While the practice of a fund dealer acting as a principal distributor for more than one family of funds is relatively rare, securities regulators are adopting rule changes to clarify that this practice isn’t allowed — and making other tweaks to the rules that aim to enhance investor protection.
The Canadian Securities Administrators (CSA) published final rule changes on Thursday that, among other things, specific that fund dealers can only act as a principal distributor for funds of the same family. According to the CSA’s notice, it’s estimated that there are only two dealers that currently act as a principal distributor for more than one fund family — so these amendments would make sure that the practice doesn’t become more widespread in the future, while also requiring current arrangements to be unwound.
The reforms include certain provisions that take effect Oct. 1, while others come into force Jan. 1, 2027 — although there is a 24-month transition period for most of the changes to give affected dealers and fund companies time to adapt.
“We anticipate that the transition period will provide sufficient time for principal distributors who act as a principal distributor for more than one unaffiliated manager to transition their practice, operational model and compensation arrangements,” the CSA notice said. “Any impacted managers will need to make alternate distribution arrangements for their mutual fund securities prior to the end of the transition period.”
During the public consultation on the proposed reforms, which the CSA launched in late 2024, certain commenters argued that the principal distributor model should be scrapped entirely.
However, in today’s notice the regulators said that they believe that the model “continues to have a place in the mutual fund industry.”
And, while dealers won’t be able to act as a principal distributor for more than one fund family, dealers that have a principal distribution arrangement with one family will still be able to act as a “participating dealer” for other fund families, the CSA noted.
Additionally, the reforms also aim to enhance transparency to investors by “requiring disclosure of principal distributor arrangements and related compensation” in fund prospectuses, Fund Facts documents, and the annual compensation reports that dealers are required to provide.
This change will require certain firms to revise their disclosures, the regulators said.
“Not every principal distributor currently provides the proposed disclosure,” the CSA noted. “The proposed disclosure of principal distributor arrangements and compensation will ensure that all principal distributors are subject to the same disclosure requirements.”
Finally, the amendments also stipulate that principal distributors can’t sell funds on a deferred sales charge (DSC) basis.
The DSC ban that took effect in 2022 technically didn’t apply to principal distributors, as they are carved out from the sales practices rule that was used to impose the ban — so these changes close that loophole.
Overall, the CSA said that the reforms “seek to improve investor protection and maintain investor confidence in our capital markets.”