One of the key investor protection initiatives of the Canadian Securities Administrators is the point-of-sale initiative. For more than a decade, this initiative has had as its worthy goal the provision of a plain-language document (known as Fund Facts) to investors before or at the time they are sold units in a mutual fund. Fund Facts would allow investors to assess the key information about a mutual fund being sold to them before they buy it.

The Canadian Foundation for the Advancement of Investor Rights supports the original goal of the POS initative but has real concerns that the current version of Fund Facts is flawed, misleading and inadequate. FAIR Canada believes that Fund Facts must be improved before regulators force investors to rely on it in place of existing protections.

The CSA is proposing changes in Stage 2 of the POS initative that will decrease the amount of information provided to investors and will reduce investor rights. Stage 2 will allow Fund Facts to be delivered after the sale (rather than prior to or at the time of the sale, which is when investors need this information) and will allow Fund Facts to replace prospectus delivery requirements, all while ignoring the serious flaws in Fund Facts. The CSA is already granting exemptions to the mutual fund industry from the requirement to deliver the simplified prospectus (which includes vital information necessary to understand the product) despite the fact there has been no due process: that is, there has been no public consultation, and amending legislation has not even been introduced.

It appears that the CSA has lost sight of the core objective of Fund Facts, aptly demonstrated by the CSA’s announcement: “The CSA’s proposals will make sure that the Fund Facts gets into the hands of investors in a timely fashion to allow them to better understand what they have purchased.”

The CSA appears to think it is making progress in protecting investors by ensuring that investors receive key information after they have been sold a mutual fund. Investor advocates strongly and uniformly disagree.

Fund Facts was not intended or designed for use after a sale, nor was it intended to replace the simplified prospectus. The CSA’s Stage 2 means investors will not receive key information before the mutual fund units are sold to them, and will no longer receive vital information through the simplified prospectus — unless they take the additional step of specifically requesting it. Studies have shown that most investors do not request documents. The result is fewer investors will have the vital information that they need.

Investors should be warned not to rely on the current version of Fund Facts. The description of “risk” in Fund Facts is inadequate, flawed and misleading. The “risk scale” captures only volatility risk and there is no consistent methodology used by the different funds to determine where, on the five-point scale, a given mutual fund falls. While some fund companies use the methodology developed by industry lobbyist the Investment Funds Institute of Canada to determine if, for example, a fund is “medium” or “high” risk, there is no requirement to do so. The result is that a “medium” rating for one fund could be the same as a “high” risk rating for another fund.

Investors cannot rely on the rating or reliably compare the risk rating of one fund with another. There also is no narrative explaining what the scale means, guidance on how to use it or any warning that it captures only volatility but does not include any other material risks for the product. This could lead to considerable investor harm.

The CSA has chosen not to follow the approach taken by other leading jurisdictions or adopt the principles and best practices for POS disclosure issued by the International Organization of Securities Commissions, despite Canada being a member. Since when does any regulator allow an industry lobby organization to set standards in a document that is not even available to the public?

Fund Facts also fails to adequately disclose conflicts of interest that can give the intermediary a financial incentive to sell a particular fund over others. In the U.S., the Securities and Exchange Commission‘s summary prospectus does provide this information to the investor.

Other deficiencies with Fund Facts include no benchmarks to compare performance and no disclosure of exposure to currency fluctuations or hedging policy.

After more than a decade of work, the CSA has handed the mutual fund industry a major victory while delivering a “damp squib” for consumers. FAIR Canada urges the CSA to fix Fund Facts before making any other changes, and urges the CSA to stop giving out exemptions from statutory inves-tor protections. The CSA should then move quickly to require that the improved Fund Facts is provided to investors before a mutual fund is sold to them. IE

Ermanno Pascutto is executive director of FAIR Canada. Marian Passmore is associate director of FAIR Canada.