On April 18, 2008, the members of the Canadian Securities Administrators (CSA) issued a notice and request for comments in connection with the revised proposal for the repeal of Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings and its proposed replacement, National Instrument 52-109 (Proposed Instrument)1. The Proposed Instrument and related forms and proposed Companion Policy 52-109CP (Proposed Companion Policy) reflect revisions made as a result of extensive comments received in response to previously proposed materials published for comment in March 2007 (March 2007 Proposal)2.
The principal substantive certification additions of the March 2007 Proposal have been retained. Namely, the chief executive officer (CEO) and chief financial officer (CFO) of a reporting issuer, subject to certain exceptions discussed below, will be required to certify in their annual certificates that:
- they have evaluated, or caused to be evaluated under
their supervision, the effectiveness of the issuer's
internal control over financial reporting (ICFR) as at the
end of the financial year; and
- they have caused the issuer to disclose in its annual
Management's Discussion and Analysis (MD&A) their
conclusions about the effectiveness of the issuer's
ICFR based on such evaluation.
These certification requirements will be in addition to the current requirements that an issuer's CEO and CFO certify that, among other things:
- they have designed disclosure controls and procedures
(DC&P) and ICFR, or caused them to be designed under
- they have evaluated the effectiveness of the
issuer's DC&P and caused the issuer to disclose
their conclusions about their evaluation in the
issuer's MD&A; and
- they have caused the issuer to disclose certain changes
in ICFR in the issuer's MD&A.
One of the key amendments in the Proposed Instrument is the elimination of the requirement that the CEO and CFO of a venture issuer certify that they have designed and evaluated the effectiveness of DC&P and ICFR. This change is currently in effect in all jurisdictions of Canada for venture issuers, in respect of financial periods ending on or after December 31, 20073.
Other important changes found in the Proposed Instrument include a longer period during which an issuer may limit the scope of its design of DC&P and ICFR to exclude controls, policies and procedures of an acquired business, and alternative forms of certificates for the first financial period following an initial public offering or certain reverse takeovers, or after becoming a non-venture issuer. The Proposed Companion Policy has also undergone significant amendments and contains substantially enhanced guidance on various topics, including with respect to self-assessments, compensating controls and mitigating procedures, use of a service organization or specialist for an issuer's ICFR, weakness in DC&P and disclosure of an external auditor report on ICFR.
Key changes applicable to non-venture issuers
The Proposed Instrument requires that a non-venture issuer use a suitable control framework to design the issuer's ICFR. A suitable control framework is one established by a body or group that has followed due-process procedures, including the broad distribution of the framework for public comment. Examples of suitable frameworks noted in the Proposed Companion Policy that an issuer could use to design ICFR include:
- Risk Management and Governance: Guidance on
Control (COCO Framework) published by The Canadian
Institute of Chartered Accountants;
- Internal Control – Integrated
Framework (COSO Framework) published by The Committee of
Sponsoring Organizations of the Treadway Commission (COSO);
- Guidance on Internal Control (Turnbull Guidance)
published by The Institute of Chartered Accountants in
England and Wales.
Smaller issuers can also make use of Internal Control over Financial Reporting – Guidance for Smaller Public Companies published by COSO. This is especially relevant in light of the requirement that a venture issuer who chooses to file the full certificate (rather than the venture issuer basic certificate described below) for a financial period must use a control framework to design its ICFR.
The previously proposed concept of "reportable deficiency" found in the March 2007 Proposal has been replaced with the concept of "material weakness" in the Proposed Instrument. Material weakness is defined as a deficiency, or a combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the reporting issuer's annual or interim financial statements will not be prevented or detected on a timely basis. Readers will note that this definition matches the one adopted by the U.S. Securities and Exchange Commission (SEC) in respect of the corresponding certification requirements under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley).
The Proposed Instrument requires that if a non-venture issuer determines it has a material weakness relating to design at the end of the financial period covered by its filings, it must disclose in its MD&A for the corresponding period and for each such material weakness:
- a description of the material weakness;
- the impact of the material weakness on the
issuer's financial reporting and its ICFR; and
- the issuer's current plans, if any, or any
actions already undertaken, for remediating the material
In contrast to the March 2007 Proposal, the Proposed Instrument no longer contains a requirement to remediate any such material weaknesses identified.
In contrast to the 90-day scope limitation permitted under the March 2007 Proposal, a non-venture issuer may now limit the scope of its design of DC&P and ICFR to exclude controls, policies and procedures of a business that the issuer has acquired not more than 365 days before the end of the financial period to which the certificate relates. This limitation is only applicable to an annual certificate relating to the financial year in which the issuer acquired the business and an interim certificate relating to the first, second and/or third interim period ending on or after the date the issuer acquired the business.
Venture Issuer Basic Certificate
The Proposed Instrument includes a new form of certificate for venture issuers (venture issuer basic certificate) that does not require the CEO and CFO to certify that they have designed or evaluated the effectiveness of DC&P and ICFR. The venture issuer basic certificate requires the CEO and CFO of a venture issuer, or officers performing similar functions (certifying officers) to certify only that:
- the certifying officer has reviewed the annual or interim
filings, as applicable (filings);
- based on the certifying officer's knowledge, and
having exercised reasonable diligence, the filings do not
contain any untrue statement of a material fact or omit to
state a material fact required to be stated or that is
necessary to make a statement not misleading in light of the
circumstances in which it was made, for the period covered by
the filings; and
- based on the certifying officer's knowledge,
having exercised reasonable diligence, the filings fairly
present in all material respects the financial condition,
results of operations and cash flows of the issuer, as of the
date and for the periods presented in the filings.
