Document
Regulators' proposals don't make sense
March
30, 2003. 01:00 AM
Regulators' proposals
don't make sense
Hard to see how investors benefit
Cooling-off period would be dropped
GLORIANNE STROMBERG
SPECIAL TO THE STAR
The events of the last year have shaken investors' confidence in the companies in which they invest and in the regulators who regulate them. It seems odd that regulators who are trying to restore confidence in the capital markets would choose at this time to introduce measures that have the potential to undermine investor protection.
However, that is exactly what is happening in the rules, proposed rules and exemptions that no longer require annual and interim reports to be sent to investors unless they expressly ask for them.
Accordingly, investors are currently receiving in the mail cards or letters, which sometimes are hard to distinguish from junk mail, advising that unless they fill out the reply card and send it back within a certain time, they will not receive annual and/or interim reports. The requirement for investors to "opt-in" to their right to receive these documents is akin to the billing issue a few years ago that so riled Rogers Cable customers. However, this time investors might not be aware that by not opting-in their names have been taken off the delivery lists.
If there's any lesson that investors should have learned from the events of the last year or so, it is the importance of gaining a better understanding about the investments they make.
The starting point is to read, with a questioning mind, the prospectuses and annual and interim reports. Often the danger signs and vulnerabilities are there for all to see. And even if these are not completely understood, they provide a basis for asking questions and discussion with financial advisers and others.
Knowledge and awareness are important investor protection tools. They are a first line of defence. Yet regulators are pursing initiatives that run counter to this.
The latest is reflected in the proposals of the Joint Forum of Financial Market Regulators to revamp the disclosure requirements for mutual funds and segregated funds - proposals that are open for public comment until April 30. (Comments can be submitted by contacting Stephen Paglia, the joint forum's senior policy analyst, by telephone at 416-590-7054, or by e-mail at spaglia@fsco.gov.on.ca). The current disclosure documents will be replaced by four documents: a foundation document for the fund, the fund's continuous disclosure record, the fund's summary document (one to two pages) and a consumers' guide. The documents will be available in electronic and paper form.
What is controversial about the proposals is that none of the documents will actually be required to be delivered to investors. According to the joint forum, ready accessibility via Web sites replaces the need for actual physical delivery of the documents to investors. This thinking is based on the assumption that access equals delivery and that if an investor wants information, the investor must seek it out.
In adopting this theory, which was rejected by the U S Securities and Exchange Commission and in part by the Ontario committee that is reviewing changes to the province's securities regulations, the joint forum seems to have been influenced by anecdotal comments and some focus group results to the effect that people do not read prospectuses or annual reports and do not want them.
One has to look at such comments and results with a degree of skepticism.
Firstly, the prospectuses and annual reports to which people have been exposed are not the ones that the joint forum is recommending be used. As well, the last regulatory effort to make these documents more useful and relevant to investors was undermined by the industry practice of combining generic and educational information with the information about the multitude of funds offered by the operator. This resulted in the "300-page telephone book" that is so off-putting to investors as well as expensive to prepare and use.
The negative reaction of investors to these documents has also been heightened by the fact that relatively few advisers explain to investors what these documents are, why they are important to them and what they should read that is relevant to them.
Many advisers do not regard the documents as important and their attitude brushes off on their clients. The result is that investors tend to treat the documents as junk mail.
In contrast, I am aware of focus groups where once these explanations were given, close to 100 per cent said that they would read the documents. The participants also said that they only wanted the information about the funds that were relevant to them and that they did not want the "telephone books."
It appears that regulators, in reaching their conclusions, have been comparing apples to oranges I am not convinced they have a sound basis for adopting a strategy that says to investors, if you want information go and get it and if you don't go and get it you will be deemed, to your detriment, to have it. This runs counter to fairness principles. It also runs counter to the most basic principle of securities regulation - that of providing full, true and plain disclosure of all material information to investors as a condition of investors investing in an enterprise. It is at odds with current regulatory thinking that is aimed at ensuring that disclosure of all material information is in the marketplace for the benefit of investors at all times and not just at the time securities are first issued.
What is the point of having the information out there if it is not provided to investors in a meaningful manner"? What investors choose to do with the information is their affair. But give it to them - in whatever format they want - electronically or paper. And if investors don't want to receive information on an ongoing basis, let them choose not to receive it. There's a big difference between giving investors the option not to receive material information and requiring investors who do want the information to take action to get it.
The joint forum's proposals are also at odds with its efforts to ensure that plan members of defined contribution pension plans and group retirement savings plans have the educational tools, information and advice to make reasoned decisions affecting their financial well-being. As well, the current joint forum proposals run counter to the extensive investor education and awareness programs that the joint forum and most of its member regulators have underway.
Another controversial aspect of the joint forum proposals is the proposal to eliminate any statutory rights of withdrawal and rescission - the so-called "cooling-off' period that gives investors in mutual funds and segregated funds up to 48 hours to change their minds about an investment.
While the proposal might go hand-in-hand with not delivering material information to investors and assuming that investors have all the material information because it is sitting in regulatory files and on operators' Web sites, it runs counter to securities and consumer protection provisions that provide investors with a cooling-off period.
The joint forum rationalizes its proposals in terms of cost savings for fund companies and insurance companies. They say the cost savings should reduce management expense ratios, thereby benefiting investors. Again, this is subject to question.
Firstly, there are less expensive ways of preparing and delivering information to investors, including delivering only the information that is relevant to the investor and utilizing optional print-on-demand services or e-mail delivery. This measure alone would cut costs by approximately 50 per cent. In any event, the impact of these costs on MERs is not significant.
Secondly, transferring the costs of information delivery to the investor directly is not a cost saving.
Thirdly, the costs of maintaining Web sites do not appear to have been factored in. Apparently, some fund companies have discontinued posting their disclosure documents on their Web sites due to costs and lack of demand. Is this a situation where regulators are being penny-wise and pound-foolish"?
It is puzzling why regulators would adopt an approach that requires investors to take positive action to receive initial and continuing disclosure documents when they are aware that investors do not seek these documents out. Less than 1 per cent of investors request semi-annual reports. Virtually no one asks for the annual information statement and financial statements that form part of the current prospectus regime for mutual funds and segregated funds. Most people do not even know these documents exist.
The proposals raise fundamental questions as to the ability of individual investors to play a meaningful role in protecting themselves. This is particularly so when taken with other regulatory initiatives aimed at eliminating the statutory prohibitions on conflicts of interest and self-dealing as well as most of the rules relating to the establishment and operation of investment funds and the offering of their securities to the public.
We are already seeing the impact of a growing lack of confidence on the part of individual investors. Steps that have the potential to increase this lack of confidence and drive investors from the marketplace do not augur well for anyone. It would be the ultimate failure.
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