The key policy making body of the International Organization of Securities Commissions has published a paper proposing a set of principles for point-of-sale disclosure by mutual funds.

The IOSCO technical committee Monday published a consultation report that proposes a set of principles for the disclosure of key information for collective investment schemes (such as mutual funds), which is designed to assist markets and regulators when considering point of sale disclosure requirements in their jurisdictions.

In Canada, securities and insurance regulators have been working on revised point-of-sale disclosure requirements for mutual funds and segregated funds for several years. New requirements have yet to be adopted as regulators weigh the objections from the industry over the content and delivery requirements being contemplated.

The IOSCO report sets out six principles:

1) disclosure should inform investors of the fundamental benefits, risks, terms and costs of the product and the remuneration and conflicts associated with the intermediary selling the product;

2) key information should be delivered before the point of sale, so that the investor has the opportunity to make an informed decision about whether to invest;

3) disclosure should be delivered or made available in a manner that is appropriate for the target investor;

4) disclosure should be in plain language and in a simple format to facilitate a meaningful comparison;

5) disclosure should be clear, accurate and updated on a regular basis; and

6) when deciding what disclosure obligations to impose on intermediaries and product producers, regulators should consider who has control over the information that is to be disclosed.

“The recent crisis in the financial markets has highlighted the critical role that accurate, understandable and meaningful disclosure can play,” the report notes.

However, it adds that no matter what disclosure is mandated, it will not have the intended effect “if the investor either does not read and/or understand the information provided.”

As a result, it calls on regulators to help improve retail investor education to enhance their ability to read investment documentation and make informed investment decisions. It also advises that new POS disclosure requirements should not be imposed without the benefit of consumer testing to help determine the likely effectiveness of new requirements.

Additionally, the report acknowledges that some members of the industry are of the view that if their products are subjected to enhanced POS disclosure requirements, this might place them at a competitive disadvantage versus other financial products. The merits of this argument are not analyzed in great detail in the report, but IOSCO encourages further work by appropriate bodies on POS disclosure regarding similar products.

In terms of this report, the technical committee is seeking input from financial services practitioners, industry participants and other relevant stakeholders. The closing date for responses is February 16, 2010.

IE