual funds in the same mutual fund family. Nonetheless, the reforms do not impact a principal distributor’s ability to distribute mutual fund securities as a participating dealer to multiple mutual fund families.
Under the revisions, principal distributor arrangements and related compensation must be disclosed in the prospectus, fund facts document and the annual report on charges and other compensation – this enhances transparency. A principal distributor is defined as a dealer with an exclusive right in the distribution of or benefits from a feature granting a material competitive advantage in mutual fund securities distribution.
The CSA began evaluating the practices of mutual funds that have principal distributor relationships with registrants to distribute their securities in September 2022. The modifications were initially pitched and presented for comment in November 2024. The CSA sought feedback on the circumstances, if any, in which principal distributors should be permitted multiple relationships; it also consulted on the use of chargebacks by dealers in mutual funds distribution. The proposed reforms were aligned with the CSA’s 2022-2025 Business Plan.
“Investor protection is at the heart of these proposed changes. By clarifying the principal distributor model and ensuring greater clarity in compensation, we aim to foster a more transparent and fairer marketplace for all participants,” said Stan Magidson, CSA chair and Alberta Securities Commission CEO, in a CSA media release dated November 2024.
The CSA issued the Notice of Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, National Instrument 81-101 Mutual Fund Prospectus Disclosure, National Instrument 81-102 Investment Funds And National Instrument 81-105 Mutual Fund Sales Practices and Changes to Companion Policy 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, Companion Policy 81-102 Investment Funds and Companion Policy 81-105 Mutual Fund Sales Practices The Principal Distributor Model to the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Québec, Saskatchewan, and Yukon on June 11.