Preparing for point of sale

As of May 2016, advisors will be required to provide pre-trade disclosure about the fees and commissions generated by the mutual funds advisors are recommending to clients – and this disclosure must be made before an investment dealer can accept instructions for a purchase. These so-called point-of-sale (POS) rules will use Fund Facts (FF) as the main disclosure document and are separate from Phase 2 of the client relationship model (CRM2) rules. However, both regulations share the principle of transparency. Changes in timing and more information about a mutual fund’s features are the mark of POS.

POS is complex, says Greg Temelini, litigator at Wright Temelini LLP who defends advisors in civil suits. “Advisors may run afoul of one of those detailed, prescriptive regulations,” he says. “To me, that’s the real pitfall.”

POS – which has been under discussion within the mutual fund industry for at least a decade – requires FF documents to be posted on a dealer/advisor firm’s website and requires advisors to provide clients with mutual fund cost and risk information within two days of a transaction.

Advisors are required to supply the relevant FF – a two-page, simplified disclosure document – to clients for a fund purchase. Under the new POS rules, advisors must offer the FF and discuss its implications with clients before a purchase takes place. This requirement also applies to situations in which purchase instructions are received remotely, which could present special challenges.

POS, coupled with recent suitability and “know your client” reforms, means there has been a lot of regulatory change imposed on advisors in the past few years, notes Susan Silma, co-founder of Guelph, Ont.-based consulting firm CRM2 Navigator and formerly an Ontario Securities Commission (OSC) lawyer. Silma, who was at the OSC when the POS initiative was taking shape, notes that the implementation process for POS and CRM2 could have been better. “It’s unfortunate that the timing didn’t better coincide,” she says. “You have had two sets of changes in a relatively short period of time.”

Firms should avoid trying to layer one set of rules on top of the other, she adds, and aim for a streamlined approach.

One of the first things to understand about the POS requirements is that the exceptions to mandatory pre-sale disclosure are minimal. They include exceptions for managed accounts, pre-authorized purchase plans and immediate transactions for which completing delivery of the FF within the time frame requested by the client is impractical.

Even then, Temelini warns, advisors are required to provide clients with a verbal summary of some of the main disclosure elements contained in the FF. And as Silma notes: “Exceptions are clearly intended to be a one-off. The [Canadian Securities Administrators] doesn’t want dealers and advisors to get used to skipping the pre-sale [disclosure].”

In most situations, then, advisors must deliver the FF to their clients prior to an initial purchase of units in a fund and explain the FF’s contents. At a minimum, advisors need to hit the FF’s high points, including direct and indirect charges, any deferred sales charges and related fee schedules, and whether the advisor will receive a trailing commission. If precise amounts are not known, estimates must be provided.

Regarding trailer fees, advisors should tell clients that the fund company helps to pay for advice and other services that the advisor provides for as long as the client holds a fund’s units. That fee includes research, IT, staff, premises, investor protection fund levies, tax reporting, insurance and training.

In general, these requirements are workable when the advisor and client are sitting in the same room. But what about phone calls? In that case, advisors will have to send the client an electronic version of the FF to review while they are engaged in conversation. That may be a challenge for some clients, who might not be able to look at a computer screen while they are talking on the phone or can’t print out the FF. Sending the FF in advance of the call may be required.

FF delivery can be made in person, by mail, fax or electronically, including via email. What doesn’t work is including a link to a website.

Silma says advisors need to think hard about the delivery aspect of the FF and decide if electronic delivery makes the most sense. “You also have to consider client consent,” Silma says, and whether or not electronic delivery will violate Canada’s new anti-spam rules, which generally require consent before sending electronic communications to clients.

It’s also key to ensure that clients understand why a particular transaction has been recommended.

“It’s not good enough to simply hand over the Fund Facts document that speaks to the general characteristic of the mutual fund,” says Temelini, “but which doesn’t speak to the specific transaction you are dealing with on the client level.”

For more, see: Prepping for point of sale disclosure