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Regulators propose new point of sale disclosure form for mutual and segregated funds

By Andrew Rickard | August 18 2007 05:41PM

Advisors are required to hand out a thick prospectus booklet whenever they sell a mutual or segregated fund, but relatively few clients take the time to read it cover to cover. On June 15, the Joint Forum of Financial Market Regulators released a proposal that, if adopted, will distil reams of small print into a plain language, two-page document that outlines the benefits, risks and costs associated with a fund.

This "Fund Facts" document outlined in Proposed Framework 81-406 is designed using a question and answer format that regulators say will make it easy for investors to learn essential details. The first page contains basic facts, performance and suitability information, while the second page deals with costs, advisor compensation and the client’s two-day right of rescission.

The sample version provided by the regulators includes a "How does my advisor get paid" section, and discloses initial, deferred and trailing commissions. "The initial sales charge is deducted from the amount you buy. That means less of your money is invested in the fund," reads the document. "The deferred sales charge is deducted from the amount you sell. That means you get less of your money back."

Advisors will have to deliver Fund Facts document to investors before or at the initial purchase, and it will also have to be provided at subsequent purchases (except for pre-authorized payment plans) and switches (except for those made under asset allocation programs). When dealing face-to-face, advisors must deliver the document by hand, but there is a provision to allow for delivery by fax, email or other electronic means when doing business over the telephone.

The Joint Forum, which is made up of representatives from Canadian Association of Pension Supervisory Authorities, Canadian Council of Insurance Regulators, and the Canadian Securities Administrators, is encouraging industry participants to review and comment on the proposal. In some cases, the regulators have asked for responses to specific questions. For example, they want to know what changes dealers and advisors would have to make in order to comply with the proposed delivery requirements, how long would it take to make them, and what costs would be involved.

The comment period closes on October 15, 2007. The complete proposal and background documents are available at www.jointforum.ca.

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