2016 CSA Continuous Disclosure Review: Mistakes to Avoid and Drafting Tips
On July 18, 2016, the Canadian Securities Administrators (CSA) published a summary of the results of their annual continuous disclosure (CD) review of reporting issuers for fiscal year 2016. See CSA Staff Notice 51-346 – Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2016 (Staff Notice).
The CSA annually conducts both “full reviews” and “issue-oriented reviews” to identify material deficiencies in reporting issuers’ CD records. This year, a total of 902 CD reviews were conducted (down from 1,058 in fiscal 2015), with full reviews comprising 31% of the total reviews and issue-oriented reviews comprising 69%.
Issue-oriented reviews are based on a specific accounting, legal or regulatory issue, an emerging issue, implementation of recent rules or on matters which the CSA believes may give rise to a heightened risk of investor harm. Issue-oriented reviews conducted in 2016 included:
- Mining/Oil&Gas technical disclosure (33%);
- Gender diversity (12%);
- Management’s Discussion and Analysis (MD&A) (9%);
- Financial statements (8%);
- Non-GAAP financial measures (6%);
- Press Release/Material change report (5%); and
- Other (including reviews of corporate governance, Management Information Circulars (MICs), material contracts, public complaints and other regulatory requirements) (27%).
The CSA classified the outcomes of both types of reviews into five categories: (i) referrals to enforcement/cease-traded/default list (8%), (ii) refiling (23%), (iii) prospective changes (31%), (iv) education and awareness (11%), and (v) no action required (27%).
The Staff Notice provides examples of common deficiencies and contrasts deficient disclosure with examples of better disclosure on select topics.
The following are examples of common deficiencies that the CSA identified in MD&As, material contracts, management information circulars and Annual Information Forms:
- Non-GAAP Measures: giving inappropriate prominence to non-GAAP measures and failure to disclose and discuss the most directly comparable GAAP measure as presented in financial statements;
- Liquidity and Capital Resources: failure to provide sufficient analysis of liquidity and capital resources;
- Forward Looking Information (FLI): failure to update disclosure relating to FLI; and
- Overall Performance: inconsistent identification of segments in MD&A as compared to financial statements.
Other Disclosure Deficiencies
- Material Contracts: prohibited redactions (including debt covenants and ratios in credit agreements and key terms necessary for an understanding of the impact of the contract on the business), failure to provide a description of the type of information redacted and failure to file all material contracts listed in the Annual Information Form on SEDAR;
- Management Information Circulars: failure to provide prospectus-level disclosure in MICs prepared in a situation of restructuring under which securities are to be changed, exchanged, issued or distributed; and
- Annual Information Form: failure to provide sufficient description of the business or applicable risk factors.
The CSA also noted common insider reporting deficiencies and errors, including:
- lack of SEDI profile for reporting insiders required to file reports pursuant to National Instrument 55-104 – Insider Reporting Requirements and Exemptions;
- failure to file insider reports on SEDI for acquisitions made pursuant to a normal course issuer bid;
- failure to report the expiration of certain issuer derivative securities (such as options and warrants) within 5 calendar days of such change; and
- failure to file amended issuer profile supplements on SEDI to reflect changes.
MD&A Drafting Tips for Reporting Issuers
Reporting issuers should review their compliance obligations and note the suggestions offered in the Staff Notice when preparing their MD&A, including:
- The description of liquidity and capital resources should discuss the issuer’s ability to generate sufficient financial resources in the short and long term to maintain capacity, meet planned growth and fund development activities.
- The obligation to discuss events and circumstances that are reasonably likely to cause actual results to differ materially from material FLI that has been previously disclosed to the public, as well as the expected differences.
- If previously disclosed FLI is withdrawn, the requirement to disclose this decision and discuss the events and circumstances that led to withdrawal.
- The need to discuss any defaults or arrears or any significant risk of defaults or arrears on debt covenants.
- The need to discuss operating segments in a manner consistent with the issuer’s financial statements.
- The need, when discussing results and trends in non-GAAP measures, to provide equally prominent discussion directly comparable GAAP measure.
Under Canadian securities law, reporting issuers must provide timely and continuous disclosure regarding their business and affairs. We are available to assist you in the preparation of disclosure documentation or to provide further guidance regarding the Staff Notice.
Note that a more detailed discussion of certain noted disclosure deficiencies relevant in the M&A context can be found in a recent post on our firm's blog, Canadian M&A Perspectives.
 See CSA Multilateral Staff Notice 58-307 for a summary of compliance with National Instrument 58-101 – Disclosure of Corporate Governance Practices.
 See the recent (January 14, 2016) CSA Staff Notice 52-306 (Revised) – Non-GAAP Financial Measures.
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