CSA calls for point-of-sale comment

The Canadian Securities Administrators’ point-of-sale (POS) disclosure scheme has taken another step forward, with the publication for comment of proposed amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure.

“The current market conditions highlight the need for investors to fully understand what they are buying,” says Jean St-Gelais, CSA chair, and president and CEO of the Autorité des marchés financiers. “This significant investor protection initiative will provide investors with the opportunity to make more informed investment decisions.”

St-Gelais admits that mutual funds are already required to disclose a great deal of information but says the delivery of a two-page Fund Facts sheet at the point of sale would ensure that the client understood what he or she was buying.

One of the primary criticisms of the proposed requirement is that delivery of the two-page document prior to the sale would interrupt the sales process. The CSA says it is “seeking specific feedback on what ‘time-sensitive’ circumstances may be appropriate for allowing an investor to waive delivery of the fund facts before the purchase is completed, and under what terms.”

Under the proposal, investors would receive the Fund Facts sheet when they buy a mutual fund they do not currently own. The client would retain the option of receiving the simplified prospectus and other disclosures.

The CSA also received many comments on the rising risk of regulatory arbitrage. With mutual funds becoming more cumbersome to sell, dual-licensed advisors may shift their sales to the less closely scrutinized segregated fund platform.

The regulatory group says it does not disagree that this is a risk and would welcome additional comment on this.

“However, we disagree with the commenters who indicated that POS delivery for mutual funds will result in investors being sold alternative products. We think mutual funds are a suitable investment product for many investors, and we would expect dealers to continue to recommend.”

And it rejects the criticism that the proposed POS documents diminish the role of the financial advisor.

“We think POS delivery builds on an advisor’s existing obligation to determine suitability of all purchases of a mutual fund. We anticipate that the Fund Facts will become a tool used by advisors to assist in the sales process.”

The CSA also points out that the issue is, at present, outside of the scope of the disclosure project.

Among the revisions now being considered is a requirement that the Fund Facts document be delivered for subsequent purchases. This would ensure that the client had the latest version of the document, which could change between the initial purchase and a subsequent buy.

The CSA is also considering a proposal that would allow the Fund Facts sheet to be delivered with the trade confirmation slip, if the client insists that the trade be placed immediately and the advisor is unable to deliver the Fund Facts sheet prior to the trade.

There is also a new proposal that the impact of sales charges and ongoing fund expenses be explained on the document in a dollars and cents format.

The comment period is open until Oct. 17, 2009. To read the entire CSA Notice and Request for Comment, please click here.

(06/19/09)