BCN 2001/39 - Proposed National Policy 51-201 Disclosure Standards and Rescission of National Policy 40 Timely Disclosure [BCN - Rescinded]

Introduction

We (the Canadian Securities Administrators, or CSA) have become increasingly concerned about the selective disclosure of material corporate information by companies to analysts, institutional investors, and other market participants.  Selective disclosure occurs when a company discloses material nonpublic information to one or more individuals or companies and not broadly to the investing public.  The practice of selective disclosure poses a serious threat to investor confidence in the fairness and integrity of the capital markets.

The purpose of proposed National Policy 51-201 Disclosure Standards (“Policy 51-201 ”) is to:

• describe the timely disclosure requirements and the confidential filing mechanism contained in securities legislation;
• provide interpretive guidance on existing legislative prohibitions against selective disclosure;
• highlight disclosure practices where companies take on a high degree of risk in light of the legislative prohibitions against selective disclosure;
• give examples of the types of information likely to be material under securities legislation; and
• list some “best disclosure” practices that can be adopted by companies to ensure that they comply with securities legislation.

Policy 51-201 is a CSA initiative and all CSA jurisdictions expect to implement it as a policy.

Background

The Allen Committee

In Canada, attention was focused on the practice of selective disclosure in 1995 when The Toronto Stock Exchange Committee on Corporate Disclosure (the “Allen Committee”) released its Interim Report.  The Allen Committee acknowledged the importance of meetings with analysts in “fostering open and thorough continuous disclosure practices”.  It recognized that “benefits may flow to the markets from the legitimate efforts of securities analysts who use their professional expertise to process detailed data and information into commentary that investors find useful and can digest relatively quickly and improve the flow of corporate information into the marketplace”.  Nevertheless the Allen Committee was concerned that private meetings with analysts and professional investors had resulted in “selective disclosure of information that should have been disclosed on a general basis”.  “Quite apart from any questions of compliance with securities laws”, the Allen Committee suggested that this causes “unfairness in the marketplace”.

The Allen Committee made recommendations designed to equalize access to information among investors including:  group analyst meetings with retail investor access; wide availability of data books and additional information; and electronic access to corporate information.

Ontario Securities Commission Staff Survey

In October 1999, staff of the Continuous Disclosure Team of the Ontario Securities Commission (the “OSC”) conducted a survey of disclosure practices of public companies.  Four hundred public companies were randomly selected across all industries to participate in the survey.  It explored several areas including: (i) company policies surrounding meetings and discussions with analysts and other groups; (ii) company responses to requests for information that is not available on the public record; (iii) company procedures if material nonpublic information is inadvertently disclosed to select groups; and (iv) the existence of company disclosure policies that address these and related issues.

The OSC published the results of the survey in July 2000.¹

^{1 See Ontario Securities Commission Staff Notice 53-701 Staff Report on Corporate Disclosure Survey ((2000) 23 OSCB 5098).}

In general, the results of the survey indicated that the extent and nature of corporate disclosure policies and practices of issuers are not sufficient to reduce the potential for selective disclosure.  For example:

• 71% of the respondents do not have written corporate disclosure policies;
• 81% of the respondents reported that they have one-on-one meetings with analysts;
• 98% of the respondents reported that they typically comment in some form on draft analyst reports; and
• 27% of the respondents indicated that they express a level of comfort on earnings projections.

Initiatives in Other Jurisdictions

United States

The U.S. Securities and Exchange Commission adopted Regulation FD effective October 23, 2000.²

^{2 See Release Nos. 33-7881, 34-43154, IC-24599, File No. S7-31-99 Selective Disclosure and Insider Trading.}

It requires that reporting companies disclose material information through broad non-exclusionary public means and not selectively to securities analysts and other market professionals.  Whenever an issuer, or any person acting on its behalf, discloses material nonpublic information to specified persons, the issuer must simultaneously (for intentional disclosures) or promptly (for non-intentional disclosures) make public disclosure of that information.

Regulation FD represents a change in the SEC's approach to the issue of selective disclosure.  Over the past thirty years or so, the SEC has framed the issue of potential liability for selective disclosure under principles of fraud law (i.e., Rule 10b-5).^{3 
 
3 Rule 10b-5 provides that “it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or the mails or of any facility of any national stock exchange: (a) To employ any device, scheme or artifice to defraud; (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading; or (c) To engage in any act, practice or cause of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security”.}

Rule 10b-5 is a general anti-fraud rule from which U.S. courts have implied a prohibition against “tipping” and which has evolved and been variously interpreted by U.S. courts over the past several decades.  This approach led to uncertain results in establishing which type of selective disclosure is prohibited.⁴

^{4 See for example, Dirks v. SEC, 463 U.S. 646 (1983), in which the U.S. Supreme Court stated that an analyst tippee would be subject to insider trading liability if the tipper breached a fiduciary duty to shareholders in disclosing material non-public information and the tippee knew or should have known of the breach.  As articulated by the Supreme Court, breach of a fiduciary duty exists where the "insider" will benefit, directly or indirectly, from the disclosure such as a pecuniary gain or a reputational benefit that will translate into future earnings.}

Given its recognition that issuers retain control over the precise timing, audience and forum for important corporate disclosure, the SEC has adopted Regulation FD as an issuer disclosure rule.

