A PRIVATE-SECTOR task force has urged Canada’s securities regulators to scrap all print delivery requirements and move to a completely electronic system based on access equals delivery principles.
Established by the Investment Dealers’ Association, a self-regulatory organization for the securities industry, the Task Force to Modernize Securities Legislation in Canada does not have any regulatory power to implement its 65 recommendations. They are offered as advice to the country’s provincial securities commissions, which have said they will study them closely.
The task force also recommends usability improvements to the country’s depository for regulatory filings, known as SEDAR. They want it to be reengineered to accept XBRL filings and use a standardized graphical user interface and navigation scheme.
In his covering letter, Committee Chairman Thomas Allen, QC., warned regulators that they need to move quickly. “Policy makers in Canada need to move with deliberate speed not to be left behind on crucial issues, let alone if they would like to lead,” he says.
No Paper Delivery, No Right To Receive
Perhaps the most ambitious and contentious recommendation is to scrap all requirements for delivery of paper-based disclosures and denying anyone the right to request printed materials. If this recommendation is adopted, it will likely make Canada’s disclosure regime the first fully paperless system in the world.
However, the recommendation is contentious because it contradicts research the panel itself commissioned. The research, conducted by academics at McMaster University, surveyed 1,600 retail investors via an online survey. They found that most stock investors rely on printed information with paper-version use ranging from 58% to 81% depending on the document.
Investors were also asked if they were open to receiving disclosures only electronically in the future. The researchers said retail investors “are generally receptive,” with comfort levels ranging between 54% and 67% depending on the document. Mutual fund investors were less open to the idea than stock investors.
In their recommendations, the academics said that regulators should “encourage” the move to online delivery, but investors should continue to have the right to receive printed materials.
“There are, of course, people, especially older individuals who have never become comfortable with computer technology, who would find electronic access alone somewhat daunting. These people should continue to have the right to request to receive in paper form all disclosures currently requiring delivery,” they say in their report which was completed in May.
However, in their final recommendations to regulators last week, the task force went against this advice.
In their final report, the task force said no investor should have the right to receive printed materials under a new access equals delivery system.
“Paper production is extremely expensive and no longer warranted in the e-world. To permit a few investors to demand paper disclosure and thereby impose a cost on all shareholders of the issuer would largely thwart the cost savings of shifting to an access equals delivery model,” the task force said.
“If an investor insists on paper disclosure, it is our view that they can download the document and print it themselves or, if their home facilities do not readily permit that, ask their adviser to print a copy. If the investor in question does not have an adviser, perhaps they will be motivated to retain one, which can hardly be regarded as a negative consequence,” the task force says.
The argument that investors get a full-service advisor because they don’t want to or can’t view information online or print it out is unfortunate as it could be viewed as self-serving to the full-service brokerages, which dominate membership in the IDA.
The panel’s claim that allowing investors to request printed materials will “largely thwart the cost savings” of electronic delivery is not backed up by any hard numbers.
Despite this, parts of the report and the supporting research that deal with communicating disclosures to investors make a valuable contribution to the topic of online investor communications. They are worthy reading for anyone with an interest in the topic anywhere in the world.
Information Presentation Key to Effective Disclosure
Perhaps most significant is that for the first time, a formal capital markets group has identified that the core problem with securities disclosure today is not timeliness, or equal access, or even a lack of plain language. They have correctly homed in on information design, presentation and usability as the most significant barriers.
The task force says that the impenetrability of current disclosure documents is detrimental to retail investors because “dense legal and technical language, the small print, the prevalence of jargon, the sheer length of the document, and the volume of information presented easily results in information overload.
“When information overload occurs, there is a tendency for retail investors to simply tune out and not try to process the information at all,” the report says.
The task force says regulators should be focused on “exploring ways to present information to investors more effectively” rather than on plain language, which they say does not by itself make disclosure effective.
They advocate a layered approach to disclosure where information is presented in three levels, from a summary of key points to full prospectus-level disclosure.
They have put together a mock regulatory filing in a Flash demo that does not quite achieve the envisaged approach, but which would nonetheless be a revolution in the design of regulatory filings if it ever sees the light of day.
|The concept regulatory filing uses current Web design techniques to improve the presentation of information.|
The concept regulatory filing, which they’ve nicknamed MERIT, uses current web design techniques to present a regulatory filing in a more usable format. It is envisaged to render XBRL and XML-tagged information in a human readable form. Think of an HTML annual report and you get the picture.
The task force urges Canada’s provincial regulators to immediately begin improving SEDAR by making it easier to search and filter filings and by expanding the categories and labels for disclosures. It also recommends upgrading it to accept XBRL.
However, this seems to be a much bigger challenge than the task force recognizes. First, there is the thorny issue of who should own the database and what access protocols should be put in place. The current model treats the SEDAR database as a proprietary system. This is a major stumbling block to widespread use and dissemination of the information filed with the regulators. It could also hamstring the promised potential of XBRL.
Next, there is the major task of developing XML tags for all the information that is required to be disclosed. And since most documents in the country’s SEDAR database are in PDF and not easily converted to XML, it will take time to build up a useful repository of historical information in the new system.
Next, much more work is needed on the task force’s concept regulatory filing. If it’s going to be standardized presentation, then it needs more testing with a diverse group of users.
It’s also clear that the task force underestimates the importance of plain language, as this is a major failing in its concept filing. Presentation alone, just like plain language alone, does not make information consumable.
Since the task force does not have any power to enact its recommendations, perhaps the best it could hope to achieve is to prompt debate and put these issues on the table. By taking some fairly radical positions, it will likely do that.
The ball is now firmly in the court of Canada’s regulators.