As part of their oversight responsibilities, the Canadian Securities Administrators (the “CSA”) undertake an ongoing review of the continuous disclosure practices of Canadian issuers. The latest results of this review (which are now released on a biannual basis) have been released by the CSA under Staff Notice 51-355 (the “Staff Notice”). The CSA reviewed disclosure by 840 reporting issuers, conducting a combination of full reviews and, in the majority of cases, issue-oriented reviews. Of these reviews, 51% required further action from a regulator, including referral to enforcement, the imposition of a cease trade order, or placement on the default list.
Covering the fiscal years ended March 31, 2017 and 2018, the Staff Notice focuses on some recurring issues and some relatively new areas of concern. Highlights of these include the following:
1. Forward Looking Information (“FLI”)
The CSA continue to identify problems with the disclosure of FLI. In particular, the CSA note that some issuers have been disclosing financial outlook for a period beyond the issuer’s next fiscal year end without providing reasonable and sufficient assumptions (which must be both qualitative and quantitative). Issuers must not disclose a financial outlook unless it is based on assumptions that are reasonable in the circumstances, and FLI must therefore be limited to a period for which information can be reasonably estimated. In many cases, this period will not go beyond the end of the issuer’s next fiscal year.
2. Financial Disclosure - Non-GAAP Financial Measures (“NGMs”)
The CSA continue to identify problems with presentation of, and disclosure surrounding, NGMs. In particular, the CSA note that the stated purpose and usefulness of some NGMs are unclear and fail to align with the nature of the adjustments being made in the issuer’s reconciliation to the applicable GAAP measure. The CSA warn that without clear disclosure accompanying NGMs and the adjustments being made to the applicable GAAP measure, there is potential that investors may be confused or even misled. Issuers should refer to CSA Staff Notice 52-306 for detailed guidance on NGMs.
3. Social Media
With reference to the recent CSA Staff Notice 51-348, the CSA note that some issuers have been providing material information on social media sites before it is generally disclosed to all investors. As the CSA do not consider information posted on social media to have been “generally disclosed”, this could constitute selective disclosure. Additionally, some issuers have been providing information on social media that may be inconsistent with the information filed on SEDAR or considered overly promotional, unbalanced, or misleading. Issuers should adopt a robust social media governance policy that sets clear parameters around what may be disclosed on social media, and who is authorized to post materials.
4. Corporate Governance Matters
The Staff Notice also addresses concerns with the disclosure of climate change risks and other pertinent corporate governance matters, including executive compensation and gender diversity.
Regarding climate change, the CSA caution that there are many issuers across a wide range of industries that could be materially impacted by climate change and that many of these issuers are currently either providing boilerplate disclosure or failing to provide adequate disclosure of issuer-specific climate change-related risks and opportunities. Material climate change-related risks should provide specificity and additional quantitative discussion, such as their financial impact.
In terms of executive compensation, the CSA note that some issuers who engage external management companies for executive management services failed to disclose the amounts paid to named executive officers (“NEOs”). Compensation paid by an external management company to NEOs or directors for these services, whether direct or indirect, must be disclosed by the issuer. If an issuer pays a management fee to an external management company for blended services that include, among other things, NEO services, the portion of such fee believed to relate to the compensation paid to NEOs should be disclosed.
Notably, 24% of the CSA’s issue-oriented reviews for the fiscal year ended March 31, 2018 focused on gender diversity disclosure. This focus is not surprising, as the CSA have previously affirmed that improved disclosure is needed in relation to women on boards and in executive officer positions - see our blog post dated October 12, 2017 for a discussion of the relevant staff notice.
5. Mineral Project Disclosure
Of particular importance to resource issuers, the Staff Notice highlights some deficiencies relating to National Instrument 43-101. For instance, the CSA note that some technical reports have not provided adequate disclosure of the important criteria the applicable qualified person used to determine that the mineral resource has demonstrated reasonable prospects for eventual economic extraction. The CSA also remind issuers that the disclosure of the results of a preliminary economic assessment (“PEA”) that includes or is based on inferred mineral resources on a mineral property on which mineral reserves have also been determined, can be potentially misleading if the results of the PEA are combined or integrated into the economic analysis, cash flows, production schedules, or mine life based on a pre-feasibility, feasibility study, or life of mine plan for the mineral reserves.
The Staff Notice provides helpful and practical guidance on areas of disclosure that continue to be, or are becoming, of particular interest to securities regulators. Issuers should assess their own disclosure practices in light of the Staff Notice.
To discuss the implications of the Staff Notice or continuous disclosure obligations under securities laws generally, please contact any member of our Corporate Finance and Securities Group.
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