(September 11, 2003) With three major initiatives on the horizon, Ontario Securities Commission (OSC) staff acknowledge that fund companies may be feeling under the gun. What’s more, these initiatives all have a November-December due date, upping the pressure on investment product manufacturers to file comments on strictures they may think burdensome.
“We hear from the industry that we shouldn’t shorten comment periods and we may even want to go longer because everybody’s overwhelmed with the number of things the OSC is putting out,” says Susan Silma, director of the OSC’s investment funds branch. This branch was created this past spring to unify the policy-making and routine “files” functions — exemptive relief and prospectus review — at the securities regulator. “We’ve have three proposals that we talked about right here, and we have a couple of others in the hopper, plus, there’s [the uniform securities legislation], so people are overwhelmed by what they’re receiving.”
Silma’s remarks followed a question about the OSC’s plans for mutual fund governance, one of the three initiatives presented yesterday at IFIC’s annual conference in Toronto.
The OSC has revamped its initial concept proposal, Consultation Paper 81-402, released in March 2002. The draft rule, which OSC staff is now finalizing, redefines the role of the agency that is to govern a company’s different mutual funds. Commentators on the original proposal, which canvassed the concept of independent boards of directors for mutual funds such as exist in the U.S., found the “board-like role was too broad,” Silma said.
Instead, there will be an independent review committee (IRC), whose sole function will be to review conflicts of interest, including related-party transactions. Having such committees would allow the OSC to replace the sections on self-dealing and conflict of interest in the Securities Act, and in National Instrument 81-102, which currently govern mutual fund operations.
The OSC doesn’t intend to mandate the structure, Silma said, but IRCs will have to have at least three members, independent of the management company, though initially appointed by them. Thereafter, replacement members will be appointed by the IRC itself.
The revised proposal also caps liability of IRC members at $1 million “per single cause of action,” and their directorship fees will be charged to the funds.
The Canadian Securities Administrators (CSA) has put enough stress on getting this proposal through that other parts of the initial concept proposal are to be held over, including the registration of mutual fund managers and a rewriting and simplification of 81-102. Still, Silma said, “we continue to believe that a registration regime for mutual fund managers is an important part of a complete regulatory regime for mutual fund managers.”
Once the OSC approves it, Silma said she expects the rule to be published in December 2003, with implementation in late 2004 or early 2005.
But that’s not the only December project looming for the fund industry. In October, the Joint Forum of Financial Regulators, the conglomerate of Canadian securities, insurance and pension regulators, is to decide on revised rules for point-of-sale documents for mutual and segregated funds. Those rules were originally formulated in consultation paper 81-403 last year. In addition, new rules for funds of funds will come into effect in December 2003, while revisions of NI 81-106, the CSA’s proposal on continuous disclosure for investment funds, will be published for comment in November.
Silma admits that disclosure documents have not performed as they were expected to. Investors are deluged with so much information, she admits, that they look at it only long enough to slip off the plastic wrapping before tossing them into the blue boxes. Advisors also find them less than useful. Meanwhile, mutual fund and insurance companies are paying to print and mail paper that mostly goes unread.
“We find that a lot of fund consumers need more information than other investors,” she said, but “the documents are daunting and very difficult for the average person to read and understand.”
The alternative being presented to the Joint Forum is a “layered” approach to mutual fund and segregated fund disclosure, with four types of documents. The first would be a foundation document that has “static” information such as the fund’s operator but no performance record or other things that may quickly change. Investors must have access to that document, but it need not be delivered.
Investors would also have access to a continuous disclosure record, with annual and semi-annual financial statements as well as a management discussion and analysis of the fund results.
A fund summary document would be a one- or two-pager that “would communicate key features that are unique to the fund. It would also clearly highlight the availability of more detailed information in the other documents,” Silma said. The fund summary would have to be given to investors before they purchase a fund.
Finally, there would be a generic consumer’s guide to mutual and segregated funds, offered by companies “only to those people whom they believe would benefit from it,” Silma said. “We hope that the end result would be that the purchaser would get as much information about the funds they’re purchasing as they wish, but need not be overloaded or overwhelmed by the information.”
However, former OSC commissioner Glorianne Stromberg said “I still think they should send them out and have the clients say, ‘Stop sending these to me,'” rather than require investors to ask for the documents.
Do you agree with the OSC’s proposed overhaul of fund company disclosure documents? Or do you agree with Stromberg? Share your thoughts with your fellow advisors in the Talvest Town Hall on Advisor.ca.
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Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.
(09/11/03)