Regulators want more disclosure from income trusts

(October 27, 2003) The sharp rise in popularity of income trusts over the past few years has attracted the attention of the country’s securities regulators. The Canadian Securities Administrators (CSA) — the umbrella group for the country’s provincial and territorial regulators — has proposed a new policy intended to beef up income trust disclosure.

“We want to ensure that everyone investing in income trust offerings has access to sufficient information to make an informed investment decision,” the CSA said in a statement.

“There are distinct attributes of investing income trusts units that should be clearly disclosed,” the report adds, suggesting that in some cases, the risks of trust investing are not being adequately communicated. “Our concerns relate to the quality and nature of prospectus disclosure and continuous disclosure records.”

“In many ways, investing in an income trust is more like investing in an equity security than in a debt security,” the policy states. “The income trust does not have a fixed obligation to make payments to investors.”

Trusts are expected to release comprehensive information about the underlying business, the CSA says. “An income trust’s performance and prospects depend primarily on the performance and operations of the operating entity,” the policy states. Such information would include quarterly and annual financial statements, management discussion and analysis, and press releases.

The CSA also expects trusts to reveal executive compensation information about the underlying business.

The regulator expresses misgivings about some trusts’ marketing and sales materials, particularly the use of the word “yield” to refer to the rate of return.

“We are concerned that the use of the term ‘yield’ may imply that the distribution entitlement is fixed,” the CSA says, adding it expects trusts to state that unlike fixed income securities, there is no obligation for the trust to distribute a fixed amount.

The CSA says it also expects income trusts to state on the cover of the prospectus whether or not a stability rating has been received. The rating measures a trust’s stability compared to other rated Canadian income trusts.

Although the policy is aimed specifically at income trusts, the CSA says it could also apply to other indirect offerings.

Proposed National Policy 41-201 is open for comment for 60 days. Submissions are due by December 23, 2003.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca