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The Ontario Securities Commission (OSC) is adopting a rule that will codify transitional relief that was originally introduced alongside the regulators’ ban on paying trailers to discount brokers — allowing firms to rebate trailers in certain circumstances.

In 2022, the Canadian Securities Administrators (CSA) effectively banned fund managers from paying trailer fees to “order-execution only” dealers. Trailer fees raised investor protection concerns because they are intended to compensate dealers for providing ongoing advice to investors, which discount brokers are prohibited from offering.

At the time, the regulators also issued temporary relief to fund managers and discount brokers to allow the payment of trailer commission rebates to certain investors. This was meant to facilitate compliance with the ban in cases where it was difficult to switch investors into a different fund series that didn’t pay trailers.

Instead of forcing investors to sell their funds, which could trigger tax consequences, the relief allowed investors to continue holding their existing funds (or to transfer their accounts to a discount broker) — by allowing dealers to rebate the trailers to investors.  

The temporary relief, which expired in November 2023, was extended once, but is now set to expire on May 31 and cannot be extended again, under Ontario securities law. 

Given the ongoing need for the relief, the OSC is now proposing to adopt a rule that sets out the requirements for dealers to rebate trailer commissions — effectively codifying the transitional relief into a rule.  

“Without the rule, there would be an unlevel playing field for [fund managers] and OEO dealers in Ontario as equivalent blanket orders issued by the other CSA jurisdictions continue to be in effect” and either don’t expire or can be extended, the OSC said in a notice outlining the proposed rule.

The rule has been sent to provincial minister of finance for approval.