The Canadian mutual fund industry has responded en masse to the Canadian Securities Administrators (CSA) point–of-sale disclosure rules, making the case that it will undermine the ability of advisors to effectively sell mutual funds.
In a number of industry submissions to the CSA, the same theme arises: the increased burden and cost to dealers and advisors to implement the fund facts document, which advisors will be expected to provide their clients with on every mandate they recommend.
In particular, industry participants are concerned that investors will move away from mutual funds because the requirement that the fund fact document must be delivered and read makes it as a vehicle inflexible compared with other securities — such as individual stocks and exchange-traded funds (ETFs) — that can be traded with no point-of-sale disclosure process required.
In particular, the Investment Funds Institute of Canada (IFIC) took exception to the pre-trade delivery requirement of point-of-sale disclosure, which requires that a trade can be executed only after the investor has received and affirmed that he or she has read the fund facts document.
“The industry has significant concerns about the pre-trade delivery requirement, both from a competitive standpoint (as such a requirement does not exist for ETFs and other mutual funds not subject to NI 81-102, and other competitive products) and from a compliance standpoint, given that it may not be feasible to provide the Fund Facts at the time an investor wishes to make a purchase (such as telephone orders or orders taken away from the dealer’s office), IFIC writes. “Such limitations on the ability to trade, and the resulting inconvenience and risk to investors of adverse price movements, are difficult, if not impossible, to cost. Since other competing products would not be subject to the same disadvantage, this could prove to be the most significant cost of the initiative over time.”
Eric Adelson, senior vice-president of Invesco Trimark, argues that without equal application of the fund facts process to separately managed accounts (SMA) and ETFs, the process creates arbitrage where investors will gravitate toward those products over mutual funds. Of course, this works against a large group of advisors not licensed with the Investment Industry Regulatory Organization of Canada (IIROC) and, therefore, unable to sell these products directly.
“To the extent, therefore, that IIROC-registered dealers find compliance with the instrument to be burdensome, ETFs and SMAs provide them with a means to provide similar products to their clients without the regulatory burden,” Adelson writes. “To the extent pre-trade delivery causes frustrations among advisors and makes it difficult for them to do business, one would expect they would convince clients to invest in vehicles other than mutual funds. To achieve that, advisors would have to criticize mutual funds as an investment vehicle and play up the virtues of other investment vehicles at the expense of mutual funds.
Fewer fund recommendations
CI Financial’s submission outlines that the company has 152 individual mutual funds, which are offered in different classes to account for 516 total classes of funds. There are an additional 254 segregated funds with a total of 807 classes. In total, CI will have to produce more than 2,600 different fund facts documents for its distributors.
CI points out that the cost at roughly $1 a document could increase costs, but more likely is that affiliated mutual fund dealers will simply not want to take on the regulatory burden of having their advisors go through that many mandates from one product provider, let alone the several that most advisors work with.
“While the CSA believes that the ability to deliver documents electronically mitigates delivery costs, it does not,” CI writes in its submission. “Independent advisors who sell funds from a variety of different companies will still be required to compile and maintain lists of hundreds of links in order to have them readily available to send to clients.”
The overriding belief by the industry is that advisors will simply deal with fewer product providers. There is an expectation that dealerships that sell proprietary products could substantially benefit, since the product provider and dealership will likely be integrated so current and up-to-date fund facts changes are available.
Susan Han, a lawyer with Miller Thomson, wrote in her submission that it will be incumbent on independent advisors to ensure that they have the most up-to-date fund facts, which can change with any underlying change to a mandate.
“If the investor wishes to proceed with a trade, and delivery of the most up-to-date fund facts is impractical, a determination must be made as to whether the trade is ‘advisor recommended’ or ‘investor initiated.’ Even there the advisor could come to grief if the advisor has not appropriately brought the ‘existence and purpose’ of the fund facts to the attention of the investor and the investor has then expressly declined to receive the fund facts prior to the trade,” Han writes. “There is no getting away from the likelihood that for the independent distribution channel, point-of-sale disclosure will mean that sales will have to be concluded over the course of several interactions with the client. Even then, the risks of regulatory non-compliance are much higher.”
This problem could be enhanced if advisors were required to provide ongoing fund fact disclosure to existing unit holders on “subsequent purchases.” The CSA has asked whether it should implement such a rule.
IFIC vigorously opposes such a proposal.
The requirement to deliver a Fund Fact for a subsequent transaction in the same fund overlaps with continuous disclosure requirements that are satisfied by one, the availability of the MRFP, two, company website material, and three, the ability for an investor to request from their advisor or distributor an updated summary of their holdings and related fund materials on demand,” IFIC writes.
(11/05/09)