COMMENTARY — Disclosure in the marketplace

The Finance Committee of the Investment Dealers Association of Canada (IDA) agrees with the Toronto Stock Exchange Committee that the unrestricted flow of information from corporate issuers to investors is the lifeblood of public markets and that full, plain and true disclosure is integral to the integrity, efficiency and liquidity of the capital markets.

The IDA Committee is concerned that the TSE Committee has concluded that the level of disclosure in Canadian markets is inadequate. We are supportive of timely remedial action to address any shortcomings that may exist in our markets. In its report, the TSE Committee cited specific examples of misleading and inadequate disclosure in domestic markets. However, the TSE Committee has relied on the informal opinions and assessment of corporate disclosure by market participants to reach its conclusions, leaving some doubt about how widespread disclosure problems have been.

In particular, the TSE Committee refers to an analysts’ survey that concludes that 90% of the respondents believe that disclosure is better in the U.S.

than in Canada. We are concerned that reference to U.S. disclosure standards may suggest that respondents may have confused inadequate disclosure with less comprehensive, and possibly inadequate, disclosure requirements.

Canadian disclosure requirements are in fact less comprehensive than the requirements of the U.S. Securities and Exchange Commission, but it does not follow that Canadian corporations are not complying properly with their own domestic disclosure regulations.

Staff of the Ontario Securities Commission have pointed to concerns with respect to accounting and reporting problems in their 1995 financial statement and review program. Staff have stated that, as a result of these findings, more emphasis will be placed, over time, on the review of the continuous disclosure documents of issuers than on the review of offering documents.

The IDA Corporate Finance Committee supports this course of action on the grounds that inadequate disclosure is mainly the result of ineffective enforcement of the disclosure rules, and is properly addressed by improving disclosure standards and tightening the enforcement of these standards. The Committee believes it is unnecessary to adopt more complex remedies, such as imposing penalties and deterrents on Canadian corporations, to address disclosure problems encountered by the regulators.

The TSE Committee may have accumulated evidence of inadequate and improper disclosure from confidential testimony given by regulators and Canadian companies. However, the TSE Committee cannot expect the public to accept the sweeping remedy of extending civil liability to continuous disclosure documents without providing the evidence of such disclosure problems. Civil liability is a major step and carries with it significant risks for domestic public markets.

Civil liability would certainly make it easier for plaintiffs to seek redress for misinterpretation through class action lawsuits and, accordingly, should discipline the disclosure process. However, the threat of class action lawsuits and the potential liability for corporations and corporate directors may discourage companies from going public, and make it more difficult for companies to attract investors.

Moreover, the preventive action taken by companies to protect against the potential liability of class action suits would incrementally raise costs for these companies. We are aware that numerous Canadian companies have accepted civil liability in U.S. markets to raise capital in these markets and have not encountered difficulty retaining public directors. However, the relatively small number of large companies placing public offerings in U.S.

markets in recent years should not be taken as a representative sample by which to judge the impact of civil liability.

— The preceding is an excerpt from the “IDA Report,” published by the Investment Dealers Association of Canada.