Thank goodness disclosure doesn’t work. If it did, Canadian investors would be quite misinformed by the disclosure they’re getting.
That’s the takeaway from reading the Canadian Securities Administrators’ annual reviews of continuous disclosure by reporting issuers for the past seven years. During every one of those years except 2013, regulators found deficiencies in more than half of all issuer disclosure. The deficiency rates ranged as high as 76%; they were at or above 70% fully half the time.
In other words, when it comes to issuers’ continuous disclosure, deficiency is the norm. It’s reliably unreliable.
Of course, not all disclosure defects are truly serious in nature. Some are relatively trifling — merely flagged by regulators as things that the issuer should consider enhancing or must improve upon in the future.
However, a sizeable number are still classified each year as requiring immediate correction. Restatement and refiling have been ordered in 17% of cases, on average, and that number has climbed above 20% in the past two years.
Then there are the egregious flaws — the ones so serious that they prompted regulators to take some kind of enforcement action, including cease trading the issuer’s securities. For the past seven years this category has averaged about 6%, but it’s risen to the 8%–9% range in the past three years.
By any measure, these statistics are just plain horrible. They show that investors have been getting, or have been at risk of getting, seriously bad disclosure from Canadian reporting issuers more than a quarter of the time — and the most recent years’ results indicate that the problem is worsening.
Why is this happening? Are the majority of issuers unable to fully understand their disclosure obligations? That’s hard to believe. The rules may be complex, exacting and demanding, but they’re not unfathomable. In addition, most reporting issuers are sophisticated enterprises advised by brigades of specialized legal counsel and communications consultants well versed in the intricacies of securities regulation.
More likely, the high rate of deficiency reflects issuers’ attitudes toward compliance. There appears to be a decidedly minimalist approach to revelation, if not a widespread willingness to varnish the truth, and this seems to be coupled with a no-harm-in-trying brashness.
But there is harm in trying — especially if the trying goes on and on.
No matter how rigorously our regulators screen filings for misstatements and omissions, some are bound to get through. And the number that penetrate will be higher if the issuer community continually releases swarms of non-compliant reports and media communiqués.
Even if most retail investors never read any of this defective material, it contaminates the information that advisors use in formulating their recommendations to those investors. It also skews the data that analysts assess and fund managers consider when making decisions about portfolio adjustments, thereby harming the fund’s unitholders.
Moreover, unabated high rates of attempted non-compliance will undermine public confidence in issuers’ integrity and, by extension, erode public confidence in our capital markets.
So, the critical question is: why is this situation being tolerated? Canada’s securities watchdogs can be proud of their screening efforts, but that shouldn’t make them blind to the residual danger or complacent about what’s going on.
The statistics are shocking. They’re a wake up call — and that call has been ringing, unanswered, for too long.