LESS BUR­DEN?

Al­though firms have long asked for more stream­lined rules, there are some re­quire­ments many would like to re­tain

Investment Executive - - FRONT PAGE - BY JAMES L ANGTON

There’s mixed re­cep­tion to the CSA’s pro­posal on semi-an­nual re­port­ing for is­suers.

the cana­dian se­cu­ri­ties Ad­min­is­tra­tors (CSA) is in the first stage of a three-part ex­er­cise de­signed to ease the costs of reg­u­la­tory com­pli­ance by do­ing away with need­less or du­pli­cated reg­u­la­tory re­quire­ments.

The first phase tar­gets fi­nan­cial re­port­ing re­quire­ments for pub­lic com­pa­nies. Next year, the CSA plans to turn its at­ten­tion to rules for in­vest­ment funds. And, some time af­ter that, the reg­u­la­tor aims to tackle reg­is­tra­tion re­quire­ments.

In the­ory, the ini­tia­tive is wel­come. Com­plain­ing about the reg­u­la­tory bur­den is a shared pas­time of cor­po­rate Canada — par­tic­u­larly, the in­vest­ment in­dus­try. But de­cid­ing which rules to scrap or change is a trick­ier task.

Af­ter all, in a dis­clo­sure-based mar­ket sys­tem, a re­quire­ment that is a bur­den to one com­pany can be the lifeblood of the in­vest­ment process for an­other. That ten­sion is ev­i­dent in the bar­rage of sub­mis­sions the CSA’s pro­pos­als have re­ceived.

One of the more fun­da­men­tal sug­ges­tions from the CSA is the idea of mov­ing away from tra­di­tional quar­terly fi­nan­cial re­port­ing and al­low­ing firms to an­nounce their fi­nan­cial re­sults semi-an­nu­ally in­stead. In the­ory, this would al­low com­pa­nies to slash the amount of dis­clo­sure they have to pro­duce and would nudge the mar­ket away from its fo­cus on short-term (quar­terly) re­sults and to­ward longer-term ob­jec­tives.

The idea has re­ceived a de­cid­edly mixed re­cep­tion from mem­bers of the in­dus­try. Al­though there’s some sup­port for shift­ing to semi­an­nual re­port­ing, there’s also a great deal of con­cern — from both in­vestors and the in­dus­try.

For ex­am­ple, the sub­mis­sion from the Cana­dian Coali­tion for Good Gov­er­nance (CCGG), a Toronto-based share­holder ad­vo­cacy group, on the CSA pro­posal states that the CCGG op­poses mov­ing to semi-an­nual re­port­ing, ar­gu­ing that in­vestors view quar­terly fi­nan­cial in­for­ma­tion as es­sen­tial.

The CCGG’s sub­mis­sion also states that semi-an­nual re­port­ing isn’t likely to be ef­fec­tive at push­ing pub­licly listed is­suers’ man­age­ment to adopt a longer-term view of their busi­nesses. As well, many com­pa­nies still will keep re­port­ing on a quar­terly ba­sis, ac­cord­ing to the CCGG’s sub­mis­sion, given that im­por­tant au­di­ences, such as in­sti­tu­tional share­hold­ers and U.S. reg­u­la­tors, will con­tinue to de­mand it.

The sub­mis­sion from the In­vest­ment In­dus­try As­so­ci­a­tion of Canada also de­fends the ex­ist­ing quar­terly re­port­ing regime, ar­gu­ing that mov­ing to a less fre­quent re­port­ing cy­cle “would be a de­par­ture from best prac­tices in the cap­i­tal mar­kets” and, that this sort of change “could make the Cana­dian cap­i­tal mar­kets less at­trac­tive to global in­vestors that are used to quar­terly re­port­ing that is typ­i­cal in North Amer­ica.”

Even ad­vo­cates for ven­ture is­suers — which of­ten are viewed as be­ing im­pacted the most by reg­u­la­tory re­port­ing re­quire­ments and could be ex­pected to sup­port any ef­fort to re­duce their com­pli­ance obli­ga­tions — aren’t in favour of a move to semi-an­nual re­port­ing.

The sub­mis­sion from the Cana­dian Se­cu­ri­ties Ex­change (CSE), which lists small, startup is­suers for the most part, states that the CSE and stake­hold­ers that it con­sulted in pre­par­ing its re­sponse to the reg­u­la­tors “are uni­fied in their op­po­si­tion to the pro­posal to per­mit semi-an­nual fi­nan­cial re­port­ing.”

