The financial services industry is gravely concerned that the simplified point-of-sale document now in the final stages of development won’t be as simple as intended.

The problem is not with the document itself — a two- or three-page “plain language” information package for segregated funds and mutual funds, which will replace the long and dense fund prospectus currently provided to fund purchasers. Rather, issues surrounding delivery of the document to clients are causing anxiety for fund companies, lobby groups and advisors who sell funds.

Representatives from the fund industry, securities and mutual fund dealers, and insurance companies say the necessity to deliver the document directly to inves-tors prior to the sale of a fund could make mutual and segregated funds less competitive than other investments by interrupting and delaying the transaction process.

They complain that the requirement to deliver the POS document to clients and for those clients to file some kind of acknowledgment of its receipt is prejudicial treatment of funds relative to other securities. Record-keeping and establishing an audit trail to prove the procedure was followed correctly could ultimately increase costs to clients.

“Nothing is more important to the industry right now than resolving the delivery issues surrounding the point-of-sale document,” says David Feather, president of Mackenzie Financial Services Inc. in Toronto. “The document itself is a huge improvement over the old prospectus that nobody reads. But the industry is not happy with issues pertaining to the timing and the method of delivery.”

The POS document, entitled Fund Facts, has been under development for several years and is nearing completion. About a year ago, the Joint Forum of Financial Regulators — which includes securities, insurance and pension authorities — gave the industry a look at its proposed Fund Facts document. The Joint Forum subsequently received numerous comments from interested parties.

The financial services industry welcomed the Fund Facts document and its intention to give clients pertinent information about a fund’s performance and fees. The snag is in the practical aspects of getting the document into clients’ hands in a timely fashion. Although the Joint Forum’s proposed framework for the new regulations says the Fund Factsdocument could be delivered prior to sale by hand, mail, fax or e-mail, it also specifically says that “access does not equal delivery.” This means clients cannot simply be directed to a company Web site or centralized industry site on which the information could be made continuously available.

In a meeting with industry representatives in June, the Joint Forum verbally assured representatives of mutual fund companies, insurers and distributors that the final framework for POS disclosure due to be released this month will allow for some situations in which the delivery of Fund Facts could be waived, such as with the purchase of money market funds or a subsequent order for a fund already held by a client. But the Joint Forum continues to hold fast to the principle that access does not equal delivery and that advisors must be held responsible for placing the fund information directly into their clients’ hands prior to any sale.

Industry representatives are concerned that the Fund Facts document could be difficult to deliver to clients in a timely manner in certain circumstances, such as when the sale is being made over the telephone. If there is any urgency to the transaction, it could be detrimental to clients to hold up the trade while a Fund Facts document is sent to clients and some acknowledgement of receipt is sent back — particularly if a client is not accessible by fax or e-mail, or if the firm’s policy prevents the sending of important financial information electronically. If market conditions are changing rapidly or there is some kind of deadline that must be met, such as the deadline for RRSP contributions, the delay could be costly.

“The requirement for delivery before sale would interfere with the smooth flow of business, and that could be disadvantageous for the client,” says John Cockerline, director of policy and dealer issues at the Investment Funds Institute of Canada in Toronto. “The advisor could be in a position of hindering the best interest of the client and frustrating the investor who wants to make an immediate trade.”

Michelle Alexander, director of policy for the Investment Industry Association of Canada in Toronto, says clients can be in a big hurry to make a switch in their portfolios in volatile markets. This past August, for example, one member firm recorded 9,000 transactions in a single frantic day, including funds and securities.

@page_break@Along with others in the industry, including IFIC, Alexander suggests that all POS documents be made accessible on a publicly available Web site, reinforced by the mailing of the appropriate Fund Facts to clients along with the confirmation of the trades. Additionally, a suitable right of rescission, or “cooling off” period, could be determined by the regulators, which would give clients a limited time to read the Fund Facts and withdraw from trades if desired.

“From a practical point of view, the rule that the document be given to investors prior to purchase is problematic,” Alexander says. “It is unclear that even electronic delivery would work, as many of our member firms don’t allow important documents to be sent by e-mail, due to issues surrounding online fraud. We have been advocating an ‘access equals delivery’ model in which Fund Facts on every single fund could be provided on a centralized database and accessible by clients.”

