The summer tends to be a slow time of year for the financial services industry, but the regulatory reforms confronting retail advi-sors are coming thick and fast.

For several years now, securities regulators have been working on a variety of reform initiatives that will spell fundamental change for retail financial advisors. And many of those proposals are now converging — just in time to ruin advisors’ summer vacations.

The latest major proposal to face dealers is the proposed new point-of-sale disclosure regime for mutual funds. On June 19, the Canadian Securities Administrators published a proposed rule for comment that would introduce a new approach to mutual fund disclosure. The centrepiece of this effort is a concise, new disclosure document (known as Fund Facts) that will have to be delivered to clients before they make their investment decisions (in most cases).

The purpose of the initiative is to try to empower investors to make more informed investment choices. “We know that the current prospectus disclosure regime for mutual funds does not give inves-tors meaningful information when they need it most,” the CSA proposal says.

Although prospectuses provide lots of information, the proposal suggests that many investors don’t read them, and that they have trouble finding and understanding the information prospectuses do contain “because it is buried” in a long, complex document. Moreover, investors often don’t receive a prospectus until after they have decided to buy a fund.

The hope is that the new, simpler document, which must be provided before the investor buys, will result in more effective disclosure and more informed decisions.

“We think current market conditions highlight the importance for investors to have the opportunity to understand what they are buying,” the proposal adds.

Although the financial crisis might have highlighted the importance of transparency, this project has been in the works for a long time. As far back as 1999, the Joint Forum of Financial Market Regulators (an umbrella body for securities regulators and insurance regulators) began examining the idea of harmonizing disclosure rules for mutual funds and segregated funds — although the idea goes even further back than that.

The Joint Forum has published a couple of consultation papers on the issue over the past few years, gradually devising the structure of a new disclosure regime. Last fall, it handed the project over to the securities and insurance regulators for implementation, and they are now moving on to that stage.

The CSA has published a proposed rule, and its counterpart in the insurance business, the Canadian Council of Insurance Regulators, was due to publish its own consultation paper before the end of June, according to Rowena MacDougall, senior manager, public affairs, with the Financial Services Commission of Ontario. The Joint Forum will keep an eye on the implementation by both sides of the industry, but it is now up to their different rule-making processes to turn the concept into rules on the ground.

The framework being proposed by the CSA is similar to the Joint Forum’s final version. It imagines a basic two-page disclosure document that describes the basic features of each fund, including its objectives, top holdings, risk profile, performance and fees. It also retains the requirement that this new document must be delivered to clients before they invest in a fund.

In past proposals, the delivery requirements have been the most contentious issue for many in the industry, who have complained that in many circumstances pre-trade disclosure delivery will be impractical and may unnecessarily disrupt the sales process. Nevertheless, regulators remain committed to the principle that disclosure should take place, in most cases, before investors buy.

According to the proposals, firms that provide only order execution can supply the document with the trade confirmation; disclosure doesn’t have to precede the trade.

For firms that provide advice, the situation is more complex. If the investor initiates the trade, or if an advisor initiates the purchase of a money market fund, the disclosure can be provided either before the sale takes place or, if the investor prefers, along with the trade confirmation. For long-term funds that are purchased with advice, the disclosure must take place at or before the point of sale.

The CSA proposal does not require delivery of the POS document for follow-on purchases of a fund that an investor already owns, but it does contemplate clients being given the option to receive the document annually for all of the funds they already own.

@page_break@So far, regulators have not given in to industry lobbying for the idea that simply ensuring access to the new disclosure document (such as a link to a website) is enough to qualify as delivery. However, the rule proposal does seek comment on a number of issues, particularly those related to delivery requirements, and regulators say they are still open to alternatives.

Indeed, they are expecting the proposal to generate a lot of comment, from both the industry and, hopefully, investors. The 120-day comment period for the proposal is unusually long. The reason, explains Rhonda Goldberg, manager of the Ontario Securities Commission’s investment funds branch, is that regulators want to give people plenty of time to consider the proposal and provide comments; and the extended comment period also reflects the fact that there are a couple of other major regulatory initiatives out for comment at the same time.

In April, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada released the latest versions of their so-called “client relationship model” proposals, which aim to improve disclosure to clients and clarify various advisor and dealer obligations. Those are out for comment until July 24.

Additionally, the CSA is also expecting to publish the final version of its registration reform initiative in July, with a planned implementation date of Sept. 28. That initiative affects all firms, as it contemplates changing the basis for registration, harmonizing and rationalizing the various registration categories that exist across the country, and imposing new registration requirements on fund managers in particular.

The implementation date for the new mutual fund POS disclosure regime is somewhat less certain. Leslie Byberg, director of the OSC’s investment funds branch, says that this proposal represents the first step in the rule-making process, and so finalizing the rule and bringing it into effect will depend on the comments it receives.

Typically, if comments motivate material changes to a proposal, it has to go back out for another round of consultation; if not, the regulators can finalize it and move to the implementation stage. When the rule is ultimately finalized, a transition period is likely to be included.

The current proposal imagines a two-year transition period before dealers actually have to start delivering the POS document to clients. However, fund managers would have to be preparing the documents and filing them with regulators, along with their prospectuses and annual information forms, before that.

Although it is too early for many meaningful comments on this proposal, the proposed transition period does meet with the approval of the Investment Industry Association of Canada, which has been a vocal critic of earlier versions (particularly regarding the delivery requirements). Michelle Alexander, director of policy with the IIAC, says the association is pleased that the proposed transition period “will allow for a consultation process on implementation issues related to the method of delivery of the Fund Facts to investors.”

Apart from delivery issues, the other key aspect of these proposals, in the industry’s view, is the prospect that the new disclosure obligations may also lead to a reduction in their traditional disclosure requirements. The CSA notice suggests that the implementation of the Fund Facts document represents the first phase in overhauling mutual fund disclosure, and that it will eventually follow up with a second phase that reviews the disclosure regime overall, with an eye to eliminating any unnecessary duplication — possibly by merging the prospectus and annual information form into one document. However, this step remains well off in the future, depending on how the initial phase plays out.

For now, the focus is on improving disclosure to investors. To dealers, this represents just another in a series of major changes facing their business in the months and years ahead.

It looks like it’s going to be a long, hot summer. IE