Canada’s securities regulators are once again taking public feedback on the topic of short selling. This, after also taking feedback two years ago and determining, quite rightly, that there isn’t much Canada needs to do about the alleged problem of “activist short sellers.”
Alas, their conclusions were unsatisfactory to the public companies and their advocates who believe there needs to be a crackdown on those who sell a stock short – positioning themselves for profit if the share price falls – and then release a report or other public statements that detail why they think the shares should go down. The targets of these short-sellers call it “short and distort.”
One of the proposals on the table, advocated by the Canadian Investor Relations Institute and backed by others, is a new disclosure regime for short-sellers. CIRI has told the Canadian Securities Administrators that it believes all activist short-sellers should be required to identify themselves and disclose their opening position, changes in that position, and their closing positions. The disclosures should be made daily, CIRI says.
That would subject short-sellers to possibly the most rigorous disclosure regime in Canada – one far more onerous than the one imposed on the “long” side – institutions and individuals who are major owners of company shares and profit when stocks go up.
Indeed, Canada’s long-side disclosure rules are inadequate – and there are a couple places they could be shored up before we even start talking about short-seller disclosure.
One is Canada’s “early warning” system, so-called because the disclosure is triggered when someone buys a significant enough chunk of a company to influence its operations. Canada defines that chunk as securities that allow the holder to have 10 per cent of the voting power at a company.
In the United States and other jurisdictions, however, the bar is 5 per cent, meaning a buyer must come out from hiding earlier in the process of buying up a company’s stock. Canada’s higher threshold for disclosure makes public companies more vulnerable to takeover because the “early warning” is more like a “late warning.”
Canada wrestled with this issue a decade ago and was close to changing it. In March, 2013, the CSA proposed lowering the bar to 5 per cent. The feedback was so negative, however, the CSA backed off. In a summary paper, the CSA said market participants cited the “unique features of the Canadian market, compared to the United States and other markets,” including how it had many small companies. Some said they didn’t want to signal investment strategies by disclosing their holdings. And, of course, the “significant administrative and compliance burden.”
The early-warning system is back on the table, however; Ontario’s Capital Markets Modernization Taskforce made it a recommendation in its final report in January, 2021. And the CSA last June included a review of the existing system it in its Business Plan for the 2022-25 period. “We plan to conduct that review within the time frame outlined in our business plan,” spokesperson Ilana Kelemen said.
The second area of potential improvement is going nowhere. In its first report draft, Ontario’s Capital Markets Modernization Taskforce also recommended Canada adopt quarterly holdings filing requirements for institutional investors of Canadian companies, much like the “13F” system in the United States.
The Securities and Exchange Commission requires money managers of at least US$100-million, based anywhere in the world, to file four reports a year detailing their holdings of U.S.-listed securities. That’s how we know how much of certain U.S. stocks the Canada Pension Plan Investment Board and Royal Bank of Canada’s asset-management arm, to cite two examples, own.
Who owns Canadian companies? For the most part, we don’t really know, and neither do they. In floating the disclosure idea, the Capital Markets Modernization Task Force said public companies and other market participants “may not have adequate transparency into institutional investors’ ownership positions,” particularly since the early-warning system kicks in at 10 per cent, not 5. “The lack of transparency hinders shareholder engagement and the ability for issuers to respond to shareholder concerns,” the task force wrote.
Sadly, that recommendation did not make it into the final report. I queried Walied Soliman, the chair of the task force, as to what happened, and he kindly surveyed his fellow members via e-mail for their recollections. Simply, they recall, the feedback they got was that the rule would be too onerous.
So we are left with the possibility of a lower early-warning threshold, perhaps recommended no sooner than 2025 and implemented some time later, and no real prospect for reporting of institutional holdings. The combination leaves Canadian companies and investors in the dark for the foreseeable future. And it’s part and parcel of this country’s disinterest in collecting, much less sharing, data and information.
Back to the short-sellers. In a letter opposing new disclosure rules, Alex Perel, the managing director for global equity at Scotia Capital Inc., notes long-position disclosure rules “are rooted in the ability of share owners to vote their shares and hence exert control over an enterprise. These considerations do not apply to short-sellers, because short-sellers do not vote.”
He adds: “Concerns in this area are often focused on ‘short and distort’ activities, with the implication that such activities are misleading. We believe these concerns should be equally applied to long investors who may also engage in ‘distortive’ campaigns, and should be regulated similarly.”
Great thoughts. So I say: Let’s beef up Canada’s disclosure system on the ownership side. Then, once that day comes, we can restart the conversation about short-seller disclosure.