The Ontario Securities Commission, Canada’s largest securities regulator, is coming out with new guidelines on selective disclosure. Is this Canada’s answer to Regulation FD? Well, not quite.
For their part, Canadian regulators have been considering the dangers of selective disclosure. ‘We have been looking at this a while now,’ proclaims John Hughes, manager of continuous disclosure for the OSC. Soon after selective disclosure tremors hit the US in earnest in fall 1999, the OSC conducted a survey of corporate disclosure practices in Canadian companies to identify areas where additional guidance from regulators might be necessary. The results showed that help was needed: 71 percent of respondents did not have written corporate disclosure policies even though 81 percent were having one-on-one meetings with analysts. Combined, those figures sounded selective disclosure alarm bells. Moreover, 98 percent of respondents said they typically comment – in some manner – on draft analyst reports, while 27 percent were willing to express a level of comfort with earnings projections. In short, the OSC found definite room for improvement from the issuer’s end in order to eliminate selective disclosure.
A new national policy
The next step, according to the commission, is to issue a policy statement on selective disclosure. Due at the end of February, it will apply across the country. Unlike the US, Canada’s regulatory bodies are decentralized – each province has its own securities commission. So all national policies must be approved by the Canadian Securities Administrators (CSA), which includes regulators from the provinces and territories, and which is currently reviewing the Ontario Securities Commission’s new policy. OSC chairman David Brown recently announced that, once approved, the national policy statement would be subject ‘to comments from the industry for 60 days in Ontario and up to 90 days in the other provinces.’
‘The new policy statement will do two things,’ says Hughes. ‘First, it will lift the standard of disclosure for all public companies and get the message out about new technologies which can help disseminate corporate news faster. And second, it will talk about specific examples of where we think issuers are crossing the line with regard to selective disclosure, for example a corporate officer talking to analysts.’
According to an OSC report, the national policy statement also suggests practical steps, such as developing written disclosure policies. The overall goal is to encourage public companies ‘to aim for best practice in their disclosure regime, not just minimum level of compliance with the law.’
Essential difference
Canada’s new national policy on selective disclosure ‘will not cover any new ground but will simply provide guidelines on what constitutes selective disclosure and how to avoid it,’ says Hughes. This is the essential difference between the SEC’s Reg FD and Canada’s policy: Reg FD represents a new regulation; the national policy statement will simply reiterate what is already covered in Section 76 of the Ontario Securities Act and National Policy Statement 40.
Before FD, US regulators had no real mechanism for punishing public companies that selectively disclose corporate information. Instead, selective disclosure was dealt with from the investor standpoint under insider trading and anti-fraud laws. ‘The case law under the anti-fraud rules states that the person you go after for insider trading has to have been in a position of trust with the company – they had to have breached their fiduciary duty,’ says Brian Lane, partner at Gibson Dunn & Crutcher in Washington, DC. ‘Then Reg FD changed the whole equation because now there is a mechanism to go after the person who tips; if an analyst asks a company how their quarter is going, it’s the issuer’s duty to speak to everyone at once.’
Current Canadian regulations do, however, hold public companies accountable for selective disclosure of material information. ‘These laws have been in place for 20 years, and if you are found in breach of them, you can ultimately end up in jail for two years or fined up to $1 mn,’ says Ross McKee, a partner at Blake Cassels & Graydon in Toronto. ‘The fundamental obligation on the issuer’s part is included in s.75 [of the Ontario Securities Act] which outlines the reporting issuer’s duty to report by press release any material change,’ he says. ‘Then s.76 says that no reporting issuer and/or person in a special relationship shall inform another person of any material fact or change before it has been generally disclosed.’
McKee says most provinces have statutes similar to s.75 and s.76 of the Ontario Securities Act included in their own legislation. And National Policy Statement 40, which all provinces have agreed to, outlines disclosure guidelines similar to those in the Act.
Gray zone
Even though this new national policy statement is not a new regulation per se, it will affect disclosure practices by clarifying certain communications practices. Ross McKee points to a ‘gray zone’ clause included in the old regulation which he thinks will be the focus of the new guidelines. ‘Under s.76, a reporting issuer is not responsible for disclosing material fact or change if the exchange is part of the ordinary course of business. So the question becomes, Is talking to an analyst in the ordinary course of business?’
‘Some issuers may have in the past suggested that analysts have a special relationship with the company but that has never been the official view of any regulator,’ McKee continues. He says Canadian securities lawyers commonly refer to the practice of disclosing material information to analysts as ‘fencing the tight rope’. In his view, the new national policy will simply support what securities lawyers have been saying all along: disclosing non-public material information to any party is risky.
