Investor protection and education figure heavily among the 65 recommendations presented this month by the task force to modernize securities legislation in Canada. But the extent to which investors will benefit depends largely on how well the recommendations are received by key regulators and enforcement bodies.

Speaking to the audience at the Toronto Stock Exchange earlier this month, task force chairman Tom Allen said the markets are “operating under a burden of cumbersome compliance requirements; unco-ordinated, uneven enforcement; and, frankly, too many investors who are not adequately informed.”

The task force’s 261-page final report, entitled Canada Steps Up, identifies several ways to meet investor needs better, including improving accessibility to investment information and ramping up investor education.

(The 12-member independent task force was created by the Investment Dealers Association of Canada in June 2005 in an effort to identify ways to improve Canada’s capital markets.)

Ian Russell, president and CEO of lobby group Investment Industry Association of Canada, says the report offers some innovative ways to serve retail investors, but admits that some of its recommendations — such as the creation of a national co-ordinator to oversee investor education initiatives — will be difficult to implement.

“One of the challenges of the report is that it bequeaths the recommendations onto other entities to turn them into practical results,” he says. “It is a fairly complicated process, and it won’t happen overnight.”

However, Russell adds, many of the recommendations, particularly those aimed at improving the accessibility of investment information, are “highly doable and can be accomplished very quickly.”

The report specifically takes aim at lengthy prospectuses and confusing disclosure documents, which result in information overload for ordinary investors. In its recommendation, the task force calls for the abolishment of hard-copy documents such as annual reports and proxy circulars in favour of the “paperless revolution,” which would see disclosure accomplished through electronic filings on SEDAR (the system of electronic document analysis and retrieval) and on the issuer’s Web site.

The report also calls for more efficient search capabilities on SEDAR’s Web site in an effort to reduce the dependence on the use of “catch-all” categories. Currently, investors who want to find basic information, such as management fees and minimum investment requirements, must wade through an entire prospectus, which is often very lengthy.

“We need a process that seeks to make public company disclosure more accessible and, therefore, more effective, and one that eliminates page-flipping and document-finding for investors,” says Gordon MacLeod, project manager at Toronto-based technology firm Navantis Inc. and a task force consultant. “The goal is to make disclosure more interactive and transparent.”

To that end, the task force presented MERIT (model for effective regulatory information transfer), a prototype for an electronic disclosure model that will present company information in a Web-browser format. MERIT builds upon the capabilities of eXtensible business reporting language (XBRL), a standard method in financial reporting in which information is tagged to grant better accessibility.

The MERIT model will allow investors to navigate important documentation on a more familiar interface, and will provide the framework for comparing similar facts and statements among companies’ documents, the report says.

A document outlining the MERIT model also pointed to the possibility of improving investor education, stating that such a model may enable market participants to “become better educated on their investment decisions and the companies they choose.”

The task force report also took aim at the regulation of hedge funds. Task force member Colleen Moorehead says that such products play an important role in Canada’s capital markets and must be accessible to average retail investors — but not until a suitable regulatory framework is established.

Currently, only “sophisticated investors” — defined as those with more than $150,000 in investible assets — are permitted to invest directly in hedge funds.

“We take the view that the pool of investors permitted to invest in hedge funds should be as large as possible. We also take the view that investors should make such investment choices within a regulatory framework that promotes transparency, investor protection and good governance,” says Moorehead.

The task force recommends a framework that incorporates full regulation of hedge funds, including:

> full disclosure of all performance, management, administrative and referral fees, including advisor commissions;

> a description of the relationship between the hedge fund manager, advisor and prime broker, as well as full disclosure regarding any conflicts of interest between them;

@page_break@> a description of the mechanism or process by which the assets of the hedge fund are valued, and a description of the hedge fund structure and investment strategies.

Moorehead also addresses the regulation of principle-protected notes, calling them a “complex financial product” that are often misunderstood by the investing public, particularly when their value is linked to an underlying hedge fund.

To that point, the task force recommends that PPNs linked to a hedge fund be regulated according to the nature of the underlying investment, not the exempt character of the related note with which the underlying investment is wrapped.

The next step is to allow regulators and enforcement bodies to digest the recommendations, Russell says. So far, the Canadian Securities Administrators have responded positively to the recommendations, but it will take some time before any major action is taken, especially as many of the recommendations call for further review.

For his part, Allen is cautiously optimistic: “I don’t think this report will have the same 10-year gestation period that other reports have had. Everybody in each regulator to whom we have talked is focusing on enforcement, focusing on investor education, focusing on hedge funds.

“We don’t think that we have identified any issues that the rest of the market isn’t already aware of,” he says. IE