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IOSCO Issues Key Principles on Point of Sale Disclosure

By Jim Hamilton

As securities regulators consider point of sale disclosure requirements for retail investors, IOSCO has issued a number of principles designed to provide key information quickly to the investors. As a threshold matter, IOSCO defines point of sale as the moment at which a customer requests that a product be purchased.

While setting forth general principles for point of sale disclosure, IOSCO is not recommending a one-size-fits-all approach. IOSCO recognizes that key information will necessarily vary depending on the type of financial product being offered. For some complex financial products with a multitude of risks, the amount of key information that a regulator might mandate for immediate disclosure to the investor under a layered approach may be greater than for less complicated products

The first principle of point of sale disclosure is that key information should include disclosures informing the investor of the fundamental benefits, risks, terms and costs of the product and the remuneration and conflicts associated with the intermediary through which the product is sold. Regarding disclosures about the financial instrument, IOSCO suggested that key information could include the name of investment and type of product, the investment objectives and strategy of product, and its risk and reward profile. Risk disclosures should include the material risks for the product, including performance risk, credit risk, liquidity risks and operational risks.

Key information will also include fees and costs, including information on any breakpoint discounts and expense reimbursements or fee waivers. Also key is disclosure on the nature of any guarantees being offered, including any restrictions or conditions that the guarantees are based on. It is also important to disclose potential conflicts of interest inherent in the terms of the product. For example, these may include when payments to the investor are dependent on certain criteria such as product performance as measured against a benchmark.

Finally, IOSCO said that past performance presented in a way that enables easy comparison between products is key data. Past performance disclosures should include a warning that historical performance is not an indicator of future performance. Where no past performance is available, potential return scenarios should be provided.

Concomitant with point of sale disclosure, IOSCO recommended that securities regulators consider measures to improve retail investor education in order to enhance their financial literacy and ability to read investment documentation. There should do this, said IOSCO, because it is axiomatic that no matter what disclosures are mandated they will not have the intended effect of having retail investors engage in an informed investment process if the investor either does not read or understand the information provided.

Section 919 of the Dodd-Frank Act provides that SEC may issue rules designating documents or information that must be provided by a broker to a retail investor before the purchase of an investment product or service by the investor. Dodd-Frank provides that any documents or information required to be provided to investors must be in summary format; and contain clear and concise information about investment objectives, strategies, costs, and risks; and any compensation or other financial incentive received by a broker, dealer, or other intermediary in connection with the purchase of retail investment products.

In Germany, a draft law is expected to be approved in a few months, which provides that where investment advice is provided to a customer an information form is to be made available to the customer promptly and prior to any sale for each financial instrument being recommended. The form must be short and easy to understand.

In Japan, the Financial Instruments and Exchange Act requires a document before concluding a contract containing a statement that the company is a financial instruments firm; and the registration number; an outline of the contract and any fees; a warning concerning potential losses; and information concerning applicable taxes, cooling off periods, and the name of the SRO of which the firm is a member.

Full post as published by Jim Hamilton's World of Securities Regulation on March 30, 2011 (boomark / email).