I recently had a chance to interview Ken Kivenko, who runs Canadian Fund Watch and is allied with the Small Investor Protection Association. Ken is a tireless advocate for investors who have been ripped off by the industry, donating his time and money to travel around the country and stare down investment company lawyers who try to intimidate their victims.

Kivenko recently wrote a report outlining his concerns about a new development in the mutual fund industry. The issue is a new point-of-sale disclosure document called “Fund Facts.”

Here’s the quick background. We all know that almost no one reads the entire prospectus of a mutual fund or ETF before they invest. That’s not because we’re lazy. The fact is that the average investor wouldn’t understand most of what he or she was reading anyway. For years, the Canadian Securities Administrators (CSA) has been working to create a brief, easy-to-read, standardized document that would help investors consider the risks, costs and other important features of a fund without having to wade through 40 pages of legalese. Their proposed Fund Facts document “is in plain language, will be no more than two pages and highlights the potential benefits, risks and the costs of investing in a mutual fund.” (To see a sample, go to page 31 of this PDF document.)

It’s an excellent idea, and it would serve investors well if it were done properly. Unfortunately, Kivenko says the proposed format is full of flaws. Notably:

• The Fund Facts document describes a fund’s risk with a single word or phrase: very low, low, low to moderate, moderate, moderate to high, or high. “The fund company gets to decide on how to define risk,” Kivenko’s report says. “You can imagine how this will mislead investors.” For example, a fund that invests 100% in equities could be defined as “moderate” risk, even though any equity fund can lose 30% or 40% in a single year.

• Fund companies need to disclose the performance of the fund over the last 10 years, but the data have no context. No index benchmark is used, and there’s no mention of how the average fund in the category performed. This is basic information that even Morningstar includes. “By not requiring such information in the Fund Facts, the CSA implicitly assumes that most investors already know or do not need this information,” says the report. “Academic research does not support this assumption.”

• The description of a fund’s suitability is unhelpful. “Fund Facts boils suitability down to vague descriptions,” Kivenko writes. For example, the document may describe a fund as “a long-term investment,” without specifying whether that means five years or 20 years. Another standard label warns investors not to buy the fund “if you need steady source of income.” Kivenko worries this label may “may send the unintended message that stock funds have no place in the context of income-oriented portfolios.”

FAIR Canada has published its own list of concerns, and calls for the fund’s costs to be front-and-centre in the Fund Facts document, instead of on page two: “Given the potential impact of fees on an investor’s total returns, we believe that the section entitled ‘How much does it cost?’ should precede the section entitled ‘How has the fund performed?’”

Despite the serious concerns of these investor advocates, the CSA has decided to press on with its flawed proposal. They plan to publish the Fund Facts requirements in December, and by mid-2011 advisors will likely be handing the two-pager to their clients.

“For our part,” Kivenko writes, “we are still trying to contact regulators in an attempt to dissuade them from unleashing this toxic regulation on unsuspecting Main Street investors. In the meantime, caveat emptor.”