It’s not often that both advisors and investors enthusiastically welcome regulatory initiatives. I learned of this rarity in June, when the Joint Forum of Financial Market Regulators released its Proposed Framework 81-406: Point of sale disclosure for mutual funds and segregated funds.
It’s an initiative regulators have been working on for years. After a lot of false starts, it looks as if they are finally getting it right.
The Joint Forum’s starting point is an unequivocal acknowledgement that the current disclosure regime for mutual funds and segregated funds does not give investors meaningful information when they need it most, which is before they make their decision to buy units in a fund.
The proposals, which include a new mandatory fund summary document called Fund Facts, are designed to remedy the problem. The Fund Facts document is the initial effort at developing a plain-language document format to give investors the basic information necessary to understand the potential benefits, risks and costs of investing in a fund.
Regulators have been talking for years about using plain language in disclosure documents but, until now, have had difficulty in articulating just what they mean. They have brought clarity to this in their prototype document and in their guiding statement, which says: “Plain language is communicating in a way that ensures the audience can immediately understand what you tell them. The plain-language approach focuses on the needs and abilities of the audience to ensure that the content of a communication is relevant, the organization of the information is logical, the language is appropriate and the presentation is visually appealing.”
In addition to adopting the two principles of providing meaningful information to investors before their decision to purchase a fund and requiring plain language to be used, the Joint Forum has rejected the “access equals delivery” approach to the delivery of disclosure documents, at least in respect to Fund Facts.
Investors participating in the Joint Forum’s focus groups clearly stated they did not like the “access equals delivery” approach for disclosure documents that regulators have adopted.
Advisors will have to deliver the relevant Fund Facts documents to investors before they make their decision to buy a fund.
Both advisors and investors who participated in the focus group testing of prototype Fund Facts documents thought that, on the whole, the documents were meaningful and useful. I agree, although there are some areas that could be made even more meaningful and useful.
Such areas include the need to:
> Make sure the Fund Facts documents do not get lost in voluminous pre-sale marketing material;
> Establish an audit trail system to track delivery of the requisite Fund Facts documents;
> Educate and acclimatize advi-sors and clients to the meaningfulness and use of the Fund Facts documents;
> Develop a prototype plain-language foundation document that will incorporate the Fund Facts document and will be meaningful and useful to investors. It will replace the current simplified prospectus and annual information form, which few people find useful;
> Give further thought to the delivery requirements for disclosure documents and when they need to be updated. The Fund Facts document should not be viewed as replacing the requirement to deliver a prospectus, nor should it suggest to investors that it is a complete statement of what they need to know;
> Develop prototype plain-language companion documents, such as meaningful and useful confirmation statements, account statements and periodic interim and annual reports;
> Fine-tune the information in the prototype Fund Facts document by addressing meaningful information that is missing or could be more clearly stated, and by eliminating information that continually changes and would be better sourced elsewhere;
> Level the playing field requirements for all funds.
Fund Facts is an important initiative for the fund industry and investors. It offers a unique opportunity to get it right. The comment period expires Oct. 15. IE
Fund Facts an important step
Plain-language document would give investors basic information
- By: Glorianne Stromberg
- August 28, 2007 October 30, 2019
- 12:34