Throw away your printers. Actually, don’t, or at least not yet. But you may get away with buying less ink if a series of recommendations proposed this week by the Task Force to Modernize Securities Legislation are embraced and enacted by the nation’s industry regulators.

High on the task force’s list is the removal of some barriers that now delay arrival of IPOs to market and a shifting of disclosure obligations away from the post office and toward the SEDAR database. “It’s time to leave the paper behind,” said task force chairman Tom Allen, who heads Westwind Capital. Once initial IPO disclosure documents have been issued, he said, the task force would like to see companies no longer required to produce hard copy annual reports or other filings for investors.

To replace the paper, the task offered a first look at, what they hope will be the next generation disclosure system. The prototype, called MERIT, essentially fields a website that serves as an interactive version of a prospectus, according to Gordon MacLeod, a project manager at Navantis which developed the system. The newfangled corporate filings would still be archived on SEDAR but would be searchable and even allow for the addition of audio and video streams as a way for corporations to more fully lay out their yearly and quarterly pictures. Investors also will have the option to download the presentations onto their own hard drives. The end goal, said Allen, is to get investors to actually read prospectuses by making them fun to use.

MacLeod said he’s confident enough investors are comfortable with the Internet to make MERIT a viable disclosure option. And, paper disclosures could still be produced for the small percentage that still wants them. More sophisticated investors and corporate analysts, meanwhile, could offload data from various MERIT-databased prospectuses into spreadsheets and actually do their own analysis of various companies. Allen added the SEC’s recent announcement that it’s looking to replace its EDGAR corporate filing database with something more interactive is a fair indication the task force’s concept has, well, merit.

In addition, the panel wants to see establishment of a regulatory framework that will allow sale of hedge funds to retail investors. Although hedge funds are no longer the purview of the super wealthy, they’re still limited to smaller groups of accredited investors, or those with $150,000 to invest. Retail investors, however, are increasingly viewing hedge funds as a viable option and so the panel would like to see a system of transparent disclosure that would help those clients understand the products.

Among the tools needed to let investors make informed decisions are: disclosure of fees; descriptions of relationships (and any potential conflicts of interest) among the manager, advisor, and prime broker; disclosure of side letters and liquidity arrangements; a fund valuation description; and an explanation of the structure. Colleen Moorehead, president of Nexinet Learning, also said advisors selling hedge funds would be required to meet proficiency standards to demonstrate they understand the products.

The study also recommended the creation of a national capital markets court to ensure those passing judgment in securities law matters are sufficiently knowledgeable about how markets operate. Ideally, the report said, all adjudicative functions of the securities commissions would be transferred to this tribunal, which also would be granted the power to order restitution or compensation.

That’s important, noted BMO Nesbitt Burns chairman Jacques Ménard because the current divided jurisdictional structure dilutes resources. “Effective enforcement lowers the cost of capital by inspiring confidence,” he said.

The study also called for:

  • A review of the rules, jurisdictions and powers of self regulatory organizations as they relate to the enforcement of securities industry standards and the assessment of penalties
  • Cost/benefit analysis of any new securities rules
  • Nationwide harmonization of penalties and orders related to the enforcement of securities laws
  • Possible creation of an arbitration option to settle industry disputes and to require this option as a condition of SRO recognition
  • A requirement that insiders provide two days notice before selling securities
  • Establishment of a new category of well-known, seasoned issuers with market caps over $350 million which would be allowed to bring offerings to market faster.

While the panelists conceded their recommendations do require action by the nation’s securities regulators before becoming reality, Allen said confidently, “I don’t think this report will have the same 10-year gestation period that other reports have had.”

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com

(10/04/06)