The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) says it has “serious concerns” about amendments to the Canadian Securities Administrators mutual fund point of sale initiative.

In its submission to the CSA, the non-profit organization expressed strong support for the goal to provide retail investors with clear, meaningful and simplified information when mutual funds are sold to them. However, the organization highlighted serious concerns about certain aspects of the proposal.

Proposed “cancellation right” called a reduction in investor rights

Under the CSA’s proposed “cancellation right”, investors are losing their existing statutory right of withdrawal, FAIR Canada says. The current right of withdrawal allows an investor to cancel a mutual fund purchase within two days of receipt of the prospectus.

“This is being replaced by a cancellation right where a consumer is left with less than his or her original investment if the value of the mutual fund investment has fallen in the intervening 1-2 days,” FAIR Canada says.

“Even though there were no problems with existing withdrawal rights, the CSA is going out of its way to create a novel form of “cooling off” period where investors are exposed to downside risk if the mutual fund goes down in value but do not profit when the mutual fund goes up in value,” says Ermanno Pascutto, executive director of FAIR Canada.

Under the existing withdrawal right, a retail investor who decides to cancel a mutual fund purchase of $100,000 within 1-2 days would simply get back the $100,000 investment.

Under the CSA’s proposed cancellation right, if the mutual fund drops by 2% in value, the investor gets back $98,000 and loses $2,000, FAIR Canada says. If the mutual fund goes up 2% in value and the investment is valued at $102,000, the investor only gets the original $100,000 returned, it adds.

Simplified prospectus should be delivered to investors

FAIR Canada also called for the simplified prospectus to continue to be delivered to mutual fund investors.

Under the proposed CSA initiative, non-delivery of the simplified prospectus would become the default position. “This means that the simplified prospectus will not be delivered to the great majority of retail investors,” FAIR Canada says. “The least sophisticated retail investors are the ones least likely to receive the prospectus,” it adds.

In its notice, the CSA says that investors have trouble using information in the simplified prospectus because its length and complexity.’

“We agree with the CSA that the simplified [rospectus is too long and complex. However, we disagree that the appropriate regulatory response is to do away with delivery of the Simplified Prospectus to retail investors,” says Pacutto. He argues that regulators should mandate fund companies to produce the document in “plain English”.

FAIR Canada also takes issue with the proposed two-year transition period to full implementation of the point of sale initiative. It says a six-month transition period should be sufficient for industry.

The organization also suggested a number of improvements to the Fund Facts document, including disclosure of after-tax returns.

The full submission to is available on FAIR Canada’s website.

IE