The form of venture issuer basic certificate contains a note to the reader identifying the material differences as compared to the full certificate required to be filed by non-venture issuers. Venture issuers have the option to voluntarily file the form of certificate required by non-venture issuers rather than the venture issuer basic certificate.
Alternative forms of certificates
In recognition of the considerable efforts that management must commit to complete an initial public offering or a reverse takeover, or to become a non-venture issuer, some leniency has been offered in the Proposed Instrument by providing alternative forms of certificates for the first financial period following certain such transactions and events. The proposed alternative forms of certificates are similar to the venture issuer basic certificates in that they do not require the certifying officers to make representations relating to the establishment and maintenance of DC&P and ICFR and they include an explanatory note to the reader that sets out the differences between the alternative certificate and the full certificate generally required for non-venture issuers.
The Proposed Companion Policy contains expanded guidance on various topics, including the following points with respect to the evaluation of operating effectiveness of DC&P and ICFR:
- self-assessment by an individual who usually operates the
control would normally be supplemented with independent
testing, though in certain circumstances, self-assessment by
a certifying officer who is involved in operating the control
would provide sufficient evidence for the certificate;
- if an issuer identifies a deficiency in ICFR, they should
assess whether there is a compensating control or mitigating
procedure in place that should be assessed in connection with
the deficiency in order to appropriately evaluate the
significance of the deficiency;
- if a certifying officer identifies a material weakness in
ICFR, such certifying officer cannot reasonably conclude that
the issuer's ICFR is effective for the relevant
- if a certifying officer identifies a significant weakness
in the design or operation of DC&P, such certifying
officer cannot reasonably conclude that the issuer's
DC&P is effective for the relevant period;
- because of the substantial overlap between ICFR and
DC&P, if a material weakness is identified in ICFR, this
will often represent a significant weakness in the
- where an issuer outsources a significant process to a
service organization, certifying officers may use a service
auditor's report to assist with the evaluation of the
issuer's ICFR; and
- if an issuer refers, in a continuous disclosure document,
to an audit report prepared by its external auditor relating
to the issuer's ICFR, then it would be appropriate
for the issuer to file a copy of such report with its
Who will be subject to the new requirements?
The Proposed Instrument is scheduled to come into force on December 15, 2008, and will apply to all reporting issuers, other than investment funds, in all Canadian jurisdictions, for financial periods ending on and after the effective date.
The Proposed Instrument includes exemptions for an issuer that complies with U.S. federal securities laws implementing the annual and quarterly certification requirements under Sarbanes-Oxley, provided that the issuer files on SEDAR as soon as practicable after they are filed with or furnished to the SEC:
- in the case of the issuer's annual filings, the
signed certificate relating to the annual report (in
accordance with Section 302 of Sarbanes-Oxley) and
management's annual assessment report on ICFR and the
auditor attestation report on management's assessment
of ICFR (in accordance with Section 404 of Sarbanes-Oxley);
- in the case of the issuer's interim filings, the
signed certificate relating to the quarterly report (in
accordance with Section 302 of Sarbanes-Oxley).
To ensure that financial statements filed in Canada are certified (either under the Proposed Instrument or Section 302 of Sarbanes-Oxley), the above exemptions will not be available where an issuer prepares two sets of financial statements and files financial statements in Canada with accounting principles that differ from those that are filed or furnished in the U.S. Further, the exemption from filing an interim certificate is not available if the issuer is only certifying its annual financial statements under Sarbanes-Oxley. If an issuer is not certifying its quarterly financial statements under Sarbanes-Oxley, then it will be required to certify its interim financial statements in accordance with the Proposed Instrument. This exception affects many Canadian issuers that comply with Sarbanes-Oxley because, as a matter of practice and in accordance with SEC guidance, foreign private issuers are not required to certify their quarterly financial statements that are furnished (as opposed to filed) with the SEC by way of Form 6-K (although some issuers do so on a voluntary basis).
The above exemptions and exceptions thereto have not been amended in the Proposed Instrument and are consistent with those provided for under the March 2007 Proposal.
Next steps and ongoing review
The notice and request for comments issued by the CSA on April 18, 2008 invites written comments on the Proposed Instrument no later than June 17, 2008. Accordingly, we encourage you to promptly communicate to us any comments or concerns you may have with respect to the Proposed Instrument.
1 A copy of the notice, proposed National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings and request for comments may be obtained at http://www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part5/rule_20080418_52-109_repealreplace-sup3.pdf.
2 For our description and discussion of the March 2007 proposal, please see our McCarthy Tétrault Legal Update – Canadian Securities Administrators Propose New Officer Certification Requirements, published April 25, 2007 on our website.
3 Pursuant to existing blanket orders and similar exemptive relief and guidance issued by each CSA jurisdiction.
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.