From the Regulators

Fund companies must use Fund Facts document instead of a simplified prospectus but point-of-sale disclosure is still on hold

By James Langton |

Canadian securities regulators are set to require mutual fund firms to deliver their Fund Facts disclosure documents to investors instead of a prospectus, but they are still not requiring that delivery to occur at the point-of-sale, as originally intended.

The Canadian Securities Administrators (CSA) have published amendments to mutual fund disclosure rules, which will require fund companies to use the Fund Facts document instead of the simplified prospectus to satisfy the prospectus delivery requirements. However, the CSA still isn't requiring that disclosure take place before funds are sold. It only requires that investors receive the disclosure within two days of buying a fund.

When securities regulators and insurance regulators first started the initiative that eventually led to the creation of the Fund Facts document the ostensible purpose was to create simple, comparable disclosure documents for mutual funds and segregated funds that would be provided to investors at the point of sale to enable them to make more informed investment decisions.

However, regulators have faced strong pushback from the industry, particularly in terms of the delivery requirements, with the industry arguing that requiring pre-sale disclosure would unreasonably disrupt their business. That argument has long delayed the adoption of the Fund Facts documents, although the CSA continues to maintain that it will eventually require point-of-sale delivery.

Indeed, in its notice today, the CSA says that, as a next step, it will propose requirements that will require point of sale delivery for conventional mutual funds; and, as part of this work it will also consider whether to impose the same requirements on other types of publicly offered investment funds, including exchange-traded funds.

For now however, the industry will not have to deliver the Fund Facts before a sale is made. And, it will have a year to comply with the new delivery requirement. The amendments related to delivery take effect June 13, 2014; although the CSA says it encourages early adoption "in order to assist investors in their decision-making process and in discussions with their financial advisors."

Additionally, the amendments published today also require changes to the documents themselves, which the CSA says aim "to enhance the presentation of risk, cost and performance disclosure".

Specifically, they are adding an explanation of volatility in the risk section; removing the requirement to include a list of main risks of the mutual fund; removing the comparison to the mutual fund's performance with a one-year GIC; adding the best 3-month returns to the performance section in addition to the worst 3-month returns; and, refining the disclosure about potential conflicts arising from the payment of commissions to refer to investments in general rather than mutual funds specifically. These changes are to take effect January 13, 2014.

"Requiring the delivery of the Fund Facts will give investors access to key information about the potential benefits, risks and costs of mutual funds, which will assist them in making more informed and confident investment decisions," said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC).