3.1 The purpose of requiring a CIS to provide potential investors with a prospectus or other offering document is to ensure that investors are given sufficient information on which to base an investment decision. Because of prospectus disclosure liability, CIS prospectuses may however, become primarily "legal" documents, as opposed to "disclosure" documents. Many CIS operators encounter difficulty in achieving an appropriate balance between fulfilling all legal and regulatory requirements, and at the same time providing a "user friendly" marketing document which adequately describes the risk associated with a product.

3.2 If the prospectus is drafted primarily for the purpose of insulating the CIS from liability, the disclosure may be lengthy and highly technical, particularly if it is not the primary tool for marketing the CIS (either because other documents may be given to investors or because CIS units are sold through financial intermediaries). Moreover, a CIS prospectus may focus on the risks of particular investments that the CIS may make, rather than on the overall risk of investing in the CIS. This may make it difficult for investors to understand the aggregate risk level presented by the CIS itself as an investment.

Options for Improvement

3.3 The strategies or policies that regulators may adopt in relation to risk disclosure by CIS vary amongst jurisdictions. However, regulatory authorities should encourage simplified, plain language disclosure in the prospectus so that investors are provided with comprehensible, balanced information on which to base an investment decision.

Regulatory authorities may wish to encourage implementation of this objective by using one or more of the following approaches:

3.3.1 Indicating support for the preparation and publication of "key features" or synopsis or profile of the CIS. These key features could be presented in a brief form at the beginning of the prospectus (for instance, as a profile or synopsis), and expanded upon in the body of the prospectus. Key features could include the following kinds of significant disclosure items:

(a) information regarding CIS investment objectives;

(b) investment strategies, information on risk and appropriateness of investment (e.g. the characteristics of an investor for whom the CIS may be an appropriate investment);

(c) fees and expenses;

(d) past performance of a CIS;

(e) purchase, redemption and distribution procedures;

(f) identity and relevant experience of CIS operator, portfolio manager, investment adviser, trustee or depositary and auditor in similar schemes; and

(g) a description of factors relating to risk that may be material to potential investors.

Alternatively, provision could be made for a CIS to be permitted to issue a "concise" prospectus or offer document prior to the offer or sale of CIS units and an additional more detailed technical document (such as a "Statement of Additional Information") could be made available to investors free of charge upon request.

3.3.2 Providing support for the establishment of disclosure best practice guidelines by industry associations. These best practice guidelines should not be seen as a substitute for the general disclosure obligations under the law, but as factors to be considered when drafting CIS prospectuses based on industry experience.

3.3.3 Issuing regulatory guidelines on discrete issues concerning disclosure in CIS prospectuses. For instance, discussion about any of the "key features", or discussion about what is considered acceptable disclosure based upon regulatory review experience of CIS prospectuses.

3.3.4 Acknowledging alternative methods of comprehensible communication in prospectuses. The use of graphs, tables and other pictorial representations in the prospectus is viewed by many as generally assisting investors in understanding the extent of the risk involved, the nature of the investment and in comparing CIS. For example, a CIS could be required to produce a ten-year total return bar graph in its prospectus, which would include a bar showing the performance of an appropriate market index for comparison purposes. Where there is a comparison of products, the comparison should be fair and should not omit factors which are likely to be relevant to an appreciation of such a comparison by an investor.

3.4 Regulatory authorities may consider the following guidelines when encouraging implementation of the approaches listed above:

3.4.1 The ability of investors to understand risk in the context of a CIS prospectus may be enhanced by issuers focusing on overall risk disclosure, rather than risks of individual portfolio investments. Therefore, it is preferable for a prospectus to concentrate primarily on the CIS's broad investment objectives, its strategies to achieve those objectives, and the portfolio risks accompanying those strategies.

3.4.2 It may be preferable to use a narrative or pictorial means when describing the risk associated with a particular CIS investment, rather than assign a particular rating to describe the risk.