We considered adopting a rule similar to Regulation FD but concluded it is unnecessary.  The existing Canadian insider trading and tipping regime sets out a specific and comprehensive code which, among other things, prohibits all selective disclosures other than those made in the “necessary course of business”. 

Appendix A contains a chart comparing the Canadian and U.S. rules on selective disclosure.

Australia

In November 1999 the Australian Securities and Investment Commission ("ASIC") issued a draft guidance note and discussion paper ("Heard it on the Grapevine...") that proposed guidelines for providing investors with fair access to information and avoiding selective disclosure.  While not proposing a change in regulations, the paper suggested "best disclosure practices" in keeping with existing regulatory requirements.  After issuing the paper, ASIC, together with the Australian Stock Exchange ("ASX"), embarked on a six-month continuous disclosure surveillance campaign.⁵

^{5 ASX continuous disclosure rules require listed companies to reveal immediately any information that could reasonably be expected to affect the company's share price.}

On August 23, 2000, ASIC released its final guidance note entitled "Better Disclosure for Investors".^{6 
 
6 Seehttps://www.asic.gov.au.}

It provides issuers with practical steps that companies can take to improve investor access to their information.  Policy 51-201 includes guidance derived from ASIC’s “Better Disclosure for Investors”.

Proposed Rescission of National Policy Statement 40

We propose to rescind National Policy Statement No. 40 Timely Disclosure (“NPS 40”) when Policy 51-201 comes into force.

NPS 40 would no longer be necessary because (i) the guidance provided in proposed Policy 51-201 incorporates the guidance previously forming part of NPS 40; and (ii) the relevant exchanges have rules and policies in place concerning timely disclosure.⁷

^{7 See The Toronto Stock Exchange Statement on Timely Disclosure and Related Guidelines, the Canadian Venture Exchange Policy 3.3 Timely Disclosure, and Policy I-8 Timely Disclosure By Listed Companies of the Bourse de Montréal Inc. (formerly the Montreal Exchange).}

Comments

You are invited to make written submissions on proposed Policy 51-201 and the proposed rescission of NPS 40.  In particular, we are requesting comment on:

(i) our approach to the “necessary course of business” exception.  For example, should the “necessary course of business” exception cover communications made to a potential private placee? (See section 3.4 of the policy).

(ii) our approach for determining how a company may satisfy the “generally disclosed” requirement under the tipping provisions.  For example, are there other means of satisfying the “generally disclosed” requirement? (See section 3.5 of the policy).

(iii) the practicalities of the recommended “best disclosure” practices in Part VI of the policy. 

We will consider submissions received by July 25, 2001.

Please send your submissions to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission, in duplicate, as indicated below: 

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Department of Government Services and Lands, Newfoundland and Labrador
Registrar of Securities, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territory
Registrar of Securities, Nunavut

c/o John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 1903, Box 55
Toronto, Ontario M5H 3S8
E-mail:  jstevenson@osc.gov.on.ca

Please also send your submissions to the Commission des valeurs mobilières du Québec as
follows:

Denise Brosseau, Secretary
Commission des valeurs mobilières du Québec
Stock Exchange Tower
800 Victoria Square
P.O. Box 246, 22nd Floor
Montréal, Québec H4Z 1G3

We request that you submit a diskette containing the submissions (in DOS or Windows format, preferably WordPerfect).  We cannot keep submissions confidential because securities legislation in certain provinces requires that a summary of the written comments received during the comment period be published.

Please refer your questions to any of:

Sheryl Thomson
Senior Legal Counsel
British Columbia Securities Commission
(604) 899-6778
E-mail: sthomson@bcsc.bc.ca

Cameron McInnis
Associate Chief Accountant
British Columbia Securities Commission
(604) 899-6767
E-mail: cmcinnis@bcsc.bc.ca

Jane Brindle
Legal Counsel
Alberta Securities Commission
(403) 297-4482
E-mail: jane.brindle@seccom.ab.ca

Barbara Shourounis
Director
Saskatchewan Securities Commission
(306) 787-5842
E-mail: bshourounis@ssc.gov.sk.ca

Sophie Jean
Conseillère en réglementation
Commission des valeurs mobilières du Québec
(514) 940-2199 ext#4578
E-mail: sophie.jean@cvmq.com

Susan Wolburgh Jenah
General Counsel
Ontario Securities Commission
(416) 593-8245
Email: swolburghjenah@osc.gov.on.ca

Rossana Di Lieto
Legal Counsel, General Counsel’s Office
Ontario Securities Commission
(416) 593-8106
E-mail: rdilieto@osc.gov.on.ca

Lisa Enright
Senior Accountant
Continuous Disclosure
(416) 593-3686
E-mail:  lenright@osc.gov.on.ca

Christopher Byers
Legal Counsel, General Counsel's Office
Ontario Securities Commission
(416) 593-8058
Email:  cbyers@osc.gov.on.ca

May 25, 2001

Douglas M. Hyndman
Chair

Ref: NP 40

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.

APPENDIX A to BCN 2001/39

COMPARISON OF “TIPPING” PROVISIONS IN CANADIAN SECURITIES LAW AND REGULATION FD

Note: The “tipping” provisions contained in securities legislation are generally similar across Canada.  However, the CSA caution that some differences do exist in these legislative provisions.  Market participants should therefore consult the applicable legislation of each province and territory for details of the relevant prohibitions.