The mutual funds sector is not pleased at all about the newly proposed compliance obligations and their competitive impact on mutual funds. The sector argues funds will be subjected to product arbitrage and hence will be disadvantaged compared with rival products sold under a simpler, less burdensome compliance regime.
“Are we really saying this product is as dangerous for you as cigarettes when you compare it to the substitutes that are out there,” says Eric Adelson, senior vice-president, legal, Invesco Trimark. He says the perception alone will drive people away.
Adelson’s views find guarded support from Dan Hallett, director, asset management, HighView Asset Management Inc. While not averse to providing pre-sale information to investors, he concedes differences in disclosure requirements may create the perception that mutual funds are “riskier” than other investment products.
“I am not convinced I fully buy into it, but I certainly believe putting more information and warnings out there can make something to be perceived as riskier,” says Hallett. “The content of the POS document, the fund facts, are not providing investors with any new information or anything that is earth-shattering. I don’t know if it can have (an adverse) impact but the potential is there because it is a disclosure document that would be required for certain products and not others.”
He suggests this can benefit direct competitors or substitutes as they may seem to be a better option in the eyes of consumers.
Representatives of the mutual fund industry say they are working with regulators to address the flaws in the current rules. Concerted efforts are underway to create investment products such as active ETFs and unit investment trusts that are not subjected to POS delivery rules.
Discussing external strategies Adelson says “the obvious one is to try and work with the regulators and to educate them about what the issue is. To try and come up with solutions that meet both regulatory needs, industry needs, and investors’ needs.”
What makes things really difficult, he says, is that it is not easy to recover from mistakes.
“If regulators have made a mistake and gone too far, they can come back and fix it. Captive distribution, if they make a mistake, they can still adapt because they have a shorter shelf. So can integrated dealers and manufacturers but if we made a mistake it would be impossible for us to recover,” says Adelson.
Hallett suggests fund manufacturers “create marketing materials that compare and contrast funds with the competing products. That can be done both from investment merit standpoint as well as regulatory standpoint.”
It remains to be seen who will pick up the tab, but Hallett is of the belief that “at the end of the day it will be the investor who will bear the additional cost.”
Industry commentators sit in direct opposition to claims that the new regulations have been created keeping in mind investors’ best interest.
They say the cost of compliance will affect smaller firms disproportionately and cause a reduction in shelf space at dealers and fewer choices for investors. The end result will be fewer distribution channels and fewer investment options for investors.
Investor advocates respond to POS controversy