Canadian securities regulators are still struggling to improve disclosure for retail investors, even as regulators in other parts of the world are concluding that sometimes disclosure just isn’t good enough to ensure investor protection.

In early October, the Canadian Securities Administrators lurched ahead with its long-standing plan to implement a new point-of-sale disclosure regime for mutual funds — although the first step in that plan doesn’t actually require POS disclosure.

Although the CSA insists that its POS disclosure regime will eventually require actual POS disclosure, initially, fund companies will just have to make the new, shorter disclosure documents available on their websites or by investor request.

Under the first phase of the rule amendments, fund companies will be required to start producing the new Fund Facts disclosure document — which highlights key information, including the risks and costs of buying and owning a fund — for each class or series of funds as of Jan. 1, 2011; and they must start making the document available to investors by July 8, 2011.

The second phase of the new regime’s implementation will involve proposals to allow firms to deliver the new document —instead of a simplified prospectus — to satisfy disclosure obligations to inves-tors. Those proposals are expected next year.

Eventually, the CSA intends to require actual delivery of the new document at the point of sale. The CSA says it “remains committed” to that idea, but that staged implementation will allow it to get the new document into the marketplace, while it continues to contemplate and consult on delivery issues for mutual funds — and whether to apply the regime to other sorts of investment funds.

Indeed, the staged implementation of the new POS disclosure regime comes in response to industry complaints that requiring delivery before an investor makes a purchase is just too cumbersome and costly in many situations, and that it is unfair to single out mutual funds for this treatment when other sorts of investment funds don’t have similar requirements.

As well, until the regulators actually start requiring POS delivery, it’s hard to say that this new regime improves disclosure for investors. In the meantime, other regulatory efforts to upgrade disclosure (such as the client relationship model reforms that the self-regulatory organizations are devising) remain works in progress. In addition, once the implementation of the new POS regime is complete, the CSA also intends to review the overall disclosure regime for mutual funds.

There’s no question that the regulators can be criticized for taking a long time to implement disclosure improvements, but the industry also deserves its share of the blame for this, as these initiatives seemingly run into resistance at every turn.

The most recent example is the Mutual Fund Dealers Association of Canada’s proposed new rule concerning the disclosure of fees and commissions to clients. The rule, which was proposed in June, aims to improve investor decision-making by requiring fund dealers to inform investors of transaction fees or charges before accepting investors’ order.

Although such a rule sounds like common sense, the handful of industry comments that were submitted on the proposal raise a number of objections. They argue variously that the new rule is unnecessary, that it’s redundant because of the existence of various other incomplete efforts to improve disclosure (such as the POS and CRM initiatives), and that it will be burdensome and costly to comply with the new requirements.

This sort of reflexive resistance to efforts aimed at enhancing disclosure effectively represents resistance to improved investor protection, as securities regulators have traditionally relied on disclosure as sufficient to protect consumers and avoid market failures.

However, this tradition is slowly being cast aside in several other major marketplaces — the U.S., Britain and Australia — where regulators are starting to recognize the need for more direct intervention in markets on behalf of consumers.

In particular, regulators in those countries are trying to address some of the conflict-of-interest issues and incentive problems that they see in retail markets by intervening in industry compensation structures (variously banning sales commissions and limiting ongoing mutual fund distribution fees).

As the chairman of the Britain’s Financial Services Authority, Lord Adair Turner, said in a recent speech to that country’s financial services industry, disclosure alone is no longer seen as good enough to protect retail financial industry consumers: “The FSA’s past approach placed significant reliance on the assumption that rational consumers would make good choices provided markets were transparent and information fairly disclosed.”@page_break@And although that assumption may still hold in wholesale markets, he continued, “In many retail financial markets, the imbalances of knowledge and power between consumers and providers are so profound, and the potential for perverse incentives so great, that even highly competitive markets and extensive information disclosure are insufficient to protect consumer interests.”

And so, the FSA (and its successor organization, the Consumer Protection and Markets Authority) are embracing a new regulatory philosophy, Lord Turner explained, that is marked by a greater willingness to intervene in the marketplace on behalf of consumers.

The contrast to the prevailing situation in Canada could hardly be more stark. Although regulators in other countries seemingly are recognizing the limitations of disclosure as a means of ensuring investor protection, Canadian regulators are still relying heavily on it; and, even so, they have to haggle with the domestic industry over how extensive that disclosure should be.

So, in light of what’s going on in other markets, is it time for the CSA to follow suit and consider more radical steps, such as eliminating commissions?

Veteran industry analyst, Dan Hallett, vice president and director of asset management with Oakville, Ont.-based HighView Financial Group, says no — although he does believe that many investors would benefit from a ban on embedded commissions.

However, he also warns that many others (mostly smaller investors) would probably be hurt by such a move, as they would no longer have access to advice: “Embedded commissions are the only way that some people can afford to obtain [investment] advice.”

Without these commission structures, clients with less than $250,000 in investible assets would probably either have to pay a relatively large portion of their portfolio in fees to obtain advice or go to a bank or other so-called “captive” advisor for advice, he suggests: “I really think that the best model is freedom of choice — commission and fee-only — and transparency.”

Hallett also observes that when advisors ensure their compensation is transparent to clients: “It’s powerful because it communicates confidence by the advisors in his/her value-added. It also helps to create trust.”

The trick is mandating genuine transparency. So far, that’s not something that disclosure alone has been able to achieve. And the industry continues to resist the regulators’ efforts to improve it.

But, perhaps more important, in certain ways the industry is structured to impede transparency.

For example, in response to the MFDA’s recent rule proposal, one comment argues that dealers may have a hard time disclosing the fees that an investor would have to pay when redeeming a fund that was sold on a deferred sales charge, as a number of factors that could affect that fee may be beyond the dealer’s knowledge, among them the fund’s DSC schedule, the impact of any free redemption provisions and the fund’s value.

Yet, if the dealers can’t say what sort of redemption charges a transaction is going to trigger, then surely investors can’t be expected to understand this on their own. And without this information, investors can’t make an informed decision about whether to go ahead with a transaction or not.

Although these impediments to effective disclosure are no doubt genuine, a regulator that is prepared to concede that sometimes disclosure can’t deliver adequate investor protection may well conclude that the underlying system for buying and selling mutual funds is needlessly complex, not necessarily in investors’ best interests, and that this merits regulatory intervention.

At one time, Canadian regulators also seemed to be starting to realize the limitations of disclosure. One of the reasons for the Ontario Securities Commission’s proposed fair-dealing model was that regulator’s recognition that disclosure alone was not sufficient.

The OSC’s FDM concept paper stated that complex compensation structures in the mutual fund industry make it very tough for investors to understand possible conflicts between their interests and the interests of an advisor.

The OSC had found evidence that advisor compensation was driving asset-allocation decisions rather than the best interests of investors doing so; and that the work involved in understanding these forces, and the possible conflicts they can cause, was beyond what regulators could reasonably expect of most investors.

Back then, the OSC paper suggested that perhaps embedded compensation should be eliminated in order to ensure that inves-tors got a fair shake.

That proposal didn’t get very far, and the FDM itself eventually evolved into more traditional regulatory responses — the registration reform project and the SROs’ CRM initiatives.

Now, at a time at which regulators in other countries are taking a harder look at traditional industry practices, resistance to improved disclosure — or claims that effective disclosure is impossible — should perhaps serve as an invitation to regulators to consider more direct intervention to protect retail investors.

IE