Arguments over dis- closure requirements at the point of sale are generally fraught with dissent: regulators push and the financial services industry resists. That battle has been particularly difficult to resolve when it comes to joint rules for two products with different names but virtually identical goals -— mutual funds and segregated funds.

Now, following summer consultations, it appears that the insurance sector is willing to move forward. The mutual fund sector, however, seems as entrenched as ever.

For more than 10 years, insurance and securities regulators have been working on a common POS disclosure regime for their respective investment fund products. The idea is that the products essentially perform the same function for investors. Thus, subjecting them to the same basic up-front disclosure requirements would make it easier for investors to understand and compare functionally equivalent products. The ultimate goal is better consumer choice.

Yet, this seemingly innocuous POS proposal has been bogged down for years. Ultimately, in late 2008, the Joint Forum of Financial Markets Regulators (an umbrella group of insurance and securities regulators) issued the final version of their proposed model. And, this past June, both the Canadian Securities Administrators and the Canadian Council of Insurance Regulators issued their proposed rules for the model, which would actually put the model into practice.

The comment period for the insurance sector’s proposals closed in mid-September, with just three comments received; those comments were fairly supportive of the entire effort. For example, the Canadian Life and Health Insurance Association Inc. indicates in its comment that the life insurance sector is “prepared to begin implementation of the Joint Forum framework.”

However, the CLHIA does flag a couple of areas of divergence between the securities sector’s proposals and the final Joint Forum framework and urges insurance regulators to “avoid creating an unlevel playing field in the interim if there are delays and/or changes in the mutual fund implementation.”

But, beyond that, the CLHIA doesn’t express any major qualms about the proposals, nor does it warn of dire consequences if this new regime is adopted (as some of the comments on the mutual fund proposals do).

Indeed, the CLHIA’s biggest concern seems to be with accusations that there is some significant divergence between the regulatory approaches in the insurance sector and in the mutual fund sector; and that some have expressed doubts that compliance with the regime in the insurance business can be very good without the sort of self-regulatory organizations that exist in the securities sector.

“This reflects a lack of understanding of the insurance [sector] structure and regulation,” the CLHIA says in its comment. “In point of fact, the industry/regulatory infrastructure for a POS disclosure regime for [seg funds] was developed several decades ago and works very successfully.”

With the apparent lack of resistance to the disclosure initiative from the insurance side, the persistent opposition from the mutual fund sector is that much more striking. While the CCIR received just three, relatively brief comments on its proposals, the CSA received 50 comments — some of them totalling dozens of pages — with comments running the gamut from suggested changes to the tiniest details to outright questioning of the need for this new regime at all.

Notwithstanding the continued sector opposition to this initiative, the CSA does not appear inclined to back away from it. “We will be reviewing and considering all of the comments we received on the POS proposals,” says Leslie Byberg, director of the Ontario Securities Commission’s investment funds branch. “We remain committed to this significant investor-protection initiative.”

Indeed, the POS project remains a work in progress in both regulatory silos. There may not be much opposition on the insurance side, yet Grant Swanson, executive director of the licensing and market conduct division at the Financial Services Commission of Ontario and chairman of the CCIR’s POS committee, indicates that the project isn’t finished yet.

He explains the divergent reactions from the two sides of the financial services industry is the result of distinct approaches to regulation. “There are significant differences in how the two [sectors] are engaged in development of solutions to issues,” he says. “The CCIR tends to sit down with the industry associations early in the process, and wherever possible, see if there is an opportunity to work together to develop a solution.”

@page_break@Whatever the explanation for the insurance sector’s cheerier reception, most of the comments on the mutual fund side do support the idea of improving disclosure to fund inves-tors. But they variously worry about the cost of compliance for the sector, and whether it is justified by the likely benefits. They express concerns about the competitive impact on mutual funds, arguing that funds will be disadvantaged by the proposals compared with rival products. And they stress that all forms of mutual fund disclosure should be overhauled as part of this initiative, so that the proposed new POS disclosure document isn’t just added to the current disclosure burden.

For example, in its comment, the Toronto-based law firm Borden Ladner Gervais LLP recommends that “the CSA focus on rationalizing the entire disclosure regime for mutual funds, as opposed to simply layering the Fund Facts on top of the existing requirements. In our view, the CSA’s proposals have become so increasingly complex that we recommend that the CSA review its overall objectives and the rationale for introducing these changes to the mutual funds [sector] at this time.”

In fact, the CSA has pledged to review the entire mutual fund disclosure regime as a secondary step in this effort; and the regulator has also suggested that it will consider extending similar POS disclosure obligations to other sorts of products in the future. The comments indicate that the financial services industry would prefer that these steps occur simultaneously, whereas the regulators appear to be planning to do this in stages.

In terms of the projected costs of the POS initiative, a number of commenters suggest that it’s premature to make that estimate until the details of the proposals and the delivery requirements are finalized. One firm that does take a stab at visualizing costs is Toronto-Dominion Bank.

