It is believed there is confusion among investors, many of whom equate trusts to more secure investments, such as bonds or preferred shares, because of their payouts, even though they are much closer to common equity, with its associated risks.
National Post
October 28, 2003
Watchdog moves to bolster income trust disclosure
Sector's growth leads to concerns
Peter Fitzpatrick
Securities regulators are moving to improve disclosure in the booming income trust sector, but some observers say the reforms do not go far enough.
Proposals put out for comment by the Canadian Securities Administrators will require more prospectus detail from trusts and other indirect offerings, better continuous disclosure, elaboration on liabilities, and clearer marketing material.
"We want to ensure that everyone investing in income trust offerings has access to sufficient information to make an informed investment decision," said the CSA in a call for comments on the package, which it hopes to implement early next year.
Since May, 1999, the amount of money invested in trusts has increased to $70-billion from $15-billion, according to industry statistics.
This proliferation has led to concerns about trusts, which are investment vehicles specially structured from a tax standpoint to pay out a regular distribution to investors. Some, such as General Donlee Income Fund, have been forced by creditors to reduce their distributions and others, such as Atlas Cold Storage Income Fund, have encountered accounting difficulties. "It's not a response to any specific one. It's because of the volume of them," said Eric Pelletier, a spokesman for the Ontario Securities Commission, which is leading the initiative.
It is believed there is confusion among investors, many of whom equate trusts to more secure investments, such as bonds or preferred shares, because of their payouts, even though they are much closer to common equity, with its associated risks.
Among other things, the CSA wants trusts to provide more information on risks, particularly related to their distributable cash and debt obligations over a five-year period.
It also recommending trusts disclose information about stability ratings, which are reviews by debt rating agencies. This has been controversial because presently trusts do not have to conduct or disclose such reviews, even though they may contain vital information about a trust's sustainability.
Another area where the CSA is seeking more information is executive compensation and employment contracts at the operating company underlying the trust. Regulators also want better reporting by insiders.
Al Rosen is a Toronto accountant who has been critical of trust accounting disclosure. One of his concerns is how trusts meet distribution requirements — for example when they borrow to make payments as opposed to meeting them out of cash flow — and the impact of costs such as capital expenditures.
"They're not focusing on how cash can be manipulated within generally accepted accounting principles. They're talking about outside of GAAP — the cash manipulations — but what about all the manipulations within GAAP? So they're missing literally three-quarters of the pie. Overall, it's a worthwhile attempt but it really comes up short in some of the big areas," he said.
"They talk about the stability of cash flows but why don't they come right out and say we need a 10-year history on this stuff?"
Others, however, say they are less concerned about trust disclosure.
"I haven't felt the disclosure has been particularly weak so far. I can't see that trusts have any worse disclosure than any other stock," said Leslie Lundquist, an analyst at Bissett Investment Management.
Stephen Probyn, chairman of the 35-member Canadian Association of Income Funds, welcomes the additional scrutiny. "I think that most of our members should have certainly no difficulty in complying with the spirit of the regulations, although we'll have to look at the specific details," he said.
The proposals could help put trusts on par with common equity, thereby increasing the likelihood the sector will reach its cherished goal of inclusion in the Toronto Stock Exchange composite index, he said.
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Risks: Income trusts, Ontario Securities Commission, Canada, 20031028 Watchdog moves
