New fund disclosure rules too much too soon, expert says

(September 27, 2004) Proposed new continuous disclosure rules for Canadian mutual funds are well-intentioned, but will be a logistic nightmare for fund firms, says author and consultant Steven Kelman.

The Canadian Securities Administrators’ National Instrument 81-106, scheduled to take effect by the end of the year, requires fund companies to produce annual and interim financial statements and management reports of performance for each of their funds, as well as detailed information on proxy voting.

Most fund companies already produce detailed financial statements and fund commentaries, Kelman says in a commentary posted on Morningstar Canada’s Web site. But the new rules will mean fund firms will have to beef up their information on material changes to specific securities and asset mixes, as well as explain the reasons for those changes.

“That seems easy enough, except for two requirements, says Kelman. “The management performance reports must be filed at the same time as the annual and interim financials, which are 90 days and 45 days after the respective period ends. And a fund company cannot combine the performance reports of its funds together. Each report must be separate.”

Kelman calls this a recipe for a logistic nightmare, considering the limited time frame and paperwork involved in meeting the new requirements. “Extending the deadlines would likely result in better reports and would likely cut down on the costs of producing them — which, in turn, saves investors money.”

There should be room for compromise on the issue of bundling fund reports together, Kelman believes, considering the additional rule that printed copies must also be provided to investors on request. “Why should the majority of investors subsidize the few who still want to receive hard copies by mail? This writer’s view is that those who want a paper report should download it and print it themselves — or pay for a hard-copy document, including postage and handling.”

Although Kelman agrees that mutual funds should establish policies and procedures on determining how they vote proxies at shareholder meetings, he’s opposed to the requirement that funds be required to maintain a proxy voting record and make it available to investors on request.

“Frankly, any investor who wants to get this close to portfolio managers should move in with one, or manage their own portfolio,” Kelman argues.

Several Canadian fund firms — including Ethical, Meritas and Real Assets — already post their proxy voting records online, though the CSA rule would not require that level of disclosure.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com