OSC Staff Notice: 53-701 - Staff Report on Corporate Disclosure Survey

On December 22, 1999 the Ontario Securities Commission (the "Commission") released the preliminary results of the corporate disclosure survey that Staff in the Continuous Disclosure Team had conducted as part of its initiative to examine the issue of "selective disclosure". Staff has completed its analysis of the survey and the Commission is publishing this Staff Report detailing the final survey results.

What is Selective Disclosure?

Selective disclosure occurs when corporate officers disclose material corporate information to select groups or individuals such as analysts or institutional investors that has not been disclosed to the public. In Canada, attention was focused on selective disclosure in 1995 when The Toronto Stock Exchange Committee on Corporate Disclosure (the "Allen Committee") released its Interim Report. In the report the Allen Committee acknowledged the importance of meetings with analysts in "fostering open and thorough continuous disclosure practices". The Allen Committee 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 remained 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 noted that this causes "unfairness in the marketplace".

These concerns about selective disclosure are widely shared, as reflected in stock exchange listing standards and in "best practices" guidelines of investor relations groups. The Toronto Stock Exchange's (the "TSE") Policy Statement on Timely Disclosure requires listed companies to disclose material information immediately upon the information becoming known to management of the company or upon it becoming apparent that the information is material. The TSE notes that "immediate release of information is necessary to ensure that it is promptly available to all investors and to reduce the risk of persons with access to the information acting upon undisclosed information". The Canadian Investor Relations Institute (CIRI) guidance in this area goes one step further and discourages companies from disclosing "more detailed, non-material information" to analysts and institutional investors in circumstances where a company would be unwilling to provide the same level of information to individual investors upon request.

Staff has become increasingly concerned about the growing reports in the financial press of "selective disclosure" and the potential impact of this practice on market integrity. Selective disclosure can create opportunities for insider trading and also undermines retail investors' confidence in the market as a level playing field by creating a perception that analysts and institutional investors have access to information that is not available to other investors. In Staff's view, the best solution to these negative perceptions is for companies to adopt best practices in the area of disclosure and communications with analysts, the media and investors. Chairman David Brown recently made the following comments in a public address:

"In today's market atmosphere, with so much riding on share price, it's understandable that companies would want to keep analysts and institutional investors well informed. But when information is shared selectively, the result may be unfair trading opportunities. Retail investors have a right to trade on a level playing field. That means they must have the opportunity to share in all relevant information, along with institutional investors and market analysts. Retail investors suffer, however, when companies announce major events or disclose new or more detailed information about their affairs in one-on-one meetings or closed conference calls with institutions and analysts. With recent improvements in technology, no one need be left out. More and more companies are giving retail investors access to analyst meetings, through the Internet and 1-800 numbers. We applaud these efforts".

The Survey

As a first step in addressing the issue of selective disclosure Staff conducted a survey of disclosure practices of public companies (the "Survey"). Four hundred public companies were randomly selected across all industries to participate in the Survey. The Survey was sent to reporting issuers in October 1999 and 170 responses were received, a 43% response rate. Companies that did not receive a copy of the survey and wished to provide input were encouraged to do so by completing the survey on the Commission website.

The Survey 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 non-public information is inadvertently disclosed to select groups; and (iv) the existence of company disclosure policies that address these and related issues.

The Survey was not intended to identify companies that may be selectively disclosing information. Rather the objective of the Survey was to seek input from reporting issuers on current practices and identify areas where additional guidance from the Commission would be appropriate.

Results of the Survey

In general, the results of the Survey indicate that the extent and nature of corporate disclosure policies and practices of issuers is 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.

Avoiding Selective Disclosure

The following, in Staff's view, are some good disclosure practices that emerged from the Survey:

1. Have a Written Disclosure Policy

A written disclosure policy can assist a company in meeting its regulatory disclosure obligations as it provides a framework for disclosure and raises the level of awareness and understanding of regulatory requirements. Disclosure policies should also be broadly communicated throughout the organization and monitored for compliance in order for them to be effective.

There are also practical benefits for a company in having one of its senior officers take overall responsibility for ensuring compliance with regulatory requirements on continuous disclosure; and overseeing and coordinating disclosure of information to market participants.