According to the OSC’s John Hughes, the new policy will directly address one-on-ones with analysts. ‘There are subtle variations where an IRO might think they are just helping an analyst with one particular number or just a few underlying assumptions which might not be saying much of anything,’ he explains. ‘But when you factor that into this big calculation, a totally different number might come out the other side and you may have influenced the work the analyst is doing. It is our hope that this new policy statement will better define that gray zone.’
Head start
Joey Brown, president of the Canadian Investor Relations Institute, thinks IROs will react favorably to the guidelines. ‘Canadian IROs are well along the way to addressing what regulators may be concerned about and all that’s needed are clear guidelines and education. We have been proponents of avoiding selective disclosure all along.’
Ciri released its Standards and Guidance on Disclosure in 1998 and is currently working on an adjunct to those guidelines. ‘We are just in the process of putting the finishing touches on our model disclosure policy,’ says Brown. Like the OSC’s new policy statement, Ciri’s new guidelines include practical suggestions on how to avoid selective disclosure. As Brown says, ‘We are suggesting companies have a disclosure policy committee and designated spokespersons responsible for electronic communications; we are also including advice on blackout periods, maintaining confidentiality, press releases and analyst contacts.’
The Toronto Stock Exchange has also been a great proponent of equal access to information for investors. The TSE’s policy statement on timely disclosure requires listed companies to disclose material information immediately upon the information becoming known to management of the company or upon it becoming apparent that the information is material. Separate disclosure standards for mining companies were introduced in 1999 to augment the requirements for these issuers. The TSE has also developed guidelines on confidentiality and employee trading as well as electronic communications disclosure. ‘These guidelines are designed to assist companies in meeting their obligations,’ says Eleanor Fritz, TSE manager of corporate disclosure and compliance.
Internal efforts
The implementation of Reg FD, together with the efforts of domestic regulators, have brought the selective disclosure issue to the attention of Canadian IROs. Reg FD does not currently apply to foreign issuers, but Canadian companies have nonetheless taken note of it. ‘There is a harmonization between the US and Canada in terms of disclosure,’ says Jane Watson, managing director at the Barnes Organization. ‘Our disclosure practices tend to be very similar to US practices because as Canadians we benchmark against US peers and many of our companies are interlisted.’
‘Most larger Canadian companies comply with the spirit of Reg FD because most of us have a significant shareholder base in the US as well as Canada and want to ensure we are complying with best practices,’ adds John Rogers, director of investor relations for Suncor Energy. At Suncor, Rogers has long been using new technologies to meet disclosure requirements. ‘We have been webcasting our quarterly releases for a couple of years and now most of our calls are open to both the media and retail investors through this technology,’ he says. ‘We are also starting to look at videoconferencing some of the analyst meetings we attend.’
The use of new technologies for disclosure purposes is growing apace in Canada. ‘Canada is in second place after the US in terms of the number of webcasts public companies are doing per year,’ avers Melanie Kurzuk, director of corporate communications at Canada Newswire. ‘By the end of this year, we estimate about 50 percent of publicly traded companies will be doing some form of webcasting.’
The focus on FD is also encouraging IROs to write internal disclosure policies, as suggested by Ciri and the OSC. Rogers is updating Suncor Energy’s written disclosure policy, while other IROs, like Darlene Markes, newly-appointed director of investor relations for Burlington, Ontario-based HCI, are in the process of writing disclosure policies for the first time. Markes is drawing on a number of resources including the OSC, the SEC, Ciri, the TSE and the NYSE to write HCI’s policy. ‘My own legal counsel and my peers are also wonderful resources for the written disclosure policy,’ she says. ‘This is definitely a top priority for my investor relations program.’
Culture shift
The OSC’s John Hughes says the new national policy statement is representative of a cultural shift which has placed corporate information in broad demand. ‘Information has a prominence now that it didn’t have in the past. I think there are far more people now who would feel personally offended if a company were to share insights with bigger institutions before they were available to them,’ he says. ‘Five years ago that would have struck people as an esoteric matter but now there are a lot more individuals who have a direct involvement [with corporations].’
Lawyer Ross McKee also acknowledges the cultural changes that have pushed fair disclosure to the main stage of corporate communications. ‘Before it wasn’t practical to invite everybody to a meeting in a hotel room or on a conference call whereas now, through teleconferencing and the internet, people can sit in a room anywhere and listen,’ he says. ‘The tools have now made this information available and investors want to listen. In short, the argument that it’s between us professionals no longer stands.’
