On its face, the idea of simplifying investment fund disclosure with a new, short, easy-to-read information sheet and then requiring investors review it before they buy seems straightforward and uncontroversial. But nothing is ever easy when it comes to reforming regulation in the Canadian investment industry.

In mid-June, the Joint Forum of Financial Regulators proposed a new point-of-sale disclosure regime for both mutual funds and segregated funds. That proposal has garnered extensive comment — led by dealers and joined by mutual fund companies, insurers and the lobby groups, the Investment Funds Institute of Canada and the Canadian Life and Health Insurance Association. Against this avalanche of industry comment — much of it critical —the odd investor or two is chiming in, as well.

The initiative that is attracting all this chatter is fairly simple. Regulators are concerned that the existing disclosure regimes for mutual funds and segregated funds aren’t working that well. The information available to investors is voluminous, complex and often not reviewed before the investor buys. In an effort to correct this, regulators are attempting to introduce a two-page disclosure document — known as Fund Facts — that would set out the basic attributes of a fund.

They are proposing that firms be required to give it to clients before they invest.

What possibly could be objectionable about a requirement that investors receive some basic information about what they are buying before they part with their money? Plenty, it seems. Judging from some of the comments, the proposal threatens to visit something close to ruin on the mutual fund industry.

Many of the comments go through the ritual of praising the concept of improved disclosure, then go on to explain why the proposed regime isn’t practical. For example, Toronto-based Sun Life Financial Investment Services (Canada) Inc. observed: “Overall, SLFIS supports the Joint Forum’s vision of ‘providing investors with meaningful information when they need it most.’ That said, the proposal as it stands will create both an operational and compliance quagmire for both dealers and advisors, the costs of which will ultimately be borne by mutual fund unitholders.”

Among the criticisms levelled by various commentators at the regulators’ effort are claims that providing the new disclosure document to investors would be too cumbersome and costly. Some of the complaints are plainly ridiculous — such as the suggestion that the cost of paper, ink (pricey coloured ink, no less) and printer upkeep that would be required by the new rule aren’t justified; others argue that it would require salespeople to lug around vast libraries of these documents.

Other concerns seem a bit more valid — that the disclosure document may be tricky to deliver to investors in certain circumstances, such as in online or telephone sales, and that repeated disclosure might not be warranted for investors who are simply buying more units of a fund that they already own.

Others fret that making such disclosure would disrupt the sales process, or that investors could be hurt by the proposed new requirement because they may not be able to trade their funds quickly if they have to wait around for disclosure. “If investors have to wait to receive a document and one is not readily available by the [financial advisor],” worries one industry player, “the client may then choose not to buy that mutual fund or any mutual fund.”

Of course, it’s not the job of regulators to ensure that funds get sold. Their responsibility is to ensure that if funds are going to be sold, buyers are adequately informed about just what they are buying and what it’s going to cost them.

Similarly, complaints about slowing investor trading might carry more weight if the products in question were something other than mutual or seg funds. These are touted as long-term investments. They aren’t priced continuously. And they aren’t supposed to be used as market-timing vehicles — a costly lesson that was learned by a handful of fund companies a year or two ago.

What’s at the core of many of the complaints about the functioning of the proposed new regime is a fundamental disagreement about how the delivery requirements should work. A number of industry commentators take the position that regulators should adopt the “access equals delivery” philosophy; and that they shouldn’t be required to ensure that an inves-tor gets the document before he or she invests.

@page_break@Investor advocates reject the “access equals delivery” model, and insist that firms should be required to get this basic information into investors’ hands before they make the decision to invest. It remains to be seen what, if any, effect these complaints will have on the proposed rule.

Prior to publication, regulators considered whether merely to require access to the new document, but they decided that physical delivery was necessary.

That position is garnering some support from those who have to worry about unhappy clients. In Ombudsman for Banking Services and Investments’s comment, the organization strongly supports the regulators’ effort, suggesting that it could help reduce investor disputes.

“If there was one thread that runs through the majority of the complaints we see in our office, it is the poor quality and incomplete nature of the disclosure of vital information to inves-tors,” OBSI’s comment notes. “Far too often we hear that investors did not have important facts about their investments.”

OBSI’s position is that the current proposal will go a long way toward correcting that fundamental problem: “Delivery of the document before the purchase will improve the possibility that the investor will be in a position to make an informed investment decision. We find the proposed Fund Facts far superior to the status quo for either mutual funds or segregated funds.”

That opinion is also shared by some in the industry; not all the comments on the proposed new regime are negative. For example, a comment from Bick Financial Security Corp. in Ancaster, Ont., applauds the regulators’ efforts: “The feedback from our advisors here at Bick Financial is unanimous in the support for improved disclosure.” It adds that the existing disclosure documents “are not meaningful for most of our clients” and that the proposed new document “will go a long way in assisting us explain the nature of the investment[s] and how we are compensated for that advice.”

But others worry that the new regime may drive investors away from investment funds altogether. The claim by those of this view is that the disclosure requirement would put funds at a notable disadvantage to competing products, such as GICs, hedge funds, exchange-traded funds and principal-protected notes.

“In addition to the impact of the rigid delivery requirements and potentially misleading content,” IFIC frets, “the proposal will have severe implications with regard to arbitrage of product, compliance and audit issues, and fairness in the marketplace.”

IFIC stresses that the point-of-sale proposal should be integrated with other disclosure initiatives that are in the works, such as the disclosure requirements that are supposed to be part of the Canadian Securities Administrators’ registration reform effort. It suggests possible changes to the content of the document and the delivery requirements. It also calls for the creation of a steering committee to ensure that legitimate implementation issues are identified and resolved before a final rule is adopted.

There are also objections to the notion that mutual funds and segregated funds should be treated as equals. Although they are more or less functionally equivalent from an investor’s point of view, the two types of funds do come from very different legal and regulatory traditions.

The CLHIA echoes many of the worries that others in the industry express, along with concerns that apply to the seg fund sector in particular. Among other things, the CLHIA maintains that the disclosure regime needs to be more flexible and principles-based, and that alternatives should be considered.

“We believe that further consultation can and should lead to a regime that improves the clarity of disclosure materials,” says the CLHIA comment, which also calls for the creation of a group comprising regulators and industry experts to develop “an approach that meets the Joint Forum’s vision while reflecting the contractual and marketplace realities of [seg fund owners].”

One lonely voice calling for even more disclosure is the Pension Investment Association of Canada. In its comment, PIAC counsels that general investor education should be part of the point-of-sale disclosure effort: “As professionals in the investment arena, we have to support the goal of gradually increasing investor knowledge, and challenge the industry to continue to deliver and improve upon the simplified prospectus and the development of a consumers’ guide.”

PIAC envisions creating a guide that will serve as an unbiased general reference for investors, and suggests that it could be provided with, or referenced in, the proposed new disclosure document.

There is no question that the regulators’ effort to reform point-of-sale disclosure could stand some improvement. But much of the criticism it is receiving from the industry seems overwrought.

Hopefully, regulators will ease implementation concerns without being deterred from their relatively modest investor protection goal. IE