In its comment, TD estimates that it will initially cost about $2 million to create the new POS disclosure document for its funds, and that this will decline to an ongoing $1.5-million annual cost (this includes design, layout, printing, fulfilment, legal counsel, translation and website development). Additionally, TD estimates that its distributors’ initial costs to develop the systems to deliver the new disclosure will be about $1.8 million, falling to $200,000 annually to maintain; and that the added audit and compliance costs for TD’s distributors would represent another $500,000 initial cost, with a $150,000 recurring annual expense.

In sum, TD estimates total initial set-up costs of $4.3 million and annual compliance costs of $1.9 million (with most of that falling on the fund manufacturer). TD concludes that these costs are not proportionate to the benefit.

While these projected costs are significant, on an asset base of $53.6 billion (which TD reported as of the end of September), they do not seem excessive.

That’s not to say that the bur-den of the new disclosure regime would fall equally on all firms. Certainly, the larger fund companies should be able to comply more easily — after all, that’s one of the chief benefits of scale. Indeed, some commenters argue that the costs will fall disproportionately on smaller firms, ultimately leading to a reduction in shelf space at dealers and fewer choices for investors overall.

“This will ultimately result in fewer distribution channels and fewer investment options for investors,” says the board of governors for funds managed by CI Investments Inc. and United Financial Corp. in its comment, “which is why we believe that the proposals are not in the best interests of the funds or their investors.”

Still, not all of the sector’s comments are negative. The Investment Funds Institute of Canada allows that it sees “many benefits” in the proposed rule. These include adoption of plain-language disclosure; the phased implementation process being considered by the CSA; and, in certain circumstances, that the CSA may allow firms to provide disclosure with trade confirmations instead of before the sale. (Essentially, when the inves-tor wants to complete a trade immediately and pre-sale disclosure is not “reasonably practicable”).

However, IFIC maintains that the sector still has “significant concerns about the pre-trade delivery requirement, both from a competitive standpoint and from a compliance standpoint.” IFIC suggests that limitations on investors’ ability to trade mutual funds will put the funds at a competitive disadvantage to other products.

In addition to these overall complaints about the fairness and efficiency of the planned regime, many of the mutual fund sector’s comments also address the details of the proposals. There are a wide range of comments about both the content of the proposed Fund Facts document and the delivery requirements.

The proposals have also generated a handful of comments from the investor side, including investor advocacy groups Small Investor Protection Association Inc. and the Canadian Foundation for Ad-vancement of Investor Rights.

These groups sit in direct opposition to industry comments on several issues, including delivery requirements, which the investor advocates believe should be more expansive, while the mutual fund sector is pushing for less onerous obligations.

SIPA recommends that regulators should not allow exceptions from the delivery obligations for money market funds or for client-initiated trades. Basing delivery on who initiates the trade “raises some significant legal, compliance and operational issues for dealers as well as investors,” the SIPA submission says. “Given the well-documented inadequacies in prevailing complaint systems, this constitutes a significant new risk for investors and the industry.”

The SIPA submission also states: “If the CSA wants to distinguish between types of investors who should receive Fund Facts, the appropriate indicator ought to be how well informed they are, not who initiates a trade.”

FAIR Canada agrees that the distinction between advisor-originated trades and client-initiated trades is not a valid basis for determining delivery requirements. Instead, the group recommends that the line should be drawn based on investing experience. FAIR Canada also maintains that investors should not be allowed to waive delivery of the new POS document.

Additionally, the investor advocacy groups both recommend that firms should be required to report sales charges and fund expenses in dollar terms as well as in percentage terms, whereas the industry would rather not have to do that.

Another area of agreement among the advocacy groups is the need to review the entire fund disclosure regime. FAIR Canada insists that the introduction of the new POS disclosure document should not spell the end of inves-tors also receiving mutual fund prospectuses; it maintains that the justification for the introduction of the new POS disclosure document is the fact that investors have a hard time finding information in the existing prospectuses, which are too long and too complex. FAIR Canada says that the answer to this is not just a new, simpler document, but an improved prospectus too.

FAIR Canada says that the fact that prospectuses are too long and complex “represents a regulatory failure to mandate and enforce the production of a document that is simpler and written in plain English rather than legalese.”

FAIR Canada’s other big gripe with the POS proposals is the rule’s proposed “cooling off” right, which the group believes represents weaker protection than the existing withdrawal and rescission rights.

FAIR Canada notes that the industry has not lobbied for this change, and it appears that regulators are proposing it in the name of harmonization, leading the advocacy group to conclude: “While investor rights are being enhanced in leading jurisdictions around the world … in Canada, we appear to be moving backwards.”

Between these harsh criticisms from investor advocates and the apocalyptic warnings of the mutual fund sector, it appears unlikely that the securities regulators are going to be enjoying the apparently easy-going life of insurance regulators any time soon. IE