Canadian securities regulators are proposing changes to the early warning reporting regime in Canada, in an effort to enhance market transparency and address concerns about the lack of disclosure required in the current regime.
The Canadian Securities Administrators (CSA) Wednesday published for comment proposed amendments to the early warning reporting regime in Canada.
The CSA says that the aim of the reforms is to provide greater transparency about significant holdings by: lowering the early warning reporting threshold to 5% from 10%; requiring disclosure of ownership changes, both increases and decreases, of at least 2%; and, proposing that certain equity derivative positions be included in determining whether the threshold has been reached, in order to ensure “hidden ownership” positions and “empty voting” are disclosed. It is also proposing more specific disclosure about an acquiror’s actual economic and voting interests in an issuer in required news releases and regulatory filings.
The CSA notice indicates that a number of market participants have recently expressed concerns with the current regime, including concerns that the current reporting threshold of 10% is too high, and that the disclosure included in the early warning reports isn’t adequate. The regulators also have concerns about the potential use of derivatives to avoid early warning requirements, insider reporting requirements and other disclosure requirements that are based on the concepts of beneficial ownership.
The primary purpose of the early warning system is to advise the market of significant accumulations of blocks of securities that may signal an imminent take-over bid. But the CSA also recognizes that the build up of significant holdings may also be material information to the market in other ways. They may limit liquidity and increase price volatility; market participants also may be concerned about who has the ability to vote significant blocks; and, the identity and presence of an institutional shareholder may be material to some investors, it says.
“In our view, our current threshold of 10%, introduced in 1987, does not respond to the reality of increasing shareholder activism and to the ability of a shareholder holding 5% to requisition a shareholders’ meeting,” the CSA says in its notice. “The objective of early warning disclosure is not only to predict possible take-over bids but also to anticipate proxy-related matters where a threshold of 5% may be critical. Our early warning disclosure requirements should recognize the realities of our current markets where a significant accumulation of securities is relevant for purposes beyond signaling potential take-over-bids.”
The CSA also says that it has found that the disclosure in early warning reports “is often inadequate and does not sufficiently inform investors”. It says that more detailed disclosure of “the intentions of the person acquiring securities and the purpose of the acquisition would enhance the substance and quality of early warning reporting.”
Additionally, it says that changes are required in order to ensure proper transparency of securities ownership in light of the increased use of derivatives. The proposed amendments would require disclosure of an investor’s economic interest in an issuer as well as its voting interest in the case of securities lending arrangements. An investor would also have to disclose that it has entered into related financial instruments and other arrangements, such as total return swaps, contracts for difference, and other derivatives that provide a notional long position.
“Disclosure to investors of any change that may influence or affect control of an issuer is essential for market transparency and investor confidence,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC). “The CSA believe that early warning disclosure requirements should recognize that accumulation of securities at the 5% threshold is relevant and that transparency of securities ownership is needed in light of the increased use of derivatives by investors.”
The CSA notice indicates that the regulators are not proposing comprehensive reforms to the alternative monthly reporting framework for eligible institutional investors (EII), but that some of the proposed amendments will apply to an EII, and it is proposing a change to the criteria for disqualification from alternative reporting. “We will consider more comprehensive changes to the AMR regime as part of a future review,” it says.
The proposed amendments are out for comment until June 12.