2. Limit the Number of Authorized Spokespersons

Companies can designate a limited number of persons, usually not more than two or three in charge of investors relations, as the only representatives of the company authorized to communicate with analysts. Other employees can then be instructed to refer all requests for information to those authorized to speak on the company's behalf. Such a policy helps to ensure that all communications to analysts are made by persons who are fully informed about the company and its disclosure policies and the risks applicable to analyst communications. This practice also reduces the risk of (i) different company representatives making inconsistent statements; and (ii) company representatives making inconsistent statements from the information contained in the company's regulatory filings.

3. Open Up Access to Conference Calls

Many companies hold conference calls with analysts shortly following the public disclosure of quarterly financial results. Some companies adopt a complete "open door" policy with respect to who is permitted to participate in conference calls by publicly disclosing the date, time and dial-in number for their conference calls (such as by including it in their press releases or posting it on their web site) or simulcasting the conference call over the internet, thus allowing access to everyone. As a matter of good practice, company officers who will be making presentations during a conference call prepare a script in advance of their remarks, which is reviewed internally for accuracy and also reviewed by counsel. Scripting a call can help to identify any "material changes" and "material facts" that ought to be publicly disclosed prior to the call and reduces the risk of inappropriate statements being made.

As a matter of law, conference calls should not divulge any "material facts" about the company which have not already been generally disclosed. In this context, companies and their spokespersons should be aware that there may be dangers in disclosing even seemingly innocuous information to a select group without first releasing it publically. Staff encourage companies to maintain an "open door" policy with respect to who is permitted to listen in on conference calls, although companies may legitimately want to restrict who can actively participate in such calls.

4. Dissemination of Information

Advances in technology are being utilized by some issuers to provide wide dissemination of information and at a relatively low cost. Posting information on the company's web site is an effective and efficient way of disseminating information to the marketplace as well as investors simultaneously.

In this context, it should be noted that on March 25, 1999, the TSE released guidelines for electronic communications by listed companies. The accompanying press release stated that the guidelines reflect the "growing importance of the internet as a preferred medium of communication", with more than 70 per cent of TSE listed companies using the internet for some aspects of their communication, marketing or promotion. The guidelines aim to encourage the use of electronic media while ensuring that information disclosed in this way complies with regulatory requirements. The TSE recommends that "companies develop policies for disseminating information by electronic means as part of their corporate disclosure policies". In this regard, the TSE's guidelines include a recommendation that companies make available to all investors through their web sites all supplemental information provided at briefings to analysts and institutional investors, such as fact sheets, slides and transcripts of speeches.

Next Steps

The Commission will publish a policy statement which will address best disclosure practices for issuers with regard to (i) providing investors with fair access to information and; (ii) avoiding selective disclosure in their dealings with analysts and institutional investors. The policy will suggest practical steps that reporting issuers can take to ensure that they meet the letter and spirit of Ontario's regulatory requirements. The Commission's goal in proposing the policy is to encourage companies to aim for best practice in their disclosure regime, not just minimum level of compliance with the law.

In the interim, Staff reminds market participants that the Securities Act (the "Act") has existing provisions that prohibit the selective disclosure of "material changes" and "material facts". The Act provides that "no reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed". In addition, the Act requires that, where a material change occurs in the affairs of a reporting issuer, it shall issue and file a news release disclosing the nature and substance of the change.

Finally, it should be noted that The Toronto Stock Exchange, the Vancouver Stock Exchange, the Alberta Stock Exchange and the Investment Dealers Association recently established the Securities Industry Committee on Analyst Standards (the "Committee"). The Committee's mandate is "to review the practices and activities of securities research analysts employed by dealers in Canada and the standards of conduct and supervision of the analysts; and to report and make recommendation on securities industry standards governing the conduct and supervision of analysts as considered appropriate to preserve the integrity of the capital markets". The Committee plans to produce a preliminary report, covering its findings and recommendations. A final report will be tabled following a comment period on the preliminary report. The Commission is awaiting the release of these reports and will evaluate at that time whether further Commission action in this area is desirable.

Questions may be addressed to any of:

Heidi Franken
Manager
Continuous Disclosure
(416) 593-8249
[email protected]

Rossana Di Lieto
Legal Counsel
General Counsel's Office
(416) 593-8106
[email protected]

Lisa Enright
Senior Accountant
Continuous Disclosure
(416) 593-3686
[email protected]