1. GOALS

1.1 - Efficient Capital Allocation

Full and fair enterprise-related disclosure to those providing the capital is essential to the efficient allocation of capital in a free market. In a free market, investors with access to full and fair disclosure, rather than the government, determine how capital should be allocated.

1.2 - Investor Protection

Full and fair enterprise-related disclosure protects investors as they determine how to invest their savings.

1.3 - Investor Confidence Enhances Market Efficiency

Full and fair enterprise-related disclosure fosters investor confidence in the capital markets, thereby enhancing market liquidity and efficiency.

2. PRINCIPLES

2.1 - When Disclosure Should be Provided

2.1.1 - Securities Offerings

When an enterprise offers securities to the public, mandated disclosures should be made to allow investors to make an informed decision about the offering.

• Mandated line item disclosure requirements may not be appropriate for some kinds of offerings, such as private offerings limited to professional investors that have the sophistication to know what information to demand and the economic strength to negotiate to obtain such information.

2.1.2 - Listing for Trading on a Public Securities Market

When a public securities market approves the trading of securities of an enterprise on its market, specific disclosures should be made available to allow investors to make informed trading decisions.

• When securities are held by significant numbers of investors, some jurisdictions mandate specific disclosures even if no public offering of securities has been made in the jurisdiction, and even if the securities are not listed on a public market, in light of the comparable information needs of investors in widely-held enterprises.

2.1.3 - Continuous Disclosure

Enterprises that have listed securities or have offered securities to the public should continue to provide on a timely basis to investors information upon which to make an informed decision whether to buy, hold or sell the securities. Availability of current information is a key factor in the liquidity of the market for the security. Liquidity enhances the number of participants in the market and increases pricing efficiency.

• Annual: Updating should be required annually.
• Periodic: Updating during the year should be required on at least a semiannual basis.
• Material Events: Updating also should be required for material events. The material events disclosure requirements may be based on either (1) specific events set forth in the disclosure regulations, or (2) a general materiality standard.

2.1.4 - Investor Vote of their Securities

When investors are asked to exercise the voting rights of their securities, disclosure should be provided sufficient to make an informed decision on the question presented.

2.2 - What Disclosure Should be Provided

2.2.1 - Subjects to be Covered in Disclosure

Enterprises that are subject to a disclosure system should provide information covering the following areas:

• Business: the business of the enterprise - this discussion should provide a narrative description of the business conducted and to be conducted by the enterprise, focusing on segments, product classes and lines of business, and including any specific risks associated with the business.
• Management: the management of the enterprise - this discussion should provide business background on those individuals who hold senior and key positions in the enterprise, as well as information relating to their relationship with the enterprise (including information about compensation and transactions with the enterprise).
• Financial Statements: appropriate financial statements (as discussed below).
• Management Discussion of Financial Position, Results of Operations and Cash Flow: this discussion should analyze and explain the enterprise's financial position, changes in financial condition, results of operations and cash flow during the fiscal periods for which financial statements are required to be provided. The analysis should include a discussion of known facts, trends or contingencies that are likely to have a consequence on future results, financial condition or cash flow. In essence, this analysis should explain the extent to which the historical financial statements are indicative of the enterprise's prospects.
• Projections: consideration should be given to requiring additional soft information, including management's projections of future financial performance of the enterprise. This currently is required in some jurisdictions and encouraged, but not required in other jurisdictions.
• Offering Information: when the enterprise's securities are offered to the public, information should be disclosed about the nature of the offering, the use of proceeds, the terms of the securities being offered, the persons undertaking such offering, and any interest such persons have in the offering or the enterprise.
• Voting Information: when the enterprise presents matters for the vote of investors, disclosure should be provided that describes the proposal, the consequences of the proposal, the persons making the proposal (such as management) and any interest of such persons in the proposal.

