CSA adopts 2028 ban on investment fund chargebacks

The Canadian Securities Administrators have adopted amendments to National Instrument 31-103 prohibiting chargebacks in the distribution of securities of investment funds that are reporting issuers. Subject to required ministerial approvals, the amendments will come into force on 1 October 2028.

The ban covers arrangements under which a dealing representative repays all or part of upfront compensation after a client redeems securities during a defined chargeback period.

Scope and transition

The CSA notice describes chargebacks as payments between registrants. A dealer firm or another registered firm pays upfront compensation, and a later client redemption triggers repayment by the dealing representative. The amendment addresses that trigger rather than imposing a general prohibition on commission recoveries or distribution arrangements.

The affected cohort is registrants involved in distributing securities of reporting-issuer investment funds. The Canadian Investment Regulatory Organization participated in developing the amendments and expects to amend its member rules, policies and guidance to align with them in all material respects.

The final instrument provides a 24-month implementation period. It also contains a legacy provision: the prohibition does not apply to a client's redemption of securities purchased before the effective date.

The CSA received 22 comment letters on the proposed amendments. It says the final changes include the longer implementation period and the legacy provision, and that the amendments will not be republished for further comment.

The ban does not capture every recovery of upfront compensation.

Commission recovery linked to cancellation of a pre-authorised contribution or auto-switch falls outside the ban where the recovery is not triggered by a redemption of securities. The CSA nevertheless says these arrangements can create material conflicts of interest that registrants must address in the best interests of clients.

The same position applies to recoveries connected with cash or in-kind transfers to another financial institution, where the recovery is not triggered by a redemption. A redemption before the transfer remains within the ban where the recovery is connected to that redemption. The relevant distinction is the event triggering the recovery, not the label attached to the payment or adjustment.

The notice discusses changes to compensation practices and compliance systems, as well as training for registered representatives, in the context of implementation feedback from scholarship plan dealers. It does not set out a separate implementation checklist. Affected registrants will need to assess compensation arrangements involving reporting-issuer investment funds against the final rule and its transition provision.

The amendments have been or are expected to be adopted by each CSA member, with ministerial approval required in some jurisdictions. The notice identifies no further scheduled publication or implementation event before 1 October 2028. The official amendments and any subsequent CSA or provincial commission guidance are the records to monitor for further scope or transition detail.