Reducing the regulatory burden, or maybe just jiggling it…

I wrote last year about the Canadian Securities Administrators’ CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers, seeking “comments on potential options for reducing regulatory burden for non-investment fund reporting issuers in the public markets.”

The CSA has now issued CSA Staff Notice 51-313, providing an update on what came of that. It says that “specific initiatives the CSA intends to pursue include”:

  • removing or modifying the criteria for reporting issuers to file a business acquisition report;
  • facilitating at-the-market offerings;
  • revisiting the primary business requirements to provide greater clarity to issuers preparing an IPO prospectus;
  • considering a potential alternative prospectus model;
  • reducing or streamlining certain continuous disclosure requirements; and
  • enhancing electronic document distribution for investors.

The notice says the CSA “may revisit or reconsider” some of the other ideas floated in the paper “if we become aware of new developments in any of these areas.”

Focusing here primarily on the points relating to continuous disclosure, I think the best way to comment is to repeat much of what I said at the time. I noted an announcement by Blackrock Inc. that “it is replacing human stock pickers with machine-run algorithms for some of its equity funds” and went on:

  • It’s not really clear whether the CSA’s initiative will attempt to grapple with this kind of evolution, and (say) to consider to what extent the disclosure regime should attempt to identify and address the interests of these AI stock pickers. As far as one can tell, the main focus of the exercise will be on the opinions expressed by, uh, humans, whether individuals or in groups, based on their own experience and doctrine. This can be a good basis for getting some stimulating input, but one shouldn’t overlook its severe limitations. For an almost exact parallel, consider a theoretical public consultation on how to reengineer the tax code – people would respond based on their views of the stimulative effect of lower taxes, the relative importance of deficits, concepts of social equality and justice and so on, but none of this would or could provide an objective basis for determining the best thing to do. Such judgments, inevitably, are ultimately as much a function of morality as of science. (In a very interesting and useful recent paper, the OSC explored various behavioral issues which also point to the problems of such exercises – for example, respondents might be biased to make the arguments which seem most consistent with their self-image, regardless of the underlying facts.)
  • To illustrate, the paper mentions in the context of quarterly reporting that “Some academic commentators and business leaders have suggested that quarterly reporting encourages reporting issuers to focus too heavily on short-term financial results, to the detriment of the reporting issuer’s business over the longer-term.” Indeed, I’ve cited that debate here a couple of times. But as I wrote before, whether that’s a problem is surely as much a ideological determination as anything else (it’s not obvious by the way that discouraging reporting issuers from focusing on the short-term is at all part of the CSA’s mandate, as long as the issuers clearly disclose their strategy as being such). The paper might have been more likely to draw contemplative responses, it seems to me, if it had tried to bring out such matters of context and to better define the structure within which to assess the questions being asked. Likewise, as the very choice of the term “reducing regulatory burden” suggests a predisposition to find burdensome things that can be reduced, the paper might have asserted more definitively which of the existing requirements seem to the CSA to be unnecessary, and asked for specific commentary on why that’s the wrong determination. After all, they probably know as well as anyone else does.

Well, on the basis of the specific projects announced to date, the CSA didn’t really grab at the implied challenges set out there, nor by those implied by its own sweeping observation that  “changes brought on by shifts in market conditions, investor demographics, technological innovation and globalization all have a real impact on reporting issuers.” For instance, beyond the specific initiative on enhancing electronic document distribution, the new staff notice doesn’t suggest any great interest in grappling with technological innovation. It does express an intention to tackle the following:

  • eliminating duplicative disclosure among the financial statements, management’s discussion and analysis (MD&A), and other NI 51-102 forms,
  • consolidating two or more of the financial statements, MD&A and annual information form (AIF) into one reporting document, and
  • examining whether the volume of information in annual and interim filings can be reduced in order to prevent excessive disclosure from obscuring key information or otherwise improving the quality and accessibility of disclosure.

…but these pretty much epitomize the problems of the old paper-based world. As such, the CSA seems subject to almost exactly the same criticisms as those I’ve recently cited as applying to the IASB, particularly with regard to its “principles of disclosure” discussion paper. And even worse, the notice says “this will be a staged project with a majority of the work requiring a longer timeframe,” even though the issues and the most obvious potential fixes must surely be well-established by now.

And also, it doesn’t appear that even the smallest issuers will be getting a break from quarterly reporting. Overall, although we’ll have to wait and see, you might fairly conclude from the information in the staff notice that the “regulatory burden” will only become incrementally lighter for the foreseeable future at least, and it certainly won’t get to be carried in a shiny new bag…

The opinions expressed are solely those of the author

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