Recently we have been bombarded with calls from the investing public regarding the lack of timely information from various public companies. In fact the calls have been so frequent, this week we have decided to concentrate our efforts on market disclosure. In particular, who is responsible and why is it so important to the survival of our thin market?

It can be argued that the interests of investors and the public at large are best served by high standards of investment practice, and that these standards are best achieved by emphasizing suitable standards of disclosure, rather than by elaborate government regulations and supervision.

Uneven standards, however, create unnecessary costs, impede healthy competition and restrict investor's choices. These problems would be minimized if similar financial products were regulated by uniform and consistent standards, irrespective of how the sponsoring institution is legally classified.

If financial markets are to operate efficiently and in a transparent manner, they must be regulated by rules requiring companies to disclose information about their assets and earnings. Rules should be established to prevent the sale of securities that fail 'merit tests', rules that set minimum levels of ethical and professional standards, minimum financial and ethical qualifications, and minimum financial reporting.

Why standards of disclosure?

Standards of practice serve to protect investors against unexpected investment performance and to provide for efficient allocation of capital. When information is fully disclosed, investors are better able to make intelligent choices, the market is more orderly, and society's resources are optimally allocated. Ultimately, institutions will have a strong commercial incentive to engage in high standards of practice if appropriate disclose standards are required and enforced by appropriate rules and regulations, which should include at a minimum an accurate and relevant description of its major professional practice to current and potential investors.

Who should establish standards of disclosure?

The Securities Markets

Competition and self-interest are the major forces driving the voluntary disclosure of much information. Investors demand information about financial products in order to make choices with confidence, and institutions attract funds by supplying the needed information. Financial institutions make relevant disclosures about their products in order to build a professional reputation for honest, fair dealings, which in turn fosters good-will, enduring client relationships and referrals from satisfied customers.

Professional Associations

The investment management professionals in The Bahamas have a great opportunity to contribute to the implementation and development of the standards of disclosure.

Firstly, many managers want their profession to assume leadership in setting high standards of practice, as is done in the profession of medicine, law and accounting.

Secondly, many financial advisors are qualified to determine suitable guidelines because they understand the important features of the financial products and know how to communicate them intelligently to clients.

Thirdly, the profession can set standards on the basis of the principals of business and finance rather than solely on the basis of legal concepts.

Disclosure Criteria

The following criteria are suggested as possible guidelines for judging the quality of investment product communications:

1. Relevancy:

If information about a feature influences investors to accept or reject a financial product or its specific features, this information becomes relevant and should be disclosed.

2. Meaning:

Avoid disclosures of trivial, inconsequential, extraneous or misleading information.

3. Balance:

The information about an investment should include both its advantages and disadvantages, thereby giving investors accurate and balanced views of the product or vehicle.

4. Intelligibility:

Terminology and data used in disclosures should take into consideration the intended investor's ability to comprehend. Information should be clearly and concisely presented.

5. Usability:

Reasonable efforts should be made to bring information to the attention of existing clients and prospective clients in such a way that they can make timely evaluations and choices.

6. Equity:

Vehicles with similar goals and features should be subject to comparable industry-wide standards of disclosure.

7. Uniformity:

The features of investment products should be communicated in a uniform format to facilitate viewing comparisons by investors.

Guidelines for Disclosure:

In devising guidelines for disclosures to investors, a determination of the following is needed (i) the content of information that should be communicated, and (ii) the quality of information based on disclosure criterion or disclosure criteria.

Investors need information that will help in evaluating and choosing amongst the different institution advisors and/or financial products. The disclosure process pertains not only to prospective investors but also to existing investors, who retain the choice of continuing, defying or replacing an ongoing financial service.

Conclusion

The challenge is for all market participants to collectively work together to achieve a high level of transparency in the system. The public interest is better served by improved disclosure practices and not by expansion of restrictive regulations.

The responsibility for these standards should be shared by a mixed system – the free financial market mechanism, government agencies and the investment industry which assists to ensure that inves-tors are better informed and financial markets are better organized and more efficient.

Please send comments and or questions to info@colinafinancial.com