Securities regulators have struggled mightily to improved point-of-sale disclosure for mutual funds in the face of arent resistance from the mutual fund industry. Now, the industry is largely satisfied, and regulators are facing new, strident opposition from investor advocates.

The regulatory initiative to enhance mutual fund disclosure has been in the works for more than 10 years now. During that time, regulators have repeatedly refined their proposals, largely in response to industry criticism. Investors have never had much of a voice in these matters, but that has been changing in the past couple of years with the emergence of more credible investor advocates, such as the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) and the On-tario Securities Commission’s investor advisory panel. Investor advocates are pushing back.


The one thing that both the industry and investor advocates appear to agree on is that fund industry disclosure could stand to be improved, and that a concise, plain-language document (such as the new Fund Facts document) is a step in the right direction.

But now that these documents are in use and regulators are proposing to allow firms to satisfy their basic prospectus disclosure obligations by using them, investor advocates are worried that investor protection is being sacrificed.

For instance, FAIR Canada’s comments on the latest proposals from the Canadian Securities Administrators suggest that the regulators have “lost sight” of the fundamental purpose of introducing this new disclosure regime, which was to help investors before they decide to buy units in a fund: “The point-of-sale initiative was originally aimed at providing investors with more meaningful and effective disclosure and was held out to be a significant investor protection initiative.”

Instead, the CSA is proposing to allow firms to deliver disclosure up to two days after a sale is made, and to permit this delivery to fulfil their basic duty to provide investors with a prospectus.

The comment from Kenmar Associates, a Toronto-based investor advocacy group, says that while allowing delivery of Fund Facts may save the industry costs: “It will do less than nothing to help address the ‘information asymmetry’ that exists between fund salespersons and retail investors.”

FAIR Canada also opposes these proposals. Its comment says that Fund Facts is flawed and that allowing this document to be substituted for a prospectus is “a major policy change” that demands public consultation and legislative amendments. The comment argues that regulators shouldn’t make such changes until both the perceived flaws with the documents are corrected and firms are required to provide disclosure before investors decide to buy.

Ensuring disclosure before an investor is sold units in a fund was the original purpose of this initiative. The primary intent was to create a common disclosure document for both mutual funds and segregated funds, so that investors could easily compare the merits of — and make an informed decision among — products that are often treated as substitutes for one another (despite the fact they are structured and regulated differently). The only way that could happen is if disclosure is made before a sale.


However, the mutual fund industry has fought bitterly against comprehensive pre-sale delivery requirements, arguing that it’s impractical to require disclosure at or before the point of sale. Regulators have given in on that issue for the time being — although they insist that in the third and final stage of implementing this new regime, they will actually require point-of-sale disclosure.

But investor advocates can hardly be expected to wait for regulators to deliver on that promise, given this initiative’s long and tortured history. Instead, they insist that the problems with Fund Facts must be fixed and, until they are, it’s too soon to allow this document to stand in for prospectuses.

Their biggest concern that investor advocates have with the content of Fund Facts is their approach to risk, which is criticized as being too ambiguous and not particularly useful for investors. The IAP’s comment on the CSA proposals argues the presentation of risk in these documents “provides an overly simplistic, vague and distorted picture of a fund’s risk profile.”

Funds are graded for their riskiness in Fund Facts from low to high, but, critics say, it’s not clear what those terms actually mean; nor are they standardized among firms, which limits the ability of investors to compare funds.

FAIR Canada’s comment says the CSA’s approach to risk ratings is “a dangerous one” and calls on the regulators to develop a standard methodology for assessing risk that includes public consultation and provides guidance to investors on how to interpret the resulting risk ratings.

The Canadian Advocacy Council for Canadian CFA Insti-tute Societies’ comment also assails the Fund Facts’ approach to risk measurement, recommending that funds be required to report their biggest declines in the most recent one-, three-, five- and 10-year periods. Data of this nature, it says, provides “more meaningful information to investors than a fuzzy description like ‘medium risk’.

Apart from risk measurement, various critics also charge that cost disclosure isn’t sufficient, benchmarks should be used and that foreign-exchange and hedging policies should be revealed in Fund Facts, among other things.

In addition to fixing this document and mandating point-of-sale delivery, the IAP’s comment says, regulators should establish a way of enforcing compliance with the new regime.