The Canadian Securities Administrators (CSA) want to overhaul how companies inform investors. While the initiative aims to reduce compliance burden, investors may suffer if disclosures become less frequent.
In the spring, the CSA published proposed reforms to continuous disclosure requirements for issuers. The goal is to streamline and consolidate reporting.
The proposals would combine the existing financial statements, management discussion and analysis, and annual information form into a new annual disclosure statement for annual reporting, and an interim disclosure statement for interim reporting. The proposals also suggest allowing venture companies to move to semi-annual reporting rather than quarterly, and would eliminate redundant reporting requirements.
Similar reforms for the investment fund sector had not been released before Investment Executive went to press.
In the meantime, the CSA’s proposals for public companies, which were out for a 120-day comment period that concluded on Sept. 27, attracted extensive feedback. Submissions generally applauded the objectives of streamlining companies’ continuous disclosure demands and curbing regulatory costs.
Investors could benefit from the changes too. To meet regulatory requirements, existing issuer disclosure is often larded with “repetitive and boilerplate language,” noted the TMX Group Ltd.’s submission. That means investors must wade through it to get to the good stuff. Streamlining requirements should discourage reliance on boilerplate, resulting in “more meaningful disclosure to investors,” the TMX said.
However, Jean-Paul Bureaud, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), said continuous disclosure reforms probably won’t do much for investors, as the information investors receive from companies would remain substantially the same.
Bureaud said he’s more worried about the risks of an “access equals delivery” model for providing that information to investors. In such a model, issuers fulfil their document-delivery obligations by alerting stakeholders that a document is publicly available on SEDAR, the regulatory filing website, and on the issuer’s website — instead of by sending the document directly.
The CSA indicated that its proposals have anticipated an “access equals delivery” model being adopted.
In January 2020, the CSA issued a consultation paper concerning the “access equals delivery” model. Ontario’s Capital Markets Modernization Taskforce also recommended the model in its report released this past January. The task force argued the need to move to primarily electronic delivery has been made more urgent by the pandemic, and recommended the model be adopted in Ontario within six months in hopes the rest of the CSA would follow.
The regulators are taking longer than the task force hoped. The CSA has yet to publish rule proposals for a new disclosure delivery model, and in June the CSA announced that the planned rollout of an improved SEDAR — SEDAR+ — which was supposed to begin late this year has been delayed, probably to the second half of 2022.
The CSA aims to adopt its reforms to the continuous disclosure rules by the end of 2023.
While there’s support for the underlying goal of the CSA’s proposals, submissions raised concerns with some details. For example, the large insurance companies noted that an “access equals delivery” model would probably be unavailable to banks and insurers under existing federal legislation. As a result, consolidating their reporting into a larger annual disclosure statement without the option of electronic delivery could increase their compliance costs. (Smaller issuers also cautioned that the proposals could increase their regulatory burden.)
Yet the proposal that raised the most concern was allowing smaller firms to provide investors with less frequent financial disclosure.
The Canadian Public Accountability Board’s submission warned that less frequent reporting “could reduce the quality and integrity of financial reporting, and ultimately investor protection,” and may also expose companies to a greater risk of fraud as their internal controls get dialed back.
Toronto-based securities class-action litigators Siskinds LLP also argued against allowing semi-annual reporting, stating that investors need “timely disclosure of accurate, decision-useful information” in documents subject to civil liability under securities law.
Davies Ward Phillips & Vineberg LLP, the venerable Bay Street firm, suggested the proposed introduction of semi-annual reporting is less a burden-reduction initiative and “more of an attempt by the CSA to address, like other regulators have attempted to, the short-term mindedness of capital market participants and refocus on the longer-term. This is a different conversation and set of issues.”
Moreover, while semi-annual reporting has been introduced in certain countries — including the U.K., Australia and parts of Europe — Davies noted that adopting it in Canada would put our market out of step with the U.S., which hasn’t indicated it would move to semi-annual disclosure from quarterly.
Still, the idea of allowing semi-annual reporting on a voluntary basis has attracted support. Ontario’s task force recommended experimenting with semi-annual reporting as an option for small issuers, particularly pre-revenue firms for which the cost of complying with quarterly reporting is most meaningful.
And, in response to the CSA consultation, the Investment Industry Association of Canada also indicated that semi-annual reporting may make going public more appealing for small firms.
The proposals drew other concerns. Some comments suggested the CSA should address the growing demand for increased disclosure about environmental, social and governance (ESG) issues in general — and sustainability issues in particular — as part of the disclosure overhaul.
For example, the Canadian Advocacy Council of CFA Societies Canada stated it was “surprised” the CSA’s proposals didn’t cover ESG reporting: “We firmly believe that any such mandated [ESG] disclosure should be an integrated part of annual disclosure statements and not be contained in a stand-alone document for ease of investor access.”
Ontario’s task force also called for new mandatory ESG disclosure requirements.
While the CSA didn’t address ESG this time around, investor demand for disclosure in this area is growing.