Investors Scrutinizing the Regulators

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Regulators unearth disclosure shortfalls

Barbara Shecter

Thursday, August 14, 2008

Significant "deficiencies" were found in the disclosures made by one-quarter of 854 companies and issues scrutinized in a review program that included the way troubled asset-backed commercial paper is valued, the Canadian Securities Administrators has found.

Industry observers said the focus by regulators on the frozen segment of the debt market during the fiscal 2008 review is not a surprise, but questioned whether regulatory standards can be applied to instruments that are in the midst of a restructuring involving the courts.

"It would seem to me it would be a target issue because of the problems we've had," said Bill Mackenzie, director of special projects at the Canadian Coalition for Good Governance in Toronto. "It's a good thing they're doing that now --it would have been nice a year ago."

The CSA, the umbrella organization for the country's regional financial-market regulators, said in a report yesterday it conducted 442 full reviews and 412 issue-oriented reviews into ABCP, new accounting requirements including financial instruments, and mining technical disclosures.

The CSA said 39% of the reporting issuers reviewed for the fiscal 2008 period were not required to amend disclosure documents or make further disclosure enhancements. But it said "some reporting issuers had significant deficiencies" in their disclosure.

Five per cent were referred to enforcement officials, while a cease-trade order was issued in 1% of the cases, the CSA said.

Nineteen per cent of the issues studied required the refiling of certain disclosure documents.

"Many companies are doing a good job? but there is room for improvement," said Cameron McInnis, chief accountant of the Ontario Securitis Commission.

He said the review revealed that some companies were not properly assessing asset-backed commercial paper, the troubled short-term securities backed by packages of loans including mortgages. The ABCP market seized up a year ago, when concern rose over the quality of the debt and the likelihood it could be repaid. ABCP was supposed to be readily convertible into defined amounts of cash.

Mr. McInnis said some companies continued to value the holdings as current assets, while others wrote them down but not to the extent expected.

"In some cases, we weren't satisfied with the value they came up with," Mr. McInnis said.

Colin Kilgour, who helped create and sell asset-backed commercial paper until 2006 and is now advising companies on how to value ABCP, said firms can do little more than guess the worth while a proposed restructuring of the frozen segment of the market makes it way through the courts. The restructuring proposal aims to convert the commercial paper into more palatable longer-term notes.

"It's still pretty much shooting in the dark. Until someone steps up and says 'I'll buy that,' you don't know," he said, adding that regulators have little expertise because the non-bank ABCP market was not regulated by them.

"You can't say [companies] are right or wrong compared to anyone else," Mr. Kilgour said. "It's easy [for regulators] to throw stones. It's hard to tell what the right answer is."

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