Regulator adopts new income trust policy

(December 3, 2004) The Canadian Securities Administrators has approved a new policy intended to enhance risk disclosure in the income trust sector.

The umbrella group for the country’s provincial and territorial regulators first published the policy for comment in October, 2003. About two dozen comments were received resulting in minor changes. However, the changes were not material, the CSA says, so the new policy will take effect immediately.

“The policy provides guidance and clarification to market participants about income trusts,” the CSA said in a statement. “The CSA wants to ensure that everyone investing in income trust offerings has access to sufficient information to make an informed investment decision.”

Initially, the CSA said it was concerned about the use of the term “yield” in some trust marketing materials, which may imply that the distribution entitlement is fixed. “We expect expressions of yield to be accompanied by disclosure in which, unlike fixed-income securities, there is no obligation of the income trust to distribute to unitholders any fixed amount of cash distributions.”

The new policy reminds issuers to include risk factors in the trust’s prospectus and suggests using the following language:

“A return on your investment is not comparable to the return on an investment in a fixed-income security. The recovery of your initial investment is at risk, and the anticipated return on your investment is based on many performance assumptions. Although the income trust intends to make distributions of its available cash to you, these cash distributions may be reduced or suspended. In addition, the market value of the units may decline if the income trust is unable to meet its cash distribution targets in the future, and that decline may be significant.”

The CSA has also backed off slightly on stability ratings, stating that although such a rating is not required, it does believe such ratings provide useful information to investors. “We have removed the recommendation for issuers to include disclosure about the absence of a stability rating and the reasons for not obtaining one.” The regulator says it intends to revisit the income trust policy in approximately two years.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com