Concerned that critical information about a mutual fund or a segregated fund is often hidden in complex disclosure documents that are not received by an investor until after the investor has purchased securities of the fund, the Joint Forum of Financial Market Regulators has recently introduced new point of sale disclosure guidelines for mutual funds and segregated funds. Proposed Framework 81-406: Point of sale disclosure for mutual funds and segregated funds is intended to assist investors with making more informed decisions, by providing investors with key information about a fund in an easily comparable, reader-friendly format, prior to making an investment.
Central to the proposed framework is the requirement that dealers and insurers create a "Fund Facts" sheet for each class or series of a fund that has a separate management-expense ratio ("MER"). The Fund Facts is limited to one double-sided page, and must be presented in plain language in a standardized question and answer format. Information on the fund’s investment objectives and strategies, fund manager and portfolio advisor, fees, past performance, risks, guarantee status (for segregated funds) and target market must appear on the front of the page, while sales charge options, adviser compensation, cooling off rights and additional sources of information must be presented on the back.
Filing and Regulation
The Fund Facts sheet must be filed with the applicable regulators on an annual basis with a fund’s prospectus or insurance contract. The Fund Facts sheet is incorporated by reference into a fund’s prospectus or insurance contract making it subject to the liabilities in respect of misrepresentations as a prospectus or insurance contract. Mutual fund managers must update and refile the Fund Facts along with the fund’s annual and interim continuous disclosure documents. Segregated fund insurers are required to update their Fund Facts on a semi-annual basis in provinces where reporting is required. Both mutual funds and segregated funds must also amend the Fund Facts whenever there is a material change to the fund, and must refrain from using the amended summary until it has been reviewed by regulators and a receipt has been obtained. While managers and insurers may choose to amend the Fund Facts more frequently than required, they are limited to quarterly amendments unless there is a material change to the fund.
Dealers and insurers will be required to deliver a copy of the Fund Facts and bring it to the attention of the investor either before or at the point of sale. This requirement applies to all initial and subsequent purchases of a fund (with the exception of purchases made through a pre-authorized payment plan), as well as to any switches that are not made through asset allocation services. Depending on the timing of delivery and method of sale, the Fund Facts may be delivered in a variety of ways, including by hand, by fax, by mail or electronically. Neither oral delivery nor general access to the Fund Facts online is acceptable. Some industry participants have questioned how this will work in practice given that most fund purchases are made over the phone. Proposed Framework 81-406 amends the simplified prospectus delivery requirements for mutual funds so that delivery of the Fund Facts will replace the requirement to distribute a simplified prospectus (the simplified prospectus will only be delivered at the investor’s request). The Fund Facts must be included in the information folder for segregated funds and the insurer must receive signed confirmation on the insurance contract that the investor has received it. There is no option for investors in mutual funds or segregated funds to waive receipt of the Fund Facts. Certain fund managers are concerned about the inflexibility of the delivery requirements; that requiring delivery at or prior to a purchase may delay purchases and frustrate investors, and that some investors may not wish to receive the Fund Facts. Investors’ Rights
Investors may cancel their purchase of a fund within a two day cooling-off period, which commences when the investor instructs the dealer or insurer to buy the fund. This right may be exercised by providing written notice to the dealer or insurer and will entitle the investor to receive the lesser of the value of the original investment and the value of the fund on the day the right is exercised, and all fees or commissions paid in connection with the investment. This is not intended to protect investors who change their mind as a result of a short-term drop in the value of the investment and will also prohibit investors from profiting from short-term market increases. The cooling-off period is expected to replace the existing rights of withdrawal and rescission provided to investors.
If the Fund Facts are not delivered prior to purchase, an investor can cancel a purchase of a mutual fund at any time and be refunded the amount of the original investment plus any fees or commissions paid. Although a purchase of a segregated fund cannot be cancelled, an investor can complain to the provincial insurance regulator, who may take action against the insurer.
The Joint Forum of Financial Market Regulators will receive comments on the Proposed Framework 81-406 until October 15, 2007.