Investor advocates struck one of their first meaningful blows for enhanced mutual fund disclosure earlier this year. Now, the question is whether it will hold up in the face of pushback from the financial services industry.

In June, the Canadian Securities Administrators (CSA) proposed a series of amendments to the new mutual fund disclosure documents known as Fund Facts __ most of which aim to respon to complaints raised by investor advocates, such as the Ontario Securities Commission’s investor advisory panel (IAP), the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) and Ken Kivenko’s Kenmar Associates.

The CSA’s proposal included changes to how fund firms are required to disclose risk, which investor advocates had sharply criticized in the inaugural Fund Facts documents. The proposal calls for funds to: highlight their four primmary risks; reveal their wors three-month performance period; show their return against a basic benchmark (a one-year guaranteed investment certificate [GIC]); and, in cases in which trailer commissions are paid, to alert investors that paying trailers can give rise to conflicts of interest.

In comments submitted on the proposed changes, several fund firms are pushing back against the regulators’ plans. They criticize the various proposals as potentially confusing, misleading and unfairly negative toward the fund industry.

The industry’s comments are almost unanimous in condemning the regulators’ proposed changes. They argue that requiring firms to disclose their four top risks is incomplete, uninformative and could expose firms to liability for failing to disclose risks that don’t rank in the top four. Also, they say disclosing the worst three-month return is unnecessary, improperly emphasizes short-term performance, and that the information may be onerous to produce.

Various fund firms also strongly oppose the use of a one-year GIC as a benchmark for performance comparison, arguing that this would be misleading to investors because GICs and mutual funds are fundamentally different products that cannot be meaningfully compared without a good deal of explanation _ and that there’s no space for the needed discussion in a concise disclosure document.

According to the comments, some firms would prefer no benchmarking while others say that funds should be allowed to use benchmarks that are more relevant to the individual fund. So a Canadian equities fund would be compared to the domestic equities index, for example.

Furthermore, commenters argue that highlighting the potential conflicts of interest tied to the use of trailer commissions unfairly singles out mutual funds when other products also use forms of embedded compensation.

But investor advocates like the proposed changes. The IAP says that with the alterations the CSA has proposed, it is ready to endorse the use of the new documents in place of traditional disclosure.

“While this document can be further refined, many of our earlier concerns regarding risk, performance measurement, and the use of vague, ‘marketing’ language have abated,” the IAP’s comment says, adding that, as a result, it now supports the use of Fund Facts instead of the simplified prospectus.

FAIR Canada is less enthusiastic. Although it endorses many of the CSA’s proposals, it is not ready to see prospectuses replaced just yet. It maintains that prospectuses provide important information that is not available in the Fund Facts documents _ and it calls on the CSA to continue to require delivery of the prospectus (while also reforming it to make it more meaningful to investors).

As for Fund Facts, FAIR Canada recommends that the CSA consider using a five-year GIC as a benchmark, which, it says, assumes a longer investment period. FAIR Canada worries that fund firms are not being required to use a prescribed methodology to measure risk as that will result in inconsistent evaluations of risk among funds and limits comparability. It also wants to see trailer fee disclosure toughened even further so that clients truly understand the conflicts trailers pose.

The IAP also says the CSA should do more to warn investors about the possibly distorting influence of trailers, noting: “It is misleading to suggest that trailing commissions ‘may’ create a conflict of interest, when, in fact, they do.”

The comments indicate that the industry and investor advocates are diametrically opposed on most of the CSA’s proposals. Thus, it appears regulators will be faced with some tough decisions.

If regulators insist on these changes, it will represent meaningful progress for the increasingly vocal investor advocates. If not, it will mean the industry continues to prevail.

The industry already scored a major victory when it succeeded in getting regulators to back away from requiring delivery of the new disclosure document at the point of sale. That was the ostensible purpose of this initiative in the first place and remains a priority for both the IAP and FAIR Canada.

Although regulators promise they will eventually require pointof- sale delivery, it’s been more than five years since the CSA first proposed its rules in this area; and the project to create more comparable upfront disclosure for mutual funds and segregated funds began more than 13 years ago. So, the regulatory problem they set out to solve in the first place _ improving disclosure before an investor decides to buy a fund _ remains unsettled and isn’t likely to be resolved soon.

© 2012 Investment Executive. All rights reserved.