Canada: New Disclosure Requirements for 2005 Annual Filings

Over the past few years, Canadian reporting issuers have been required to comply with gradually increasing disclosure requirements, changing their policies and practices along the way. As a result of securities law requirements enacted or amended in the summer of 2005, filings required to be made for the year ended December 31, 2005 are also subject to new disclosure requirements. These include: additional certifications in CEO and CFO certificates, along with corresponding disclosure in annual MD&A, as well as new disclosure relating to corporate governance practices in management information circulars and annual information forms.

CEO and CFO Certifications and Related MD&A Disclosure

Originally adopted as of March 30, 2004 and amended effective June 6, 2005, Multilateral Instrument 52-109 Certifications of Disclosure in Issuers’ Annual and Interim Filings (the Certification Rule) requires Canadian reporting issuers to file interim and annual certificates, certified by the chief executive officer and the chief financial officer of the issuer (or equivalent). For financial years ending on or before March 30, 2005, the required certificates were "bare" certificates only, and did not require certifications about the establishment, maintenance, design or evaluation of disclosure controls and procedures (or internal controls over financial reporting). However, commencing with the first full year ending after March 30, 2005 (which, for most issuers, is the year ended December 31, 2005), the certificates must include certifications regarding the establishment and maintenance of disclosure controls and procedures, including the design of such disclosure controls and procedures to provide "reasonable assurance" that material information relating to the issuer, including its consolidated subsidiaries, is made known to the certifying officers.

In addition to the content of the certificates, additional disclosure is also required in the issuer’s annual MD&A: the certifying officer must confirm in the certificate that he or she has evaluated the effectiveness of the issuer’s disclosure controls and procedures and has caused the issuer to disclose his or her conclusions about such effectiveness in the issuer’s annual MD&A.

While the Certification Rule requires certifying officers to represent that they have evaluated the effectiveness of the issuer’s disclosure controls and procedures and have caused the issuer to disclose their conclusions based on such evaluation in the annual MD&A (which, unlike changes in internal control over financial reporting, are not required to be disclosed in the interim MD&A), it does not specify the contents of the certifying officer’s report on such evaluation. The Companion Policy to the Certification Rule suggests, however, that given that disclosure controls and procedures should be designed to provide, at a minimum, a reasonable assurance of achieving their objectives, the corresponding report in the MD&A should set forth, at a minimum, the conclusions of the certifying officers as to whether the controls and procedures are, in fact, effective at the "reasonable assurance" level.

Certifications regarding internal controls over financial reporting, including disclosure in annual and interim MD&A of any changes in the issuer’s internal control over financial reporting, are not yet required. It is expected that issuers will be required to include such certifications in their annual and interim certificates (and corresponding disclosure in annual and interim MD&A) in respect of the first full year ending after June 29, 2006 (i.e. for most issuers, commencing with annual certificates and annual MD&A for the year ended December 31, 2006).

Unlike other Canadian governance or disclosure rules, the Certification Rule currently applies on the same basis to most Canadian reporting issuers (other than investment funds), with no separate standards or exemptions for venture issuers.

Corporate Governance Disclosure

Effective June 30, 2005, Canadian securities administrators also adopted National Instrument 58-101 Disclosure of Corporate Governance Practices (the Corporate Governance Rule) and the associated National Policy 58-201 Corporate Governance Guidelines (the Guidelines). The Corporate Governance Rule requires issuers to include prescribed corporate governance disclosure in their management information circulars or annual information forms and the Guidelines provide guidance on corporate governance matters in the form of suggested "best practices."

The Corporate Governance Rule applies to all reporting issuers, other than investment funds, issuers of asset-backed securities, designated foreign issuers, SEC foreign issuers, certain exchangeable security issuers, certain credit support issuers and certain subsidiary issuers. For most issuers, the specific disclosure items are set out in Form 58-101F1. However, venture issuers (those whose securities are not listed or quoted for trading on the TSX, a U.S. marketplace or a marketplace outside of Canada and the U.S.) are required to disclose only those items identified in Form 58-101F2.

Under the Corporate Governance Rule, if an issuer solicits proxies from its security holders for the purpose of electing directors to its board of directors (or the equivalent), the prescribed disclosure must be contained in its management information circular. For issuers who do not send management information circulars, the disclosure must be contained in the issuer’s annual information form (or annual MD&A for venture issuers who do not file annual information forms).

The prescribed disclosure requires details of matters such as the identity and composition of the members of the board of directors, measures taken in respect of orientation and continuing education of directors, the process for identifying new candidates for the board, the process for determining compensation for directors and officers and whether the board, its committees and individual directors are regularly assessed with respect to their effectiveness or contribution. Additional requirements include disclosure about the following (if they exist): board mandate, written position descriptions for the board chair, committee chairs and the CEO, code of ethics or conduct, nominating committee or compensation committee (and their composition and function) and the identity and function of any other committees. Where these matters have not been formally addressed by the board (i.e. through the adoption of policies or descriptions), the Corporate Governance Rule requires in most instances that the issuer describe how the issuer's board deals with these matters.