2.2.2 - Standards Governing the Disclosure

The disclosures provided should be subject to the following overall standards:

• Anti-fraud Proscription: a sound disclosure system should include a general proscription against misleading statements and omissions that would cause statements made to be misleading.
• Materiality Standard: the disclosure standards must be applied in light of an overarching principle of materiality because the strict application of specific disclosure standards could result in investors being overwhelmed with information of little or no significance to their investment decisions, and, conversely, insufficient information if no specific line item requires it.
• Level of Disclosure: the emphasis should be on ensuring the disclosure of that information which will be of use to reasonably knowledgeable investors willing to make the effort needed to study the disclosures.

- Equal Access to Mandated Disclosure from Enterprises: Where disclosure is mandated, it generally should not vary depending on the nature or sophistication of the investors. In other words, there should not be a two-tiered disclosure system.

• Comprehensibility: all information that is provided should be clear, concise and comprehensible; the adequacy of the disclosure document should be judged on the basis of the total mix of information.
• Enterprise-specific Disclosure: information should focus principally on the specific enterprise, rather than on external factors such as macroeconomic conditions.

- A disclosure based system recognizes that investors' decisions will be based on a number of factors, including macroeconomic. Mandated disclosure should be enterprise-specific, recognizing that the enterprise-specific information may include macroeconomic factors with a special or unique effect on the particular enterprise.

- It may be appropriate to mandate disclosure of information relating to facts and circumstances not controlled by the enterprise (such as market information relating to industry competitors and information about regulatory constraints affecting the enterprise) when such information is material to an understanding of the enterprise.

- Provision of information for other social or governmental purposes should not be effected through the mandated disclosure document, as this approach undermines the efficacy of disclosures by obscuring other information and is not easily measured under the materiality standard.

• Comparable Enterprise-related Disclosure in Offering and Periodic Reporting Documents: comparable disclosure should be provided for public offerings of securities and secondary trading.
• Small Enterprises: in order to address the significant cost burden to small enterprises associated with compliance with comprehensive disclosure requirements, consideration may be given to modifying the disclosure requirements for small enterprises, provided any such difference in disclosure is balanced against investor protection and other concerns, including the following:

- small enterprises may involve higher risks, thereby increasing the need for disclosure; and

- disclosure provided under the disclosure system may be the only information available concerning the small enterprise. Investor willingness to provide capital depends upon the availability of information, and a reduction in available information may erode investor willingness to purchase such securities, thereby undercutting the liquidity of securities.

2.2.3 - Financial Information

• Relevant Reliable Comparable and Consistent Presentation: Financial statements should be provided on a consolidated basis. The statements should provide material financial information that is relevant, reliable, comparable and consistent. These concepts encompass the following:

- Relevance: the information makes a difference in a decision by helping users to form predictions about the outcomes of past, present and future events or to confirm or correct prior expectations. Relevance also requires timeliness -- availability of the information before it loses its capacity to influence decisions. If information is not available when needed or becomes available so long after the reported events that it has no value for future action, it lacks relevance and is of little or no use.

- Reliability: the information must be relatively free from error, independently verifiable and unbiased towards a predetermined result.

- Comparability and Consistency: the information must be such that it can be readily compared with similar information about other enterprises and with similar information about the same enterprise for a different point in time.

- Cost Effective: the perceived benefits of the disclosure must exceed the perceived costs associated with it.

