BCN 2002/30 - Notice of Policy under the Securities Act National Policy 51-201 Disclosure Standards and rescission of National Policy 40 Timely Disclosure [BCN - Rescinded]
I. Notice of Policy and Rescission of Policy
The Commission, together with the other members of the Canadian Securities Administrators (the CSA or we), has adopted National Policy 51-201 Disclosure Standards (“the Policy”).
We have also rescinded National Policy 40 Timely Disclosure.
We published the Policy for comment on May 25, 20011. Appendix A contains a list of the people and organizations who commented. We made changes to the Policy in response to these comments. Appendix B summarizes the comments and our responses. The changes as a whole are not material and do not introduce any new approaches. Accordingly, we are not re-publishing the Policy for comment.
II. Substance and Purpose of the Policy
The Policy addresses concerns about the practice of selective disclosure. Selective disclosure occurs when a company discloses material non-public information to one or more individuals or companies and not broadly to the investing public. Selective disclosure creates opportunities for insider trading and damages investor confidence in the fairness and integrity of the capital markets.
We have not introduced new law in this area as existing Canadian legislation on “tipping” already prohibits selective disclosure. The Policy has two aims. First, it will help ensure that investors have equal access to important information that may affect their investment decisions. Second, it will help companies navigate between business pressures and legislative requirements. To achieve these goals, the Policy:
- describes timely disclosure obligations for reporting companies and the confidential filing mechanism contained in securities legislation;
- provides interpretive guidance on existing legislative prohibitions against selective disclosure;
- highlights disclosure practices where companies take on a high degree of risk in light of the legislative prohibitions against selective disclosure;
- gives examples of the types of information likely to be material under securities legislation; and
- lists some “best disclosure” practices that can be adopted by companies to help manage their disclosure obligations.
III. Summary of Responses to Specific Requests for Comment
In this section we discuss the comments received to the specific questions that we raised in the May 2001 notice and our responses. A more detailed summary of the comments received on these specific issues and our responses to the commenters is included in Appendix B.
1. Necessary course of business exception
We asked for specific comment on our approach to the “necessary course of business” exception. In particular, should the “necessary course of business” exception cover communications made to a potential private placee?
The May 2001 version of the Policy stated that disclosures by a company in connection with a private placement might be in the “necessary course of business”. Commenters were divided as to whether this was the right approach. Commenters who supported our approach argued that receipt of material information might be necessary for companies to raise financing. In addition, private placees will typically negotiate with the company for the information that they need in order to make an investment decision. Commenters who opposed our approach argued that private placees, who purchase directly from the company, should not be in a better position (i.e., an informational advantage) than secondary market investors.
We considered the various arguments and decided to maintain our original approach. We are concerned that if we take a more restrictive interpretation of the “necessary course of business” exception we may be unduly interfering with the ability of companies to raise funds in the exempt market. We also believe that the legislation provides adequate protections for secondary market investors by prohibiting private placees from further disclosing information received from the company (other than in the “necessary course of business”), and from trading with knowledge of this information until it has been “generally disclosed”. To address some of the commenters concerns, however, we have added more guidance in the Policy, which recommends that companies make disclosure of such information to the marketplace at the earliest opportunity.
2. Generally Disclosed
We asked for specific comment on our approach for determining how a company may satisfy the “generally disclosed” requirement under the tipping provisions.
The May 2001 version of the Policy explained how courts and the commissions have interpreted the term “general disclosure”. We indicated that a company will likely satisfy the “generally disclosed” requirement under the tipping provisions, for example, by issuing a news release distributed through a widely circulated news or wire service, or making an announcement through a press conference or conference call provided that adequate notice has been given and members of the public may attend or listen to it. We also said that posting information on the company’s Web site would not, by itself, be likely to satisfy the “generally disclosed” requirement.
We received three comment letters, which said that news releases should be the only acceptable means of generally disclosing material information. One commenter argued that posting information to a company’s Web site should be considered general disclosure.