Telephone sales are not the only problematic situation. Advisors who make house calls will find it impossible to carry a full complement of Fund Facts that will cover every possible fund a client might buy. Advisors will probably end up restricting their sales suggestions to a limited lineup of funds, so they can carry the appropriate supporting documents. But if the client wants something else, the transaction will be stuck in limbo until the necessary documents could be delivered.

Thus, the natural inclination will be for distributors to “shorten their shelves,” Cockerline says, and offer a limited number of fund families.

“The requirement for a pre-sale delivery imposes a disadvantage on investment funds relative to other products,” he adds. “The fund industry is worried about a product arbitrage issue, whereby advisors and their clients will turn to products that are easier to buy, such as stocks, bonds, guaranteed investment certificates, managed accounts or exchange-traded funds. Due to the inconvenience of purchase, mutual funds could be sidelined in favour of other products that may be less suitable for the investor and have much less advice support associated with them.”

One of the issues not addressed in the proposed delivery framework is the method of obtaining acknowledgement or proof that the client has received the Fund Factsdocument. Some kind of proof will be needed to create an effective compliance system for the firms that sell the products. Therefore, advisors would need to act as collection agents, insisting on a signature or electronic acknowledgement in advance of the sale, so he or she can prove the Fund Facts document was sent in a timely manner in the case of an audit or client complaint.

“If a client delivers an order, or a recommendation is made over the phone, the client wants to get that order in at today’s price, not 72 hours later,” says Bryan Snelson, an investment advisor with Raymond James Ltd. in Mississauga, Ont. “While we honour the spirit of what the regulations are intending in terms of plain-language disclosure, advisors don’t want to be put in a position in which there is a timing problem. The new rules may be ideologically sound, but there are practical considerations that could put funds at a disadvantage relative to other products.”

At the June meeting with financial services industry representatives, the Joint Forum said it had amended its framework so that the requirement for a Fund Factsdocument to be delivered in advance of purchase could be waived when the purchase has been initiated by clients. But the IIAC’s Alexander points out that there can be a great deal of uncertainty concerning when a purchase has actually been initiated by the investor.

For example, the fund’s purchase may have been suggested by an advisor a month earlier, but the client has only now made a decision to buy. Or the client may want one of two Asian equity funds, but is unsure of which to buy. Alexander says the Joint Forum needs to provide much more guidance to define what is an advisor recommendation and what is initiated by a client.

Even if well defined, she says, this distinction would create significant operational challenges surrounding audit trails and supervision. She says most firms will probably endeavour to provide Fund Facts in all circumstances, to avoid potential repercussions for non-compliance if an investor claims after the fact that a purchase was recommended by the advisor. Furthermore, she says, by allowing this distinction, the Joint Forum would be putting full-service firms at a disadvantage relative to discount brokerage firms, which would generally be exempt from a requirement to deliver a Fund Facts due to the self-directed nature of their clients.

“Because of the impact on choice, this is a public policy issue, not simply a regulatory disclosure issue,” says Peter Tzanetakis, senior director of regulatory affairs with Advocis in Toronto.

Since the June meeting, industry lobby groups IFIC, the IIAC, the Independent Financial Brokers of Canada and Advocis have expressed their continuing concerns to the Joint Forum — even though the official comment period has passed. As it stands now, once the final POS document framework is released in October, it will go to regulators, including the Canadian Securities Administrators and the Canadian Council of Insurance Regulators, which will formulate the new rules.

Neil Mohindra, policy manager of the Joint Forum Secretariat, says the Joint Forum is carefully considering all input, and a number of changes will be made in the final framework to address the issues raised by investors and the investment industry. But he declined to be specific on the issue of access equals delivery.

“The preparation of the framework is only an articulation of principles agreed upon by regulators,” he says. “It is anticipated that there will not be a further comment period on the ‘final framework.’ However, once the framework is approved and published by the Joint Forum, the project will be referred to the CSA and CCIR, and there will be full input from their respective constituents on the manner through which the agreed-upon principles will be implemented.”

Industry representatives worry it will be more difficult to have effective input and make changes at the rule-making stage. What many would like to see is a revised version of the framework prior to its final release and another opportunity for the industry and the public to provide input before it makes its way to regulators as a basis for rule-making. IE