New proposed framework makes mutual funds easier to understand

It was years in the making, but a new point-of-sale disclosure agreement for mutual funds and segregated funds has finally been drawn up.

The Joint Forum of Financial Market Regulators, a group of representatives from the CSA, CAPSA and CCIR, released the proposed framework 81-406 on Friday, which outlines a new two-page “fund facts” summary that must be given to investors at the point of sale.

The summary gives investors an outline of the soon-to-be-purchased fund in grade-five-level English and includes details such as what the fund invests in, how it has performed, its risk level and its creation date.

“Conceptually, this is a very good idea,” says Susan Allemang, who works in regulatory affairs at the Independent Financial Brokers of Canada. “The current materials that are available are too unwieldy for consumers and for advisors to try and explain them.”

That’s precisely why the Joint Forum decided to supplement what seems like an endless amount of paperwork with two easy-to-understand pages. Neil Mohindra, acting policy manager of the Joint Forum project, says the fund facts were created to provide “basic and simple information that investors would find useful in making an informed decision.” He stresses that the new document doesn’t replace what was already in place. Investors can still ask for existing prospectuses, which they should read over. But if that’s too much for investors to handle, the two-pager will sum things up.

One major change to the existing regime is that advisors will have to provide the fund facts to their clients at the point of sale, rather than after the fund is purchased. “[Previously,] mutual fund information would arrive after a sale is completed,” says Mohindra. “The prospectus document would be provided at some point afterwards as opposed to at the time when the actual decision is being made.”

In the 216-page Joint Forum document, the organization says investors wanted the fund facts to help them make their purchase decision. If the proposed framework becomes mandatory, dealers and insurers will have to deliver the two-page document before or at the point of sale for initial purchases, some subsequent buys and certain switches.

Allemang thinks delivering the fund facts at the point of sale could actually slow down the process. “This may make it more difficult for advisors to have the document on hand,” she says.

As an example, says Allemang, a client and advisor could be discussing KYC documents or other unrelated things, when the conversation turns to mutual funds. “If the client decides they want to purchase something, and you don’t have the fund facts with you, there is going to be a delay while you have to obtain the document.” And if this is a home meeting, the wait could be even longer. “That could be frustrating for both client and advisor. It could impact decisions that the client makes at the time,” she says.

Mohindra admits that this rule isn’t perfect. “There may be some specific situations where there may be complications,” he says.

An area that investors shouldn’t find confusing is what the document calls the “cooling-off right.” Investors in both mutual and segregated funds will have two business days to renege on a purchase. If they choose to exercise this right, dealers will have to return “the lesser of the amount of their original investment, and the value of the fund on the day they exercise the cooling-off right.”

In addition, the document states, “If a fund manager has received payment from the dealer or fund units have been issued, the fund manager will have to return to the dealer the money it has received or the value of the units it has issued.”

Allemang supports this part of the proposal. “I think it’s valuable for consumers to have a short period of time to re-evaluate and not be at any financial risk to do so,” she says.

While the fund facts seem to benefit the investor, they work only if the client wants an individual fund. For a family of funds, this simplified document doesn’t apply.

Allemang sees this as a misstep. “There are often advantages to consumers investing in a product that offers a family of funds,” she says. “I think there may be value to the consumer knowing information that is part of investing in a family of funds.”

Once this proposal takes effect, fund managers will be required to file the fund facts annually — along with their regular prospectus information — to their securities regulator. As for segregated funds, insurers will also be required to file the fund facts annually, in conjunction with their other documents.

As for now, the Joint Forum wants people’s comments on 81-406, which the group is accepting until October 15, 2007.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(06/15/07)

Bryan Borzykowski