By Tom Bradley

The Canadian Securities Administrators (CSA) are considering whether embedded commissions, otherwise known as trailer fees, should be eliminated from mutual funds.

The CSA is conducting research into whether this form of compensation impacts mutual fund flows. It has hired a finance professor from York University, Douglas Cumming, to do the analysis and deliver a report at the end of the first quarter.

It was pointed out to me this week that most mutual fund companies have missed the deadline and have not yet provided the requested data. According to the Investment Executive magazine (IE), Professor Cumming “has received only a small number of responses.” Apparently, fund companies have voiced concerns about the confidentiality of the data despite repeated assurances from Professor Cumming and the CSA.

As I’ve written previously, the mutual fund industry has circled the wagons on the trailer fee issue and is fighting it hard. It’s my reading of the situation that on the other side, the provincial regulators (the 13 members of the CSA) are agonizing over this decision. They know that embedded commissions don’t fit with where the rest of the world is going (a number of countries are banning them) and trailers create inherent conflicts of interest between the advisor and the client – i.e. commission-based products provide higher and less visible compensation for the advisor, but may not always be the best product for the client.

The news that the fund industry isn’t playing ball with the CSA raises the questions – Is this the final nail in the coffin for trailers? Or should it be the final nail? As an editorial in IE muses, “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.”

(Steadyhand note: Despite the data request being a pain in the butt and coming at a time when we were also filing our prospectus and going through our company and fund audits, we complied with the CSA request by the mid-January deadline. We put an N/A in the trailer fee column, as there are no embedded commissions in the Steadyhand funds.)