Here in Ontario, Canada, we have something new to excite us – the final report of the Capital Markets Modernization task force.

The taskforce was established in February 2020 to review and make recommendations to modernize Ontario’s capital markets regulation; the final report (following a consultation document issued last July) contains 74 recommendations. Here’s some of the broad overall commentary:

• Since the financial crisis in 2008, the global financial system has undergone significant changes. The ongoing COVID-19 pandemic has highlighted the need to be adaptive and forward-looking in developing a modernized capital markets. The Taskforce aimed to address the issues of tomorrow’s capital markets with bold and innovative recommendations that will make Ontario one of the most attractive capital market destinations globally.
• The Taskforce worked diligently for ten months, through the COVID-19 pandemic. We met over 110 different stakeholders in our preliminary consultations, meeting with some repeatedly, and received over 130 stakeholder comment letters in response to our consultation report released in July 2020. The consultation meetings and formal feedback told us that the time for change is now.

Most of the items don’t directly relate to financial reporting and are outside this blog’s scope of interest. But here’s one we can probably all have some views on:

• … issuers incur significant costs and allocate substantial resources to producing quarterly financial statements and MD&A. While quarterly financial statements provide timely information to investors and intermediaries, there can be instances in which the regulatory and internal cost of preparing such frequent reporting exceeds the benefit. This is particularly true for smaller issuers and issuers that are developing towards generating revenue that may not experience significant changes to their operations that would be reflected in the financial statements.
• Through its public consultations, stakeholders agree that smaller issuers face a disproportionate burden through ongoing quarterly reporting requirements but have raised concerns over eliminating quarterly reporting due to the reduction in timeliness of disclosed information to investors and the market. Stakeholders also expressed concern about Ontario’s disclosure requirements not being aligned with other Canadian jurisdictions and the U.S.
• To minimize regulatory burden, the Taskforce is recommending changing the requirement for quarterly financial statements to allow for an option for publicly listed reporting issuers to file semi-annual reporting. Reporting issuers would be eligible for this option if the issuer:
  • has developed a continuous disclosure record of at least 12 months …;
  • has annual revenue of less than $10 million, as shown on the audited annual financial statements most recently filed by the reporting issuer; and
  • is not currently, and has not recently been, in default of their continuous disclosure obligations.
• If an issuer that has adopted semi-annual filing achieves revenue of $10 million or greater, it would be required to resume quarterly filing following the filing of its audited annual financial statements.
• …In addition, the decision to file on a semi-annual basis must be approved by holders of a majority of shares entitled to vote, excluding any related parties of the issuer, prior to adopting this option and reconfirmed at least every three years.

I’ve acknowledged before that I’ve been more inclined to argue for preserving quarterly reporting, ever since Trump mused about getting rid of it. But even leaving that aside, and while fully admitting that any trigger for requiring a greater frequency of reporting would be arbitrary in one way or another, I don’t think the proposed test here is particularly logical. We can probably agree that the reporting of some issuers is more changeable and complex than others, such that quarterly updates are more likely to yield a materially different perspective on their activities. But, for example, an issuer not yet generating revenue might have variable and unpredictable expenditure patterns and financing structures, whereas an issuer generating $20 million in annual revenue from a single predictable investment interest might just tick along boring and predictably. One issuer generating $10 million in revenue might be subject to going concern uncertainty and other volatile risk factors; another might not be at all. And so on. The proposed condition of requiring a majority vote of unrelated shareholders imposes some control, but if the anxiously engaged users of an entity’s financial statements all end up in the minority, that’s not going to be much consolation to them.

Really, I tend to think that any entity-specific weighing of costs and benefits, as is proposed here, is likely only to end up generating glaring inconsistencies in the reporting provided by largely similar entities, and to cause confusion – that’s partly why in Canada many of the available concessions (such as longer filing deadlines) are currently defined with relation to the exchanges on which the entities are listed. Despite the flaws in that approach, I think it probably remains the most transparent and objective approach of distinguishing between groups subjected to different requirements. If such a distinction is justified at all…

The opinions expressed are solely those of the author