Canada: Forward-Looking Information: New Rules Published For Public Comment

Originally published in Canadian Securities Law News, January 2007.

Since the mid-90s, there has been regulatory uncertainty over Complaints National Policy Statement No. 48 (NP48), which guides the use of future-oriented financial information (FOFI) in offering documents, restricts the use of projections and requires an auditors’ report and compliance with section 4250 of the Handbook of the Canadian Institute of Chartered Accountants. Canadian securities regulators have proposed new rules that cover all forward-looking information, which includes FOFI and a new category of forward-looking information called ‘‘financial outlook’’ (which itself includes earnings guidance). In general, the regulators propose to

• substantially maintain the requirements for FOFI under NP48, which will be rescinded and replaced with legally enforceable amendments to National Instrument 51-102, Continuous Disclosure Obligations (NI 51-102), and other securities rules and forms, and by substantially maintaining the requirements for FOFI in MD&A under NI 51-102;

• drop the requirement for an auditors’ report on FOFI in a prospectus or circular, bringing Canadian requirements into line with U.S. requirements for FOFI;

• extend certain current NP48 requirements — to compare FOFI with actual results, to update FOFI and to withdraw FOFI — to financial outlook, including earnings guidance.

The comment period on the proposed new rules is open until March 1, 2007.

Under the proposed rules ‘‘financial outlook’’ means ‘‘forward-looking information about prospective results of operations, financial position and/or cash flows, based on assumptions about future economic conditions and courses of action, and not presented in the format of a historical balance sheet, income statement or cash flow statement; examples include expected revenues, net income, earnings per share and R&D spending; a financial outlook relating to earnings is commonly referred to as ‘earnings guidance’.’’

The proposed rules would require issuers to have a reasonable basis for forward-looking information. When issuers initially publish material forward-looking information, they would be required to comply with some general disclosure principles, as well as to

• identify forward-looking information as such;

• caution users that actual results will vary;

• disclose the material factors or assumptions used to develop the information; and

• disclose the issuer’s policy for updating the information if it includes procedures in addition to those described under ‘‘Updating’’ below.

There are additional proposed requirements for assumptions used to prepare FOFI and financial outlook, and for disclosures when FOFI or financial outlook is initially published; these requirements are consistent with those in NP48 and section 4250 of the Handbook.

The proposed rules would require issuers to discuss in their MD&A events and circumstances that occurred during the period covered by the MD&A that are reasonably likely to cause actual results to differ materially from previously released material forward-looking information, including expressly earnings guidance. This differs from the current requirement under NP48 to report material changes in the events or assumptions in the same way they report a material change, but is generally consistent with the current MD&A form, which requires issuers to ‘‘discuss any forward-looking information disclosed in MD&A for a prior period which, in light of intervening events and absent further explanation, may be misleading.’’

Issuers would be required to disclose in their MD&A material differences between actual results and previously released FOFI or financial outlook for the period covered by the MD&A. This extends the approach in NP48 to financial outlook (including earnings guidance).

As with NP48, issuers would be required to disclose in their MD&A a decision made during the period covered by the MD&A to withdraw previously released material forward-looking information. They would also be required to Markets discuss the events and circumstances that led to the decision, including the assumptions underlying the information that are no longer valid.

The regulators propose to abandon the requirement in NP48 that an auditors’ report accompany any FOFI included in a prospectus or circular.

The new rules, if adopted, will not apply to oral statements. Despite this, FOFI and financial outlook in oral statements will continue to be subject to the new liability for disclosure laws, and so must be made with great care and only if accompanied by certain cautions.

A copy of the proposed new rules can be obtained from the OSC’s website at www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part5/csa_20061201_51-102_not-rfc-np48.pdf. We also remind issuers that some amendments to NI 51-102, including to the information circular, AIF, MD&A and other statutory forms, were made in October 2006. Blacklined copies of NI 51-102 and these forms can be obtained from the OSC’s website at www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part5/rule_20061013_51-102_supplement.pdf.

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