Compliance Memo

Compliance Memorandum 2018-04; Deferred Sales Charge and Low Load Purchase Option Changes

For more information, contact:

Compliance Team
compliance@gpwealth.ca

Date Issued:

November 8, 2018

As you know, there has been considerable scrutiny from regulators on the issue of advisor compensation, the conflict of interest that arises from certain purchase options and the suitability of purchase options.

In 2015 the MFDA undertook a targeted sweep of Members trading in deferred sales charge funds (“DSC Sweep”) MFDA Bulletin #0670-C. This initiative was part of a continued focus on suitability with an emphasis on protecting seniors. In short, the DSC Sweep focused on the suitability of sales charges considering client time horizon, age and disclosure of fees.

As you know, the suitability of sales charges is a significant aspect of your suitability obligation. The MFDA DSC Sweep considered three key suitability areas that must be addressed with every purchase transaction using the Deferred Sales Charge (DSC) purchase option:

Time Horizon: The time horizon of the client should be consistent with the redemption schedule. In other words, the stated time horizon should be at least as long as the redemption fee schedule.

Client Age: The client’s age must be considered with respect to the suitability of a purchase using the DSC purchase option, most particularly with seniors. Consideration must be given to liquidity needs, sudden death, estate considerations and accounts in or nearing a withdrawal stage such as RRIFs and LIFs.

Disclosure of Redemption Charges: Proper disclosure must be made with respect to fees (e.g. disclosure of redemption charges) however it’s important to understand that disclosure alone is not enough to satisfy your suitability obligation. In other words, just because the client is aware of the fees does not make the DSC purchase option suitable.

In December 2016 MFDA Bulletin #0705-C, Review of Compensation, Incentives and Conflicts Of interest, identified further compensation and incentive practices that increase “the risk of mis-selling funds under the DSC purchase option”, such as “unsuitable leverage strategies” or churning of investment accounts.

After considerable review of our own compensation practices, a review of our most recent MFDA Audit and the increased awareness of and scrutiny surrounding seniors’ issues, we believe that changes are necessary to address conflicts that arise for the DSC and LL purchase option. As a result, our policies and procedures regarding the DSC and LL purchase option are being revised effective immediately as follows:

An Account Holder over the age of 60: the DSC purchase option will no longer be available. We will continue to allow the LL and FE purchase option and will continue to monitor the conflicts arising from these purchase options. 

An Account Holder over the age of 70: the DSC and LL purchase option will no longer be available. We will continue to allow for the FE purchase option.

A Leverage Plan: the DSC and LL purchase option will no longer be available. We will continue to allow for the FE purchase option.

As always, if you have questions or comments, contact the Compliance Department by email at compliance@gpwealth.ca.