Proposed new fund disclosure system to benefit consumers and advisors, regulators say

(February 14, 2003) Consumers will have more easily understandable mutual fund and segregated fund information for their investment decision-making, while advisors and fund companies will have simplified responsibilities for distributing that information if a proposed new disclosure system wins acceptance from all players.

The Joint Forum of Financial Market Regulators unveiled the proposal yesterday in a public consultation paper entitled “Rethinking Point of Sale Disclosure for Segregated Funds and Mutual Funds.” The Joint Forum styles their proposal as part of a larger initiative to standardize regulation of segregated funds and mutual funds.

“It does not reflect the policy of any government. However, it goes a long way toward harmonizing information flow not only among provinces but also cross-sectorally,” says Grant Swanson, director of the licensing and compliance division at the Financial Services Commission of Ontario, a Forum member.

The proposed new system focuses on four documents to be compiled by fund companies:

The Foundation Document provides basic disclosure information about the fund, such as its features, the individuals and companies providing various services and activities of key players. “It contains the non-changing elements of the fund,” explains Rebecca Cowdery, manager of investment funds regulatory reform at the Ontario Securities Commission. Cowdery says the document would be posted on government and fund company Web sites.

The Continuous Disclosure Record would contain more current information such as the annual audited and semi-annual unaudited financial statements, along with performance data. “This [looks at] the changing elements of the fund,” Cowdery says. This document would also be posted on fund companies’ Web sites.

The Fund Summary Document would be used in the sale process and contain information provided to the investor, including the investment objectives and strategy and risk characteristics of a particular fund. Cowdery says that advisors would use this document as a kind of checklist for investors during discussions about fund selection. When the client is being pitched on the telephone, the salesperson would work from the document during the discussion to ensure a comprehensive picture.

“We’re putting expectations on the sales representative to take the client through the information in the Fund Summary Document and to tell them that they can get additional information if they want it,” Cowdery explains. Advisors and fund companies would only be obligated to provide this information by mail when specifically requested by the client.

The Consumers Guide would contain basic educational information about the two types of funds without dealing with specific funds. This guide would also be available in print and electronic formats.

Cowdery says that the ease of availability of these documents and the simplified language in them would call into question the necessity of keeping existing rights of withdrawal and rescission. That change would simplify the paper burden for companies as well as individual investors. Under the proposed new regime, the consumer receives all relevant information in advance of the transaction decision, most often by electronic means. Instead of providing the intended opportunity for sober second thought, the right of rescission has often been used when an investor became disappointed with a sudden market downturn, she says.

Investment Funds Institute of Canada president Tom Hockin welcomed the Joint Forum initiative, calling it the first step in a new era of fund disclosure. “Our members have long advocated a regime based on investor choice and harmonized disclosure requirements that treat similar products like mutual funds and segregated funds consistently,” Hockin said in a statement.

The Joint Forum of Financial Market Regulators will accept comments on the proposal until April 30, 2003. The Joint Forum began in 1999 and consists of the Canadian Council of Insurance Regulators, the Canadian Securities Administrators, the Canadian Association of Pension Supervisory Authorities, as well as representatives of the Canadian Insurance Services Regulatory Organization and the Bureau des services financiers in Quebec. The full text of the proposal can be accessed on the FSCO Web site.

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Art Melo is a Toronto-based investment writer.

(02/14/03)