Canadian securities regulators are proposing a standardized risk classification methodology, based on standard deviation, for use in Fund Facts documents.

In CSA Notice 81-324 and Request for Comments Proposed CSA Mutual Fund Risk Classification Methodology for Use in Fund Facts published today, the Canadian Securities Administrators (CSA) indicate that the proposed methodology has been developed in response to complaints that the lack of a standardized methodology could result in inconsistent measurements of risk, which would make comparisons between mutual funds more difficult.

Currently, regulators require fund managers to provide a risk rating on a scale of five categories, with the methodology chosen and applied at the fund manager’s discretion. The new proposal would expand the number of categories to six, proposes standard deviation as the most suitable risk indicator, and would allow the use of a reference index for funds that don’t have adequate performance history.

The proposal is out for comment until March 12, 2014. the CSA notes that it is particularly interested in feedback on whether the proposed methodology should be mandated, or simply the subject of guidance.

“We think that the development of a standard methodology, whether mandated or adopted as guidance, would benefit both investors and the capital markets by providing consistency and transparency of disclosure and improved comparability of investment fund products,” it says, adding that it expects that the costs of complying with the proposed methodology will be minimal, since most fund managers already use some type of return volatility measure.

The CSA notes that the adoption of the proposed methodology could result in changes to the risk band categorization for some funds between Fund Facts renewal dates. So, it proposes that fund managers monitor risk classification on a monthly basis, inform investors of risk band changes if they occur within certain prescribed quantitative boundaries and criteria, and update the Fund Facts accordingly.

“Overall, we think the potential benefits of improved comparability of the Fund Facts for investors, as well as enhanced transparency to the market, are proportionate to the costs of complying with the proposed methodology,” it says.

“The Fund Facts is designed to ensure that key information about a mutual fund is provided to investors in a simple and comparable format,” said Bill Rice, chairman of the CSA and chairman and CEO of the Alberta Securities Commission (ASC). “The consideration of a standard risk classification methodology is intended to enhance that objective, and promote consistency in how risk is measured by mutual fund managers.”