In addition, the Corporate Governance Rule requires that if an issuer has adopted a written code of conduct (which is a recommended "best practice" under the Guidelines but is not mandatory), then it must file a copy of the code or any amendment to it on SEDAR no later than the date on which the issuer's next financial statements must be filed, unless a copy of the code or amendment has previously been filed.

These disclosure requirements replace the corporate governance disclosure previously required under the TSX Company Manual, and compliance is to be jointly enforced by the TSX and securities regulatory authorities.

The Guidelines set out suggested "best practices" relating to certain corporate governance matters and are not meant to be prescriptive. According to the purpose and application section of the Guidelines, issuers are "encouraged to consider" the Guidelines in developing their own corporate governance practices. The suggested best practices set out in the Guidelines include:

  • maintaining a majority of independent directors on the board of directors,
  • appointing an independent chair or lead director for the board,
  • holding regularly scheduled meetings of independent directors (without non-independent directors and management),
  • adopting a written board mandate,
  • developing position descriptions for the chair of the board, the chair of each board committee, and the chief executive officer,
  • providing each new director with comprehensive orientation, and providing all directors with continuing education opportunities,
  • adopting a written code of business conduct and ethics,
  • appointing a nominating committee and a compensation committee composed entirely of independent directors (with a written charter for each), and
  • conducting regular assessments of the board effectiveness, as well as the effectiveness and contribution of each board committee and each individual director.

Audit Committee Disclosure

Also originally adopted as of March 30, 2004 and amended effective June 30, 2005, Multilateral Instrument 52-110 Audit Committees (the Audit Committee Rule) governs the functions and powers of the audit committee and requires issuers to provide certain prescribed disclosure regarding its composition and functions as set out in Form 52-110F1 (or Form 52-110F2 for venture issuers).

Like the Corporate Governance Rule, the Audit Committee Rule also applies to all reporting issuers other than investment funds, issuers of asset-backed securities, designated foreign issuers, SEC foreign issuers, certain exchangeable security issuers, certain credit support issuers and certain subsidiary issuers.

Pursuant to the Audit Committee Rule, each reporting issuer to whom the rule applies is required to have an audit committee comprised of a minimum of three directors, who are all, subject to certain exemptions, independent of the issuer. The Audit Committee Rule also mandates that the audit committee of the issuer:

  • have a written charter that sets out its mandate and responsibilities,
  • recommend to the board of directors:
  • the external auditor to be nominated for the purpose of preparing or issuing an auditor's report or performing other audit, review or attest services for the issuer; and
  • the compensation of the external auditor,
  • be directly responsible for overseeing the work of the external auditor,
  • pre-approve non-audit services to be provided to the issuer or its subsidiary entities by the issuer's external auditor,
  • review the issuer's financial statements, MD&A and annual and interim earnings press releases before the issuer publicly discloses this information,
  • be satisfied that adequate procedures are in place for the review of the issuer's public disclosure of financial information extracted or derived from the issuer's financial statements, other than the public disclosure referred to above, and periodically assess the adequacy of those procedures,
  • establish "whistle-blower" procedures for:
  • the receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and
  • the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters, and
  • review and approve the issuer's hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of the issuer.

The prescribed disclosure required under the Audit Committee Rule must be included in the issuer’s annual information form. Where the management of the issuer solicits proxies from security holders for the purpose of electing directors to the issuer’s board of directors (or equivalent), the issuer must include a cross-reference in the management information circular to the section in the issuer’s AIF that contains this disclosure. The prescribed disclosure includes disclosure of the text of the audit committee’s charter, its composition, including relevant education and experience of its members, as well as disclosure regarding reliance on certain exemptions from the requirements of the Audit Committee Rule, a description of its pre-approval policies and procedures, if any, and the aggregate amount of fees billed by the issuer’s external auditor for the last two fiscal years, segregated based on "audit fees," "audit-related fees," "tax fees" and "all other fees."

While the disclosure required under the Audit Committee Rule is not new (as it applied commencing on the earlier of the issuer’s first annual meeting after July 1, 2004 and July 1, 2005) the Audit Committee Rule was amended effective June 30, 2005. These amendments included a clarification of the definition of "independence" (part of which also applies to the Corporate Governance Rule and the Guidelines), technical amendments to the definitions of the terms "venture issuer" and "control" and changes to the exemptions for controlled companies and to the form of disclosure required for venture issuers to include a section on "relevant education and expertise."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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