Re­duc­ing the avail­abil­ity of fi­nan­cial in­for­ma­tion re­gard­ing small-cap com­pa­nies could turn off prospec­tive in­vestors about th­ese firms — which, the CSE sub­mis­sion states, would raise the cost of cap­i­tal for small-caps.

The CSE’s sub­mis­sion points out that small pri­vate com­pa­nies typ­i­cally are ex­pected to re­port to their out­side in­vestors on a monthly ba­sis; thus, quar­terly re­port­ing for th­ese com­pa­nies is less bur­den­some by com­par­i­son. As a re­sult, the CSE sub­mis­sion rec­om­mends not do­ing away with quar­terly re­ports.

How­ever, there’s more sup­port for other as­pects of the CSA’s pro­pos­als, such as the no­tion of elim­i­nat­ing some of the re­dun­dant re­quire­ments in fi­nan­cial state­ments, an­nual in­for­ma­tion forms, and man­age­ment dis­cus­sion and anal­y­sis dis­clo­sure.

There also is sup­port for de­liv­er­ing fi­nan­cial dis­clo­sure elec­tron­i­cally as much as pos­si­ble, with the caveat that in­vestors who still want to re­ceive dis­clo­sure on pa­per should have that op­tion.

Some sub­mis­sions sug­gest that the CSA should be think­ing big­ger. For ex­am­ple, the sub­mis­sion from TMX Group Ltd. rec­om­mends that the reg­u­la­tors foster in­no­va­tion in the prepa­ra­tion and de­liv­ery of con­tin­u­ous dis­clo­sure: “As se­cu­ri­ties reg­u­la­tors, the CSA plays a crucial role in defin­ing the ground rules for in­no­va­tion and set­ting the tech­no­log­i­cal stan­dards upon which third-party de­vel­op­ers can cre­ate so­lu­tions. By draft­ing se­cu­ri­ties leg­is­la­tion with a view to stan­dard­iza­tion and au­to­ma­tion, se­cu­ri­ties reg­u­la­tors can cre­ate a plat­form for tech­nol­ogy providers to cre­ate new and bet­ter sys­tems for com­pli­ance.”

The sub­mis­sion from Toron­to­based al­ter­na­tive trad­ing sys­tem Ae­quitas NEO Ex­change sug­gests that reg­u­la­tors look at pro­duc­ing a con­cise, fo­cused new dis­clo­sure doc­u­ment for is­suers, sim­i­lar to the Fund Facts doc­u­ments that have re­placed much of the tra­di­tional long, dense dis­clo­sure re­quired of in­vest­ment funds. That sub­mis­sion calls on the CSA to “de­sign a Fund Facts- like doc­u­ment for pub­licly listed com­pa­nies that will pro­vide in­vestors with the key in­for­ma­tion about the is­suer, in lan­guage they can eas­ily un­der­stand, at a time that is rel­e­vant to their in­vest­ment de­ci­sion.”

A hand­ful of sub­mis­sions call on the CSA to fol­low a re­cent de­ci­sion from the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) that al­lows is­suers to keep their pre-ini­tial pub­lic of­fer­ing (IPO) fil­ings con­fi­den­tial.

In July, the SEC be­gan al­low­ing all listed and po­ten­tially listed com­pa­nies to make con­fi­den­tial pre-IPO fil­ings. This al­lows th­ese com­pa­nies to eval­u­ate the mar­ket’s in­ter­est in an of­fer­ing and to re­fine their fil­ings be­fore they de­cide whether to go pub­lic with an is­sue. Sev­eral sub­mis­sions sup­port the idea of the CSA fol­low­ing suit.

Oth­ers sub­mis­sions raise con­cerns about the pos­si­ble im­pact on in­vestors by the pro­posed dis­clo­sure changes. Re­fer­ring to the SEC’s move, the sub­mis­sion from the In­sti­tute of Cor­po­rate Di­rec­tors (ICD) notes: “This de­vel­op­ment could mean less trans­parency in [the] mar­ket. While ac­knowl­edg­ing that we must re­main com­pet­i­tive, Canada should be cau­tious of re­duc­ing reg­u­la­tion in our unique mar­ket in an ef­fort to keep up with oth­ers at any given mo­ment in time.”

The ICD’s sub­mis­sion points out that fac­tors other than reg­u­la­tion play a big part in the health of the IPO mar­ket, and cau­tions that th­ese changes may have unan­tic­i­pated ef­fects that need to be con­sid­ered fully.

Semi-an­nual re­port­ing gar­ners mixed re­sponses

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