An investor advocate and some advisors are questioning the direction that regulators are taking as they appear set to drop a controversial line in the proposed point-of-sale documentation for segregated funds that attempted to quantify insurance costs.

“If the goal of the documents is to be transparent, it should be as transparent as possible,” says Tom Hamza, president of the Investor Education Fund, which is funded by the Ontario Securities Commission. Hamza has made it clear that he hasn’t seen any new documents — nor has anyone else.

In the previous proposal, the draft disclosure POS document lists, in a hypothetical example, Giant Financial’s “Choice Insurance” and breaks down the product’s fee structure. It reads: “Annual expenses, as a percentage of the fund’s total value: 3.10%.” The hypothetical example then breaks the costs down into “fund expenses [management expense ratios]” of 2.25% and “insurance costs” of 0.85%.

The insurance industry has made at least two major complaints about this line. Regulators have hinted in the past month that they would drop it, but they yet to confirm this.

The final POS documents have been in the works for more than two years. In June 2007, the Joint Forum of Financial Market Regulators released its proposed draft. Since then, investors and the industry have made various submissions in response.

The POS documents are aimed at harmonizing and simplifying sales disclosure on certain investment and insurance products, including fees, commissions and their effect on the consumer’s return. When the documents are finalized — and no one knows exactly when that will be — advisors of all types will be required to deliver similar documents to clients every time they sell mutual funds or seg funds.

In October 2007, the investment and insurance sectors responded to the Joint Forum’s proposed POS documents by delivering more than 80 submissions. Local departments and executive offices of 14 insurance companies were among the most heavy-hitting comments.

Their main argument is that it is almost impossible to quantify insurance costs and — more important — that to reveal them would effectively reveal competitive information about what insurance manufacturers pay the subadvisors that manage the underlying portfolios in the seg fund products, for example.

“For Transamerica, and probably other insurance companies, [this type of disclosure] would potentially reveal proprietary pricing information with respect to institutional partners and actuarial pricing policies,” wrote Paul Raeburn, then president of Transamerica Life Canada in Toronto.

The Canadian Life and Health Insurance Association made a general submission that summarized most of the same points.

Studies show that the ballpark cost of insurance on seg funds with death benefits tend to run between 15 and 45 basis points; but getting more specific than that is difficult, says Moshe Milevski, a professor of finance at York University who has studied the cost of insurance in both the U.S. and Canada and backs up the insurers’ main claim.

“I’ve spent the past 10 years trying to do it,” he says, “and I’ve learned that the attempt to quantify what you’re getting is a devilishly difficult exercise.”

The regulators seem set to list just a seg fund’s MER, which reflects the total cost of the investment before the return is calculated, as is the case for the proposed documents on mutual funds, which, of course, are not the same in that they don’t provide insurance.

Hamza concedes that actuarial difficulties make the exact details of insurance costs difficult to calculate, “but it doesn’t preclude some mention clearly of the additional cost of seg funds. I think there’s a way around it.”

He adds that in the name of transparency, insurance costs should be mentioned in some way in the POS documents.

“If there are complications in expressing with precision certain numbers, there are other solutions,” he says. “Whether that includes mentioning that they exist within a certain range or that they exist at all. For the sake of transparency, there has to be a mention. People are paying those fees.”

The move appears to capitulate to the industry, agrees John J. De Goey, a certified financial planner and vice president of Burgeonvest Securities Ltd. in Toronto. De Goey had made a submission to the Joint Forum last autumn in favour of greater transparency.

@page_break@“My view — and this has only been reinforced with what’s been going on in the past month or two — is that transparency is the absolute least we should be expecting from the industry, including manufacturers and distributors,” he says. “It’s a disconcerting development.”

De Goey makes reference to the raft of securities and financial instruments traded privately between commercial banks that include little or no disclosure in terms of their content or risk to investors, such as asset-backed commercial paper, collateralized debt obligations and credit-default swaps that, together, have gummed up financial markets and brought the global economy to a skidding halt.

“You could simply make a blanket disclaimer statement about the cost of insurance,” De Goey notes, “because MERs change every year at any rate.”

The Joint Forum was set to make an announcement about the next phase of the process in creating POS documents for mutual funds and insurance products in late October or early November, after Investment Executive went to press. It made the decision at its meeting in Yellowknife in October.

But Rowena McDougall, a spokesperson for the Financial Services Commission of Ontario, the provincial regulator that participates in the Joint Forum, would neither confirm nor deny the absence of the controversial line in the proposal, nor would she provide details about the forthcoming announcement.

The Joint Forum is composed of the Canadian Council of Insurance Regulators, the Canadian Secu-rities Administrators, the Cana-dian Association of Pension Supervisory Authorities and includes representation from the Canadian Insurance Services Regulatory Organizations. IE