The reluctance of mutual fund companies to provide the data needed for a regulatory research project may be understandable, but it’s really not a good look.

The Canadian Securities Administrators are seeking to answer a fundamental question about the fund industry: to what extent do fees and compensation influence sales? It’s an essential subject for anyone engaged in the sale of mutual funds; and, lately, it has become of interest to regulators as well, as they grapple with investor-protection concerns.

Amid these concerns, regulators have indicated that everything up to and including an outright ban on embedded commissions is on the table. And, given a trend in that direction in several other countries over the past few years, a ban hardly seems to be an idle threat.

The inevitable death of trailer fees is starting to be forecast in research reports and openly discussed at industry conferences.

Understandably, much of the industry is adamantly opposed to this sort of regulatory intervention. Any threat of fundamental change to a long-established business practice is bound to face opposition. While the industry surely would adapt to whatever regulatory environment it faces, it would prefer not to have to. And there would be winners and losers.

Yet, regulators have a broader mandate. They must guard the public interest and protect investors. Their research initiative reflects a good-faith effort to determine whether the investor-protection concerns are valid. By declining to provide data to the research, fund companies risk making themselves look guilty regardless – like a suspected drunk driver who tries to beat the charge by refusing a breathalyzer test. The mutual fund industry might blow under the limit, but doesn’t want to take the chance of failing.

The problem with this strategy is the endgame. The regulators simply are not likely to shrug and walk away if the industry refuses to play ball. Rather, lack of co-operation is liable to have the opposite effect: to confirm any suspicions the regulators may have about the industry’s integrity and harden attitudes on the policy front – to say nothing of the message sent to clients. Better to take a deep breath and hope for the best.

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