New Scholarship Plans - Up-Front Commission Structure
This article was originally published in the Investment Funds Practitioner in December 2015.
Staff have previously raised comments in respect of group scholarship plans that require subscribers to pay up-front commissions to sales representatives. We have recently observed that some plan providers appear to be shifting their focus towards the development of new individual plans with similar features.
Group scholarship plans (GSPs) have historically required the up-front payment of sales commissions to sales representatives who sell them. Currently, most plan providers require 100% of a subscriber’s initial contributions to a GSP to be directed to the payment of the sales commission until half of the commission is paid. Subsequently, 50% of the subscriber’s contributions are directed to the payment of the sales commission until it is paid in full.
This practice only allows for a small portion of a subscriber’s initial contributions, if any, to be invested in the plan’s actual portfolio investments. Depending on the circumstances, it can take two years or longer before the sales commission is fully paid. Staff have determined to no longer recommend prospectus receipts for new scholarship plans with similar up-front commission structures that lack the ability of a subscriber to receive a refund, in whole or in part, for paid sales commissions in appropriate circumstances.
We recently received a prospectus which proposed to establish a new individual scholarship plan. The plan, however, required subscribers to pay an up-front sales commission without the possibility of any refund should the subscriber withdraw from the plan. Staff indicated that we would not be willing to recommend a prospectus receipt for this plan on the basis that receipting it, without a mechanism to provide for a refund, in whole or in part, of any sales charges to subscribers, would not, in our view, be in the public interest. The prospectus was subsequently withdrawn.
We encourage any scholarship plan providers that are contemplating the creation of new scholarship plans to consult with staff prior to developing new compensation models for their sales representatives.