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 semi-annual 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 Toronto-based 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.
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