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Reducing the Regulatory Burden on Public Companies, Yes Please But…

Traders Magazine Online News, August 22, 2017

Jos Schmitt

In mid-July, Jay Clayton, chairman of the U.S. Securities and Exchange Commission (SEC), announced his support for scaling back the scope and breadth of disclosure rules imposed on public companies, explaining that regulators have “significantly expanded the scope of required disclosures beyond the core concept of materiality.”

Undeniably, diligently satisfying disclosure requirements takes time and resources that management at public companies would prefer to apply to managing and growing their business, particularly where it does not improve investors’ and other stakeholders’ understanding of the company. Furthermore, the quarterly reporting cycle may inadvertently drive management into short-term thinking and strategies that are not necessarily to the benefit of their long-term investors.

At NEO, we have been vocal advocates for ways to reduce the regulatory burden for publicly listed companies in Canada and commend the Canadian Securities Administrators (“CSA”) for their recent initiative seeking comments on how to effectively do this.

While we are of the opinion that there is substantial opportunity for reducing regulatory disclosure requirements that are not enhancing the understanding of the company, that are already publicly available or that could drive the wrong management behaviours, we also believe that such exercise must include three other critical considerations:

  • Investors’ and stakeholders’ understanding of companies should not, as result, be negatively affected;
  • Investors’ interest in companies should not, as result, be lessened; and
  • Investors’ information should, as a result, be made easier to understand.

Instead of discussing the various areas where the regulatory burden can be reduced, largely discussed in the CSA request for comments and the subsequent comment letters, I would like to share some thoughts about these additional considerations.

Investors’ and Stakeholders’ Understanding of Companies

As we all agree, investors need to have easy access to information that will allow them to make informed investment decisions. This information allows them to understand a company’s business and financial condition based on current facts and expectations for the future, and is available through accurate reporting on operating results, cash flows, assets and liabilities, economic and business realities and outlook, risks, material events, etc. The good news and the bad news. Let’s never forget why disclosure requirements were initially implemented in the 1930s: selective disclosures were putting the general investment public at a disadvantage when, for example, insiders used material non-public information for their own gain and at the expense of everyone else. Fundamentally, regulatory disclosure requirements are in place to ensure a level playing field amongst all investors, and that needs to be maintained at all costs.

Having a good understanding of a company is also critical for other stakeholders: inaccurate or incomplete reporting can lead to sub-optimal deployment of capital and resources, customers and suppliers making wrong business decisions, employees making wrong career and retirement decisions, lenders and insurers miscalculating risks, etc.

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