Thursday, June 4, 2020

Access Equals Delivery (AED) –NOT SO FAST

Canadian securities regulators are contemplating implementing access equals delivery for prospectuses, financial statements and MD&A, and possibly other types of documents, including rights offering materials, proxy-related materials and bid circulars. The regualtors describes “delivery” to mean document filing on SEDAR (The System for Electronic Document Analysis and Retrieval), posting on the issuer website and issuance of a News Release. We do not believe that such a process is actually delivery. It is insufficient to protect and engage investors, and in particular retail investors and individual shareholders, absent additional measures.

National Policy 11-201 provides that “delivery” can generally be satisfied through electronic distribution, provided that the investor receives notice that the document has been, or will be, delivered electronically; the investor has easy access to the document; the document received is the same as the document delivered; and the issuer has evidence that the document has been delivered. This is reasonable.

As of 2013, the “notice and access” model of delivery set out in National Instruments 54-101 and 51-102 has applied to permit electronic delivery of proxy materials for shareholders’ meetings. This works fine – investors wanting electronic access can have it, investors wanting paper copy can have it at no charge. After all, it is investor money that is financing the Company so they should have the right to choose how they want disclosure delivered.

The key difference under the current proposed model is that nothing would need to be sent by mail.  The system relies on investors finding and accessing materials online through SEDAR and the issuer’s website. We are not aware of any way for investors to be sure that they receive these news releases in a timely manner and in a way that they can distinguish them from other news releases.  There is currently no mechanism through SEDAR by which a person might receive alerts that a SEDAR filing has been made. In other words, AED does not actually require delivery to retail investors. And yet, the regualtors cite disclosure as a cornerstone of investor protection. This mere notice and posting, without a determination of whether participants actually open the notice or access the disclosure, is not enough to be considered a measure reasonably calculated to ensure actual receipt of the disclosed material by investors.

The regualtors assert that AED is more efficient, is environmentally friendly and will save companies money via reduced mailing costs. But what about investor protection? Not everyone has access to a computer, the internet or is comfortable using the internet in seeking and utilizing financial information. Some just find it easier to read paper copy rather than off a computer screen.

Some limitations of an access equals delivery model include:

• lower utilization and engagement by those retail investors who prefer paper copies, or because emails can more easily get not noticed or forgotten;
• lower readership by investors cautious about cybersecurity concerns ;
• lower readership of important and time-sensitive documents if notifications to investors are generic and fail to provide sufficient detail regarding the nature of the document and applicable deadlines;
• potential increase in investor complaints if they are not made adequately aware of time-sensitive decision-making and if decision deadlines lapse;
• scrolling on a screen may lead to a more cursory review;
• challenges in locating disclosure documents on difficult to navigate reporting  issuer websites;
• difficulties in navigating SEDAR until the planned SEDAR overhaul is finalized; and

• low readability on phone screens by investors who primarily, or exclusively, access the internet through smart phones.

Some consequences of access equals delivery are still to be determined, such as how to address investors’ withdrawal rights (the right to withdraw from an agreement to purchase securities within two business days of receipt of the latest prospectus).  The regulators are no doubt cognizant that introducing this model for disclosure documents requiring immediate shareholder attention and participation could raise investor protection concerns and could have a negative impact on shareholder engagement. There seems to be no benefit to investors even if, as improbable as it is, any cost savings are passed on to investors.

Finally, given that an increasing number of Canadians are now responsible for managing their own retirement accounts, there is a renewed importance to effective disclosure.

A transition to a delivery system where access equals delivery will make it less likely that certain retirement savers read issuer disclosures and, as a result, these investors could make less informed investment decisions. In short, the regulators are proposing to seduce a material swath of retirement savers and retirees into a disclosure system that they didn’t ask for and which may not work well for them.

We’d like to see regulators focus more on improving the accuracy and quality of disclosures, increase use of plain language and improve financial literacy among Canadians.