Disclosure is essential to the functioning of a free market and it’s the cornerstone of our securities regulatory system. But although everyone claims to believe in its importance, ensuring that companies and capital market players are candid with investors remains a constant battle from which regulators must not shrink.

For the past few months, investors have focused on the turmoil arising from the disruption of credit markets. Seeds of doubt are easily sown when companies announce large writedowns and then inflate them even further just a few weeks later. The dispersion of risk, once thought a strength of the global financial system, has since become a vulnerability as investors realize they have little idea just where exposures lie — particularly among the world’s large financial institutions, including Canadian banks. Without full disclosure of these exposures, investors are left to speculate.

Disclosure is also proving a fundamental challenge in the retail investment industry. Here, the issue is not one of rapidly deteriorating credit conditions; rather, it’s a question of detailing the basic features of products the players hope to sell to investors.

Dealers and product manufacturers pledge their interest in improving disclosure, but then resist regulators’ efforts to do so. In response to a proposal to simplify and enhance point-of-sale disclosure for mutual funds and segregated funds, firms have twisted themselves into knots in arguing that the new regime won’t fly.

Policy-makers are also showing a worrying willingness to back down in the face of opposition to enhanced disclosure. The Canadian Securities Administrators has decided venture companies shouldn’t have to stand behind the quality of their financial reporting; the CSA is dropping a requirement that executives at these firms must certify they have effective internal controls.

The CSA also appears to be abdicating its responsibility to ensure that investors in principal-protected notes receive adequate disclosure from issuers. Admittedly, PPNs — considered to be banking products while functioning like securities — remain beyond the CSA’s purview ,but it seems like a dereliction of duty to defer to another authority with seemingly weak enforcement capabilities.

Without effective disclosure, markets can crumble. Although companies and financial services firms may resist it, regulators must insist on honest, meaningful disclosure if markets are to have any chance at becoming fair and efficient.