FAIR Canada has provided positive comments on several improvements the CSA has proposed to the Fund Facts document in Stage 2 of its Point of Sale initiative. Improvements include:
- a requirement to confirm whether trailing commissions are paid to advisors;
- language informing investors of the potential for conflicts of interest resulting from trailing commissions;
- the addition of the worst three-month return to the ‘Performance’ section;
- stronger warning language about the risks of investing in mutual funds;
- the inclusion of historical GIC performance as a benchmark; and
- the addition of a requirement to include up to four of the main risks of the fund.
The Risk Section Needs Further Improvement
There continues to be problems with the CSA’s current approach to the risk rating scale, given that there are inconsistent methodologies used between funds as fund managers are not required to use the same methodology under the current proposals. The methodology that has been recommended by IFIC, which measures the standard deviation of a fund over three- and five-year periods, does not capture a retail investor’s perception of ‘risk’. The strongest criterion for an investor deciding not to buy a particular investment “is simply the chances of losing money”. In addition, a short-term measurement of volatility is not an appropriate measure of risk for investments that investors are encouraged to hold for the longer term. Kenmar Associates’ submission states that “retail investors view risk as the likelihood of a decline in investment value, or the failure to meet a benchmark, over a long-term time horizon.” Retail investors are worried primarily about the risk of loss of their capital, and secondarily about the risk that their investments may not perform as expected.
Funds Facts Needs to Be Provided At or Before the Point of Sale
We have also continued to call for the CSA to require, as soon as possible, funds to make the Fund Facts documents available to investors at or before the point of sale, consistent with the intended use of the document.
Conflicts of Interest and Fund Facts
FAIR Canada is supportive of the introduction of language informing investors of the potential for conflicts of interest resulting from trailing commissions. In our view, it is imperative that the potential for conflicts of interest be stated expressly and clearly in the Fund Facts document, as has been proposed by the CSA.
We are concerned, however, that the proposed changes direct investors to dealer representatives following the disclosure of the potential for a conflict of interest. FAIR Canada recommends that, instead of directing investors to their dealer representative, the CSA expand the existing CSA mutual funds brochure for investors to include information explaining, among other things, compensation structures, different fee models, and any potential inherent conflicts of interest. Investors should be directed to this brochure after the conflicts disclosure in the Fund Facts document.
Our submission also notes concerns about non-delivery of the simplified prospectus and requests that the results of the CSA’s investor testing of the Fund Facts document be made public when they are complete.