We agree that disclosure by news release is probably the safest way to ensure general disclosure of material information2. But we do not believe that it is the only way for companies to make “general disclosure”. Securities legislation in this area does not require use of a particular method, or establish a “one size fits all” standard for disclosure; rather it is essential that a company choose a disclosure method that will ensure dissemination of material information in a manner that will effectively reach the market place. The guidance contained in insider trading case law gives companies considerable flexibility in choosing appropriate methods of “general disclosure”. We therefore believe that it would be undesirable for us to change the Policy to suggest that companies can make “general disclosure” only through a news release3. As regulators, we do not want to hinder the use of current technologies in the disclosure process provided that the goals of securities regulation are not undermined.
2In the case of a “material change”, securities legislation requires that issuers must issue and file a press release.
3We note that commenters in the United States are urging the SEC to take a more flexible approach in this area as well. In April 2001, the SEC sponsored a public roundtable discussion to discuss the impact of Regulation FD. The roundtable included issuers, institutional investors, securities analysts, and journalists. One of the issues discussed was the use of technology by issuers to make disclosure. In December 2001 former Commissioner Laura Unger released a report examining the effects of Regulation FD and the concerns raised by roundtable participants (the “Unger Report”). The Unger Report cites comments by roundtable panellists expressing frustration about rules of the US stock exchanges which mandate paper press releases to disclose material information and urging the SEC to permit Regulation FD disclosures by Internet Web site posting. The Unger Report recommends that the SEC should: (i) explore with the exchanges ways to amend their rules to permit greater use of technology to disseminate material information; (ii) allow Regulation FD disclosures to be made by adequately noticed Web site postings, fully accessible webcasts and electronic mail alerts; (iii) encourage issuers to post written transcripts of webcast presentations and to archive webcasts and transcripts on their Web sites. (See Laura Unger, “Special Study: Regulation Fair Disclosure Revisited”).
We also considered whether we should rethink our position with respect to Web site postings. We believe that a company’s Web site can be an important component of an effective disclosure process and encourage companies to make use of the Internet to improve investor access to corporate information. We do not believe, however, that posting material information on a company’s Web site would alone constitute “general disclosure”. Information that is posted to a Web site is not effectively “pushed” out to the marketplace. Instead, investors must seek out this information themselves. As technology evolves in this area we will revisit the guidance in the Policy relating to this issue.
3. Best Disclosure Practices
We asked market participants for comment on the practicalities of a company implementing the recommended “best disclosure” practices in the Policy.
Commenters generally supported the recommended “best disclosure” practices. One commenter was concerned that the suggested “best practices” will become mandatory requirements, despite our intent that the Policy not be prescriptive. The commenter was also concerned that the guidelines may be burdensome for smaller companies.
The Policy is intended to assist companies in managing their disclosure obligations and minimize the risk of breaching securities law by highlighting some risky disclosure practices. The Policy’s objective is to outline what we consider to be good disclosure practices, not to impose regulatory requirements. Hopefully, companies will also recognize the benefits of good disclosure in terms of corporate credibility and market integrity. Each company needs to exercise its own judgement and develop a disclosure regime that meets its own needs and circumstances. We recognize that many large companies have specialist investor relations staff and devote considerable resources to disclosure, while in smaller companies this is often just one of the many roles of senior management. We encourage companies to consider adopting the measures discussed in the Policy, but they should be implemented flexibly and sensibly to fit the situation of individual companies. Where particular methods of achieving good disclosure are suggested, our intention is to give meaningful guidance, not to tell companies that no other way is acceptable. Finally, we attempted to reflect in the Policy disclosure practices that many companies have voluntarily adopted4.
4For example, the Canadian Investor Relations Institute (“CIRI”) conducted a survey of its member companies in May 2001. The CIRI survey showed that 60% of respondents had a written disclosure policy and of those without one, 83% were contemplating developing one within the next 12 months. In 2000, only 43% reported that their company had a written disclosure policy.
