Long-awaited, controversial changes to mutual fund disclosure rules will begin to take effect this July. That’s when fund companies must ensure that “fund facts” documents are posted on their websites and advisors must be prepared to provide the forms to clients who ask for them.

The fund facts initiative — part of the ongoing, sometimes painful negotiations with regulators over mutual fund disclosure at the point of sale — is designed to provide investors with easy access to short, plain-language information about the key features of the funds they are buying or considering, including all fees associated with the funds.

Another imminent reform is likely to see clients receiving a fund facts document instead of a simplified prospectus after a purchase transaction is made.

But additional rules requiring financial advisors to provide clients with fund facts at the actual POS, which is a core component of securities regulators’ original plan for mutual fund disclosure reform, could still be years from implementation. This has many advisors and mutual fund firms relieved that they won’t yet face the challenges associated with giving clients disclosure forms before selling a fund.

Investor advocates, however, are dismayed. Without the actual POS delivery requirement, they say, the disclosure reforms represent a decline in investor protection — especially if the simplified prospectus gets replaced by the less detailed fund facts as a post-trade disclosure document.

“The whole purpose of the initiative that started more than a decade ago,” says Ermanno Pascutto, former executive director of the Ontario Securities Commission and now executive director of the Toronto-based Canadian Foundation for Advancement of Investor Rights, “was to make simplified, plain English information available to retail inves-tors before they purchased mutual funds. This defeats the entire purpose of the initiative.”

However, the Canadian Secu-rities Administrators says it remains committed to implementing full POS disclosure rules for mutual funds eventually. After hearing a raft of financial services industry concerns around the original specifications, first proposed in October 2008, regulators have decided to implement the disclosure regime in three stages beginning this year, thus buying time for further review of the more contentious aspects of the proposal.

In simplified terms, the three stages are: filing fund facts documents with regulators and posting them on firm websites; delivering fund facts documents following the sale, either in addition to or in lieu of a simplified prospectus; and requiring the use of the fund facts document at the POS.

The CSA is currently implementing the first stage of the regime, the filing of fund facts documents with regulators and posting them online. These documents, which are a maximum length of two double-sided pages, highlight details about a fund’s holdings, performance, risks and taxes in language investors can easily understand. The document also highlights fees and commissions more prominently than do prospectuses, revealing the fund’s sales charges, fund expenses and trailing commissions, expressed as both percentages and in dollars and cents. The requirements are detailed and feature the use of bold fonts for fees and commissions.

Fund companies have been developing their fund facts in anticipation of the new rule, which came into effect on Jan. 1. From April 8 onward, fund companies must include a fund facts document when they file a fund prospectus with regulators, including for annual updates of the prospectus. By July 8, all funds must have filed their fund facts with regulators and have posted them on the fund’s or fund manager’s website. In addition, fund facts must be provided to investors, free of charge, upon request.@page_break@Despite the challenges associated with the fund facts initiative, the mutual fund industry is generally supportive of the new documents. “I think we’ve gleaned the highlights of the information that customers most want to know about when making a purchase,” says Jon Cockerline, director of policy, dealer issues with the Investment Funds Institute of Canada. “It’s in a more presentable style that will make the clients more likely to read it.”

The second stage of the proposed disclosure regime — post-trade delivery of disclosure documents to clients — is likely to see fund facts replace the simplified prospectus as the primary document delivered to investors after they purchase a mutual fund. The CSA plans to publish for comment its proposed rules on this stage of the regime midyear.

This stage requires amendments to all of the provincial securities acts, and could take time. “They have to change legislation across the country,” says Rebecca Cowdery, partner at Borden Ladner Gervais LLP in Toronto. “It’s going to be a big deal.”

In the meantime, the CSA has invited mutual fund firms to apply for permission for early use of fund facts to satisfy the current post-trade prospectus delivery requirements, and many firms are in the process of doing so.

But investor advocates are also concerned about this aspect of the new disclosure regime, alleging that replacing prospectuses with fund facts will diminish the amount of information investors ultimately receive about their funds. “If you’re going to rely exclusively on the fund facts document, then it has to provide more information,” says Pascutto, who believes fund facts does not include enough information about fees, risks and fund performance.

But proponents argue that fund facts does a good job of conveying all of the essential information in a more accessible format than a prospectus. And, they note, prospectuses will still be available to investors who specifically ask for them. Says Cockerline: “I think the big benefit is that clients are not going to be receiving these big packages of prospectuses in the mail, which they don’t receive any value from.”

Frank Wiginton, a certified financial planner with TriDelta Financial Partners Inc. in Toronto, considers the fee disclosure in fund facts a “good start” toward helping investors better understand what they’re paying. But he’s concerned that most investors still won’t bother to read the documents: “The majority of people are going to look at it briefly. They’re going to look for rates of return, and that’s about it. They’re not going to take a closer look at management expense fees, custodial fees — all of those additional costs that are out there.”

Wiginton suspects many advisors don’t clearly explain the sales charges, fees and redemption penalties. And unless this changes, he says, inves-tors will remain uninformed.

The third stage of the disclosure regime has generated the most industry backlash. This stage will mandate delivery of fund facts at or before the POS of a fund, which advisors say presents logistical and compliance-related challenges.

One problem is that mutual fund transactions often occur based on telephone instructions from clients rather than in person. “If you’re not sitting with the client, showing [the document] to them, walking them through it,” Wiginton says, “it’s a lot more difficult to [deliver fund facts at the POS]. You can’t know for certain that a client has looked at it, has reviewed it — that kind of thing.”

IFIC is concerned that such challenges will cause advisors to shy away from mutual funds and instead sell products with less onerous disclosure requirements, such as stocks, bonds and exchange-traded funds. Says Cockerline: “This is an undue compliance burden that would be placed on mutual funds but on no other comparable investment products.”

To address these so-called “product arbitrage” concerns, the CSA will consider extending POS delivery requirements to other types of publicly offered investment funds. IE