CSA Moves to Ban Chargebacks to Strengthen Investor Protection
Written By: Michael Holder, Kanchan Mehta, Rijja BaigSummary of Proposal
On June 26, 2025, the Canadian Securities Administrators (“CSA”) published proposed amendments to National Instrument 31-103 that would prohibit the use of “chargebacks” in the distribution of investment fund securities offered by prospectus (which includes mutual funds and other publicly offered investment funds).
Chargebacks occur when advisors receive an upfront commission for selling a fund but are required to repay all or part of that commission if the client redeems all or part of their investment before the end of the chargeback period, which is a fixed schedule as determined by the dealer firm or other registrant.
Regulatory Intent
The CSA believes that Chargebacks create a conflict of interest between advisors and their clients. When advisors know they may lose compensation if a client redeems early, they may be incentivized to advise against redemptions – even if doing so is not in the client’s best interest, or to recommend funds based on the commission structure rather than the suitability for the client. This misalignment undermines investor trust and can result in suboptimal investment outcomes.
By banning chargebacks, the CSA aims to eliminate these conflicted compensation arrangements. This means that dealer firms and advisors will no longer be allowed to structure agreements where upfront commissions are clawed back if the investor redeems their investment early.
The proposal aligns with the CSA’s 2025–2028 Business Plan, which focuses on improving investor protection and ensuring confidence in Canadian capital markets. According to the CSA’s impact analysis, the proposed ban is expected to affect a small number of firms, as only one mutual fund dealer and possibly a few scholarship plan dealers currently use chargebacks. However, the CSA argues that intervening now is critical to prevent conflicted compensation models from becoming more common.
The proposed amendments would apply to all registered firms and individuals involved in the distribution of publicly offered investment funds. The rule would come into force six months after its final publication.
Potential Implications Beyond Public Funds
While the proposed amendments currently apply only to the distribution of securities of publicly offered investment funds (i.e., reporting issuers), the CSA has invited comment on whether the proposed chargeback ban should be extended to other types of securities, including those of non-reporting issuers. This may have future implications for privately held investment funds and non-investment fund issuers such as mortgage investment corporations.
Next Steps
All registered firms may want to review their compensation structures now to ensure they do not rely on chargeback arrangements on public and privately placed products that could fall under future regulatory scrutiny.
Contact North Star at info@northstarcompliance.com to review your firm’s compensation practices and take early action to stay aligned with the CSA’s evolving expectations.
The public has until September 24, 2025, to comment on the proposed amendments.