The controversial new point-of-sale regime for investment funds has been given its final form by the Joint Forum of Financial Market Regulators. Lobbying efforts of the fund industry and others not thrilled with the regime will now turn to the provincial authorities that will implement the framework.

The Joint Forum has been toiling on a new harmonized disclosure regime for mutual funds and segregated funds over the past few years. In late October, it published the final version of the proposed regime, which calls for the traditional prospectus disclosure to be replaced by a two-page document that highlights critical information about each fund’s performance, risk and cost characteristics. The new summary document must be provided to investors at the point of sale in most cases, whereas prospectuses are often sent along after a sale has been made.

The concern for regulators is that the existing disclosure regime just doesn’t work well. The prospectuses that investors receive are too long and too dense to provide investors with meaningful disclosure. The fact that they are often received after the sale means that they don’t do anything to inform investors’ initial decisions. It’s hard for buyers to beware when they don’t know what they are buying.

Although few would disagree that the existing disclosure regime could stand improvement, this effort to overhaul it has become increasingly contentious in recent months, as the industry has turned up the volume on its opposition to certain elements of the proposal — particularly the delivery requirements, which industry players worry will prove unduly onerous.

The Joint Forum indicates that it considered all of the comments it received in crafting the final version of the framework, and it has made changes in response to that feedback — tweaking the content of the proposed new disclosure document and altering other operational elements, such as the delivery requirements.

However, the Joint Forum has not given in to the industry’s fondest wish, which would have been a decision that providing access to the new disclosure document could be considered equivalent to having delivered it.

Instead, the Joint Forum has modified the delivery requirements so that clients can waive their right to receive the document when buying money market funds or in cases in which they initiate the purchase. Nor does the delivery obligation apply to purchases made through discount brokers or for subsequent purchases of the same fund. The one situation in which the new document must be provided at the point of sale is for new purchases recommended by an advisor. But the electronic delivery option has been revised so that it can be met by providing an e-mail link to the document as well as by e-mailing the document itself.

Along with the modifications to the delivery requirement, the Joint Forum has also revised the cooling-off right provided to investors, who will now have two days from receipt of the trade confirmation rather than from the point of sale.

In response to the Joint Forum’s final version of the disclosure regime, the Toronto-based Investment Funds Institute of Canada reiterates that it has always been in favour of the move to a two-page disclosure document.

“We see this as a significant step and we applaud its development,” says Susan Yellin, IFIC’s director of communications.

That said, she also points out that as the rule-making process moves to the insurance and securities regulators, IFIC will continue to push for the objectives it had when this was a Joint Forum project — ensuring that inve-s-tors have the ability to make transactions in a timely manner and that the rules do not create disadvantages for mutual funds and seg funds relative to other investment products.

Indeed, while the Joint Forum has spent a great deal of time crafting the details of the new regime, the actual implementation is up to the various provincial regulators in both the securities and insurance sectors. The Joint Forum’s final version marks the point at which it turns the project over to those regulators. It remains to be seen how much the provincial authorities deviate from the Joint Forum’s vision, both between the two sectors and among the various jurisdictions.

Concurrent with the publication of the final framework, the Canadian Securities Administrators also issued a request for comment that will give the industry another chance to influence the proposed regime’s ultimate look. That comment period closes Dec. 23.

@page_break@“We are pleased that the CSA has opened up this subject for further comment,” says Yellin. “We will be looking forward to working with them through the next steps of the process.” IFIC will be meeting with its members to discuss the next steps.

The Toronto-based Investment Industry Association of Canada, another vocal critic of some of the proposed regime’s provisions, will also be pushing for some further changes to the proposed rule. The IIAC notes that it “is pleased that the Joint Forum has reacted to concerns from our industry by making a number of key changes to the framework.”

In particular, the IIAC says, the new delivery option that enables an advisor to direct the client to the disclosure on a fund manager’s Web site with an e-mail link “is a welcome approach.” The IIAC also applauds the decision to remove the obligation to provide the disclosure document before the sale of a fund that an investor already owns, or when investors are buying a money market fund (whether they already own it or not).

That said, the IIAC indicates that it has “some remaining concerns” and will be submitting a comment letter to the CSA to spell those out: “For example, the delivery of the [disclosure document], depending on whether the advisor recommended the fund or the client initiated the purchase, raises some significant compliance and operational issues for our members.”

That’s one point that the industry and investor advocates may agree on — although they are undoubtedly coming at the issue from different directions. One of the few voices on the inves-tor side of this debate, Ken Kivenko, also expects that disputes over whether a fund sale was triggered by the advisor or the client will become a “major issue.”

But Kivenko has other complaints with the proposed regime that run in direct opposition to the industry’s view. For example, he worries that the decision to allow firms to satisfy the delivery requirements by simply providing an e-mail link — which the industry is lauding as a step in the right direction — “comes perilously close to what investor advocates fear most,” which is the proposition that “access equals delivery” as sought by the industry.

Additionally, he calls the exemption for money market funds “surprising,” noting that these funds have had some of the biggest problems due to the credit crisis, as some of them were found to be significant holders of the non-bank asset-backed commercial paper that froze up amid the onset of the credit crunch. And he warns that the new document is short of information about risk and suitability.

The Joint Forum may be finished with its point-of-sale project, but it appears that the tussle over a new disclosure regime for investment funds is still far from over. IE