Increased disclosure, decreased transparency
81-106 a step back on the transparency scale
In a recent
article, I wrote about how National Instrument 81-106 (Continuous
Disclosure) required investment funds to provide a sort of information overload.
As an investor, analyst, and investment counsellor I don’t find the new
information all that helpful. When I wrote that article, I didn’t realize the
gravity of the situation. Not only are fund companies spending lots of investors’
money producing these extra reports and fund details; but regulators repealed
the document I use most when researching funds.
The new document required is the Management’s Report on Fund Performance.
Think of it as the mutual fund’s version of the Management’s Discussion and
Analysis that publicly traded companies produce periodically. But the increased
transparency that regulators hoped for may be backfiring.
At some fund companies, the commentaries written by fund managers are heavily
edited by legal and compliance departments to ensure consistency and avoid
issues that might be considered “forward looking statements”. So I guess
that greater transparency takes a backseat to protecting one’s proverbial
backseat – a situation caused by this recent regulatory initiative.
The MRFP will also contain financial highlight information once found in the
prospectus. A few months ago, I was looking for this very section in an updated
prospectus for a fund with a June 30 year end. I could not figure out – at the
time – why I couldn’t locate the turnover figures. It took a fair bit more
searching (i.e. until I finally looked into the MRFP) that I realized this key
information was moved.
But these issues are relatively minor compared to the document that was
Statement of Portfolio Transactions
In my last article on this issue, I highlighted the importance I place on the
Statement of Portfolio Transactions (SPT). At the time I wrote that article, I
did not realize that the SPT was sacrificed for such valuable information as top
25 holdings, and commentary that is scrubbed heavily by lawyers. (For those that
missed it, that was sarcasm.)
But the importance of the SPT cannot be overstated. That document has, in the
past, helped me uncover a U.S. small cap manager who regularly flipped IPOs
(which would escape quarterly listings because of the quick turnover); an
otherwise well regarded Canadian equity fund that bought Nortel to minimize
tracking error even when it didn’t come close to meeting the manager’s
stated quality and price criteria; and the global fund that emphasizes quality
stocks that traded in Playboy Enterprises (a firm known for being unfriendly to
These are but a few examples off the top of my head. The point is that the
document that I consider most important in helping to confirm what portfolio
managers actually do – as opposed to what they say – is gone.
Lucky we are not
I will continue to find ways around the lack of certain information. However,
it’s a sad surprise when a long-standing disclosure document is yanked from
the available information set. Had I known of the plans to sacrifice the SPT, I’d
have surely submitted a comment (as I have done with other proposed rules).
However, until the next set of regulatory changes we will all have to live
without the SPT. It’s just a shame that the Canadian Securities Administrators
(CSA) thinks that improving investor protection is achieved by replacing the
most insightful document available with what amounts to a fluff report (MRFP)
– all at the cost of the very investors it aims to protect.
So, to all fund managers that wish to trade in securities that neither meet
your investment policy nor stated investment style; here’s your chance. Just
make sure to trade the securities so quickly that they don’t show up in your
top 25 each quarter. Oh, and make sure they’re out of the portfolio completely
at the semi-annual dates. That way, neither I nor any other investor is likely
to detect this trading because NI 81-106 has made such inconsistencies nearly
impossible to spot.
Aren’t we lucky to have the protection of increased regulation?
Dan Hallett, CFA, CFP is the President of
Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as
Investment Counsel in Ontario and provides independent investment research to
financial advisors. He can be reached at