IV. Summary of Changes to Policy
Appendix B to the Notice summarizes the changes made to the Policy in response to comments received. We draw your attention in particular to the following changes:
“Necessary Course of Business”
- the list of examples of possible “necessary course of business” communications has been expanded to address certain communications with controlling shareholders (see section 3.3(4) of the Policy);
- we explained why we believe that issuer communications with credit rating agencies may be in the “necessary course of business” (see section 3.3(7) of the Policy); and
- the following guidance relating to a company’s communication with the media has been added:
- we explain that relationships with the press and other media, though often contributing to a well informed market, need careful management in instances where undisclosed material information is involved; and
- we stress that companies are not prohibited from speaking with the media about non-material information or material information that has been previously disclosed (see section 3.3(8) of the Policy).
- the discussion relating to “general disclosure” has been clarified to recommend that a company make a replay or transcript of analyst conference calls available to the public for a reasonable amount of time (see section 3.5(4) of the Policy)5
5The May version of the Policy did not explicitly say that replays were necessary.
- more examples of material information were added (see section 4.3 of the Policy); and
- we amended the discussion relating to the timely disclosure policies of the various exchanges to stress the importance of issuer compliance (see section 4.5(2) of the Policy).
Risks Associated with Certain Disclosure
- guidance has been added to say that companies should be careful about circulating analyst reports to shareholders or potential investors, as this may constitute an endorsement of the report (see section 5.2 (4) of the Policy); and
- the discussion relating to the “duty to update” was amended to:
- delete the suggestion that the obligation to disclose “material changes” creates a “duty to update” voluntary forward looking statements;
- remind companies that some provincial securities laws prohibit a person, while engaging in investor relations activities or with the intention of effecting a trade in a security, from making a statement that the person knows, or ought reasonably to know, is a misrepresentation;6
6This prohibition could impliedly extend to a previously issued statement which the market continues to rely upon but has subsequently become misleading and has not been amended or withdrawn.
- recommend that as a matter of “good practice” companies should update earnings estimates; and
- emphasize that whatever a company’s practice is, the company should explain its update policy to investors when making a forward looking statement (see Section 6.9 of the Policy)7.
7The discussion relating to the “duty to update” appeared in section 5.7 of the May version.
Best Disclosure Practices
- we added a recommendation that a company’s board or audit committee should review the following disclosures in advance of their public release by the company:
- earnings guidance issued by the company; and
- news releases containing financial information taken from the company’s financial statements prior to the release of such statements.
- we have also clarified that pre-releasing information taken from the company’s financial statements without prior board or audit committee review is inconsistent with the requirements of some provinces that require board or audit committee approval of interim and annual financial statements (see section 6.4 of the Policy);
- we amended the guidance on the recommended scope of a company’s “quiet period” to say that:
- companies should avoid discussing earnings expectations and other financial information with analysts and investors during the “quiet period”; and
- being in the “quiet period” should not prevent a company from conducting normal course communications with analysts or investors or from participating in investor conferences or meetings to discuss information that is in the public domain or that is non-material information (see section 6.10 of the Policy)8.
8The May version of the Policy recommended that companies consider stopping all communications with analysts, institutional investors and other market professionals during the “quiet period”.
- we added a recommendation that companies concurrently post to their web sites all information that they file on SEDAR (see section 6.12(2) of the Policy).
We also note that various initiatives are currently underway with respect to standards governing financial analysts. In response to the recommendations of the Securities Industry Committee on Analyst Standards (the Crawford Committee), the Investment Dealers Association of Canada published its Proposed Policy No. 11 Analyst Standards on July 5, 2002. The CSA is reviewing the proposed IDA policy and we may give further guidance.
V. Canadian tipping requirements and Regulation FD
In the notice accompanying the May 2001 version of the Policy we discussed what other foreign regulators had done in response to concerns about selective disclosure. In particular we discussed the U.S. Securities and Exchange Commission’s Regulation FD. You can read the May 2001 notice for a description of Regulation FD. We have included again as an addendum to this notice a chart that compares the Canadian and U.S. rules on selective disclosure. We believe it is important that companies continue to keep these differences in mind as compliance with U.S. rules does not necessarily ensure compliance with Canadian rules in this area.
VI. Text of Policy
The text of the Policy follows.
July 12, 2002
Douglas M. Hyndman
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.