On July 16, 2015, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-344 summarizing the results of their Continuous Disclosure (CD) Review Program for the fiscal year ended March 31, 2015. The CSA carried out 1,058 full and "issue-oriented" CD reviews of public issuers, 59 percent of which resulted in the issuer being required to take remedial action. This included requiring issuers to improve and/or amend their disclosure, referring them to enforcement, or having them cease-traded or placed on the default list.
The 2014 CD review program, by comparison, resulted in 60 percent of reviews leading to remedial action. This apparent consistency masks a somewhat more exacting approach by regulators in fiscal 2015, as mandatory re-filings increased by seven percent while the proportion of reviews that required only prospective changes to an issuer's disclosure practice fell by a corresponding amount. The higher incidence of re-filings may stem in part from the emergence of medical marijuana companies, which were the subject of eight percent of the issue-oriented reviews in fiscal 2015.
The CSA identified a number of common deficiencies uncovered by the CD review, and grouped them into three broad categories: Management's Discussion and Analysis (MD&A) Deficiencies, Financial Statement Deficiencies, and the catch-all Other Regulatory Deficiencies. These included, among other things, the following:
The CSA noted that issuers continue to fail to provide sufficient analysis in the liquidity and capital resources section of their MD&A. In this section, issuers should provide detail about their short- and long-term liquidity and an analysis of their capital resources. The disclosure should be more than a mere repetition of information provided in the financial statements. This is particularly important for issuers that have negative cash flows from operations, a negative working capital position or a deteriorating financial condition.
Another problem area was disclosure around the results of operations. The CSA observed boilerplate language that did not provide sufficient detail regarding the key drivers or reasons for change. A better approach, according to the CSA, is for issuers to provide a detailed explanation of how they performed during the period. This explanation should include applicable trends, commitments and uncertainties.
A third common pitfall for issuers, generally, is the failure to clearly identify forward-looking information and include the appropriate disclosures. Deficiencies with respect to forward-looking information can occur in MD&A, a website, news releases or any other public document. Issuers can improve forward-looking disclosure by identifying the material factors or assumptions that were used to arrive at the forward-looking information, or cross-referencing such information included in another CD document. Material factors or assumptions should be clearly linked to any associated risk factors.1
Although not discussed in the Notice, issuers are incentivized to pay close attention to cautionary language relating to forward-looking information in that—aside from avoiding unwanted regulatory comments on an issuer's CD record—it can provide a defence against potential secondary market liability.2
The Notice highlighted that related party transactions are subject to higher disclosure requirements in MD&A than in financial statements. It provided examples of insufficient and proper descriptions of compensation paid to a related party for management services. The better disclosure identified the related party and the business purpose, both of which are required by the MD&A form, but not by the applicable accounting standard.
Finally, the Notice discussed common errors in certification of annual and interim filings by non-venture issuers, specifically regarding the effectiveness of internal controls over financial reporting (ICFR). If an issuer identifies a weakness in this area, it must describe, in both its MD&A and the CEO/CFO certifications, the weakness, the impact on financial reporting and any remedial actions or plans. The CSA cited insufficient description of these three points, as well as inconsistent disclosure of ICFR weaknesses between the MD&A and the certifications.
Financial statement deficiencies
The CSA noted that issuers recording an impairment of assets commonly did not disclose how they determined the amount of the loss in accordance with the applicable accounting standard. Issuers must disclose whether the recoverable amount of the asset is: (a) its fair market value less costs of disposal, or (b) its value in use. There are specific rules for each approach.
The Notice cited precedents of deficient and proper disclosure, using as an example the impairment of a mineral resource property. The deficient disclosure did little more than acknowledge the impairment and attendant write-down. The proper disclosure, by contrast, comprised a more fulsome explanation, noting the method used to calculate the impairment, the rationale for such method and the criteria considered in determining the amount, such as the sale price of adjacent properties.
Other regulatory deficiencies
The failure of issuers to file material contracts and Material Change Reports (MCR) is a trend that continued in fiscal 2015. The CSA reminded issuers that any material contract must be filed no later than: (a) the time of filing of the MCR if the contract constitutes a material change, or (b) the time of filing the issuer's next Annual Information Form (or, if it is not required to file one, within 120 days after the issuer's year-end). MCRs must be filed as soon as practicable and, in any event, within 10 days of the material change.
The CSA also warned issuers about selective disclosure. This occurs when an issuer discloses material non-public information to select individuals or companies. Industry conferences and meetings with analysts are particularly vulnerable to selective disclosure. As such, one preventative mechanism is for issuers to keep detailed meeting notes to determine if unintentional selective disclosure has occurred. If such a disclosure has occurred, an issuer must take immediate steps to ensure that the information is released to the public. This may include requesting that trading be halted until a news release can be issued.
The Notice referenced a previous publication, Staff Notice 43-309 Review of Website Investor Presentations by Mining Issuers (which was the subject of a Dentons blog post), and noted that the CSA would continue to review mining issuers' website disclosure.
Finally, the Notice provided reminders about news release requirements. Issuers should avoid unbalanced and promotional disclosure, particularly in connection with entering a new business. If an issuer decides to refile a disclosure document or restate its financial results, and the revised information will differ materially from the originally disclosed information, it must immediately issue a news release stating the nature and substance of the revision or proposed revision.
If you have any have any questions about the CSA Staff Notice, or about other continuous disclosure matters, please feel free to contact one of our securities lawyers.
1. CSA Staff Notice 51-330 – Guidance Regarding the Application of Forward-Looking Information Requirements under NI 51-102 Continuous Disclosure Obligations.
2. The defence, which also requires that the forward-looking information have a reasonable basis, exists in the securities legislation of the provinces and territories. See, for example, section 138.4(9) of the Securities Act (Ontario).
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