• Required Financial Statements: enterprises that are subject to the disclosure system should be required to provide financial statements which include a balance sheet, income statement and statement of cash flows; segment and geographic area information should be required with respect to the following items: revenues, operating profits, assets, export sales and related financial information.
• Comprehensive Body of Accounting Principles: the financial statements must be prepared on the basis of a comprehensive body of accounting principles consistently applied to all periods covered. These comprehensive standards should be sufficiently detailed and accepted throughout the jurisdiction to assure that relevant and reliable financial data is provided and that comparable and consistent information and accounting treatment is given for like transactions by all enterprises using such standards. These standards should focus on the economic results of transactions rather than the manner in which such transactions are undertaken.
• Intended Audience: the standards should have as their goal the production of financial statements that are prepared for external reporting purposes for use by investors and creditors, rather than for other non-investment related purposes, such as tax accounting.
• Fair Presentation Requirement: the overarching standard should be production of financial statements that fairly present the financial condition, results of operations and cash flows for the enterprise.
• Periods Covered: financial information should be provided for more than one fiscal period, to allow comparison with earlier comparable fiscal periods and the identification of trend information. Full financial statements for the most recent fiscal periods and less detailed financial statements for less recent fiscal periods may be appropriate.
• Audit Requirement: financial statements should be subject to audit by qualified external auditors that are independent or the enterprise being audited. The complete audit should be conducted on at least an annual basis covering the annual fiscal period of the enterprise, and should be conducted in accordance with a comprehensive body of auditing standards.
• Content of Auditor's Report: the report of the auditor should indicate the body of auditing and accounting standards followed and identify any audit procedure deemed necessary that was omitted. The report should state clearly the opinion of the auditor with respect to the fairness of the financial statements and their conformity with the comprehensive basis of accounting on which they are prepared. Any matters to which the auditors take exception should be clearly identified and, to the extent practicable, the effect of such exception should be clearly stated.

2.3 - Methods of Providing Disclosure

A sound disclosure system should assure that investors have access to mandated information on a timely basis, and that such information is made available to them efficiently and in a reasonable manner.

2.3.1 - Actual Delivery of Disclosure

In certain jurisdictions, some events are deemed of such significance that actual delivery of a disclosure document to investors, rather than reliance on publicly filed information, is called for. For example, actual delivery may be called for with respect to the following: provision of a prospectus during a public offering; annual information; information in connection with a security holder vote; and information in connection with transactions (such as tender and exchange offers, and mergers) that can affect the value of an existing investment.

• Some jurisdictions allow widely-held enterprises that regularly provide disclosure to the public to incorporate the publicly available information by reference into a prospectus, without the need to repeat the information in the document.

2.3.2 - Public Repositories

Arrangements should be developed to make enterprise disclosures publicly available in a prompt and efficient manner. Repositories may include securities exchanges, securities regulators or other organizations.

2.3.3 - Public Availability Through Enterprises

Publicly held enterprises also should be required to provide mandated disclosure documents.

2.3.4 - Concerns Raised by Limited or Unequal Access

Limited or unequal access to material information raises concerns relating to fairness of market structures and could erode public confidence and deter investor participation in the market.

2.4 - Measures to Assure Efficacy of Disclosure System

2.4.1 - Sanctions for Non-Compliance

To assure compliance with the disclosure system, sanctions should be imposed for non-compliance.

• Regulatory Sanctions: there is a range of non-exclusive alternatives that may be available to regulatory authorities in order to assure incentives for compliance, including:

- monetary sanctions;

- disqualifications from serving in certain capacities in the securities markets;

- suspend or cease trading in the securities; and

- proscriptions against further non-compliance.

• Criminal Sanctions: criminal sanctions can be imposed for noncompliance, including monetary penalties and imprisonment.
• Enforcement by Private Parties: investors may be provided with rights of redress to seek compensation for damages suffered as a result of noncompliance with disclosure standards.
• Sanctions Imposed by Self-Regulatory Industry Organizations: self-regulatory organizations can employ a range of sanctions, including those available to regulatory authorities; for example, securities exchanges may suspend or cease trading in, or delist, a security.

2.4.2 - Oversight

To assure high quality compliance with the disclosure standards, an oversight body should have the authority to establish the disclosure standards and to oversee their compliance. Such oversight authority should include the power to either (1) take action to enjoin ongoing violations and sanction breach of standards, or (2) refer such violations, ongoing or past, to governmental authorities for injunction and sanction.

Optimally, oversight and enforcement power should be in the same agency. To the extent the oversight body relies on other authorities to impose sanctions for non-compliance, such parties should establish a close co-operative relationship.