Article published in The Financial Post, July 28, 2001, p. C-11
What mortal economic sin was Air Canada charged with to land it in such hot water? In the early evening of Oct. 5, 2000, it apparently provided 13 analysts with selective "material" information, in violation of securities legislation, Toronto Stock Exchange rules and the company's own internal policies. According to allegations by staff of the Ontario Securities Commission (OSC), Air Canada thus "acted contrary to public interest."
Actually, Air Canada wasn't charged with anything. Following typical OSC practice, the company was bullied into accepting a settlement for fear of being charged. But let's disregard this factor here. Let's also disregard the facts that Air Canada's shares were already on a downward slide when they dropped 12% to $13.25 on Oct. 6, that they recovered in less than three weeks to more than $17, and that they remained above the Oct. 6 level for almost three months. The so-called material information apparently wasn't all that material. Air Canada shares have dropped steadily since then, but for reasons completely unrelated to selective disclosure.
So, although the alleged inappropriate disclosure turned out to be more confusing to the market than material -- the earnings forecasts, in fact, proved to be dead wrong -- Air Canada was forced yesterday by both the Ontario Securities Commission and the Quebec Securities Commission (QSC) to pay a fine of $1-million.
What's the moral of the story? "[S]elective disclosure," said Michael Watson, OSC director of enforcement, "is a practice that will not be tolerated." But what's wrong, exactly, with selective disclosure? How can any kind of disclosure be non-selective? After all, not everybody reads press releases at the same time.
Let's first consider public interest. How can we expect the analysts, specialized information brokers, to do a good job if we remove their incentive to get their hands on information first? Public interest calls for a free flow of information, not for tampering with efficient incentives or replacing spontaneously evolved rules by top-down diktats.
From an economic point of view, the assault on selective disclosure is just another junk-science type of witch hunt. It is closely related to the similar witch hunt against insider trading, about which we have also heard much in Canada recently. Both witch hunts have been imported into this country from the U.S. Securities and Exchange Commission (SEC), the mother of all securities bullies. They are based on the same ideal, or illusion, of equal information simultaneously falling on everybody like manna.
Second, let's look at private interests, which are the building blocks of the public interest. I suggest that we should not interfere with institutions that generate private interests in disseminating information. But we should also not interfere with legitimate interests to keep some information private. Depending on circumstances, selective disclosure may be an efficient way for a firm to get information to the market.
For example, Air Canada executives may have wanted to transmit to the market their educated guesses about next-quarter profits without publishing quantitative forecasts that are necessarily unreliable. Indeed, since the Oct. 5 "disclosures" proved wrong, it seems appropriate to conclude that the company was right not to make its rough guesses official. Or the company might have had other reasons to talk to analysts exclusively. Who knows better about this than Air Canada executives and financial analysts? Forbidding such an exchange of information between consenting adults may very well curtail the flow of information to the market.
There may, of course, be occasions when the opposite is true, when it may be in shareholders' interests to restrict selective disclosure. If that's the case, then let shareholders, or their elected boards of directors, enact what they think are the best internal rules to do so. Why do we need a legal prohibition? If, as alleged by the regulatory bureaucracies, Air Canada executives have acted "not in accordance with Air Canada's Public Disclosure Policy," and if such policy was meant to be unbreakable, then let the company's owners or the CEO fire the culprits.
Similarly, if Air Canada has broken its membership conditions in the Toronto Stock Exchange, the economically efficient rule would be to let the exchange find the best punishment, if any is required. And what would be the problem if, responding to their particular circumstances, different firms or stock exchanges adopted different rules? Companies and stock exchanges used to be private organizations, but we seem to have lost the capacity to distinguish between private agreements and top-down regulation. Investors don't need a financial nanny state.
We should not automatically accept the myth that investors' confidence would be ruined by allowing selective disclosure or insider trading. It may just work the other way around as investors risk becoming too naive. There is already plenty of anecdotal evidence that investors have developed a false sense of security under the illusion of an equality that is somehow guaranteed by the state. There is no such thing as equality of information and no state can provide it.
Can the type of bureaucrats who run medicare be trusted to regulate complex financial markets? Anybody who thinks government information is more perfect than what the free market offers should try to find, say, a definition of insider trading on the OSC Web site, or an English version of the QSC annual report.
Whether in relation to disclosure or insider trading, regulation of financial information with threats of prosecution gives dangerous powers to governments that are already much too powerful. Ask George Soros. The anti-capitalist international speculator who argues for more regulation of financial markets is actually tasting his own medicine: He is being prosecuted before a French criminal court for insider trading in a 1988 politically dictated raid on Société Générale.
Michael Watson, who was with the British Columbia Securities Commission before becoming an Ontario bully, wrote in 1998: "The existence of a strong regulatory framework is essential to the creation of a credible capital market ..." One year after the unsuccessful raid on Société Générale, the annual report of the French Securities Commission (COB) boasted that "a strong and differentiated regulatory framework is essential to social and economic order."
The OSC and the QSC are slowly getting on par with the COB and the SEC. The bullies of the world are uniting.