A regulatory wish list

Financial regulation is constantly evolving. I don’t envy the people working for our regulatory bodies: while prescribing solutions is easy, implementation, on the other hand, can be overwhelming.

I believe that regulation should be improved in a number of areas — particularly in the investment fund world — to inform and protect investors better. Here are my top three regulatory wishes:

> Make Available The Statement Of Portfolio Transactions. The 2005 approval of National Instrument 81-106 has resulted in many new mutual fund disclosure requirements. As a concession to mutual fund companies, the regulation removed the obligation for funds to file the SPT. Previously, the SPT was available on request (or by visiting www.sedar.com). Now, the regulation requires the internal tracking of the same trading details that were found in the SPT.

I have begun approaching companies about these trading details. I thought I could obtain this information by asking. Not so.

Many of the companies that I first approached have a policy against releasing trading summaries. I then made the same request of a company I have long covered — and even offered to sign a confidentiality or non-disclosure agreement. My motivation was to obtain the insight gleaned from the SPT even if I could not disclose any of the details.

Still no success. Legal counsel at some firms even justified their refusal by saying they could not release non-public information. But that’s nonsense. There’s no compelling reason to keep this data secret. Mutual funds trade at net asset value, and old trading data cannot possibly influence any mutual fund’s market price or NAV.

I’ll continue pressing fund companies to release this valuable information to interested parties.

> Implement Meaningful Risk Disclosure. Almost two years ago, I criticized the risk ratings used by the industry in its Fund Facts summary document. In light of steep stock market losses suffered during the past year or two, this is an issue well worth revisiting.

The industry uses standard deviation as its risk rating. Prospectuses for many Canadian equity funds say such funds are suitable for “long-term” investors with a “moderate risk” tolerance. Failing to define terms like “long term” and “moderate risk” leaves investors unprepared for the possibility that stock values occasionally get halved.

Worse, such abstract descriptions may have contributed to a problem that I’ve observed in client portfolios. Too many seniors’ portfolios that I have reviewed over the past two years were far too heavily exposed to stocks, to the tune of 80%-100%. Predictably, sustained losses have made many clients disgruntled.

Accordingly, we may see a rise in the number of lawsuits against financial advisors (if they haven’t started already). Had the industry adopted a more intuitive and explicit risk illustration, it may have saved pain for more than a few regretful investors.

> Disclose Portfolio Managers’ Fund Stakes. When I ask portfolio managers where they invest their liquid assets, they usually tell me that they invest significantly in the funds they run. But I have no idea if they’re truthful.

I would love to see some disclosure of where fund managers invest their own money. I’m not talking dollar amounts — that would be too invasive — but, perhaps, something showing what percentage of a manager’s liquid net worth is invested in the funds that he or she manages (or is invested in other funds run by the manager’s firm). This would give some indication of alignment of interests between fund managers and clients. And limiting the details to percentages would respect privacy while allowing for comparisons.

I believe that any one of these “wishes” would significantly improve transparency rather than add to information overload. So, forget about the quarterly top 25 holdings that fund companies are now required to report and the many other superficial disclosures. Make one (or more) of my wishes come true and you will see more informed investors and advisors. IE

Dan Hallett, CFA, CFP, is president of Dan Hallett & Associates Inc. in Windsor, Ont., which provides a mutual fund recommended list and investment research to financial advisors across Canada.

IE:TV