So Hard Done By? CSA Proposes to Reduce Burden with Continuous Disclosure Reforms

In furtherance of their ongoing burden reduction initiative (see our April 2018 Blakes Bulletin: CSA Announce Policy Projects to Reduce Regulatory Burden for Public Companies), the Canadian Securities Administrators (CSA) have released proposed amendments to National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102) and other related changes to securities laws and guidance (collectively, the Proposed Amendments).

Both “interesting and sophisticated” (from “So Hard Done By” by The Tragically Hip), the Proposed Amendments are intended to reduce regulatory burden by fostering streamlined reporting and increasing reporting efficiency for reporting issuers (other than investment funds), while increasing the quality and usability of the disclosure provided to investors without compromising investor protection or the efficiency of the capital markets. In particular, the Proposed Amendments would streamline management's discussion and analysis (MD&A) and annual information form (AIF) requirements by combining them into one reporting document, together with an issuer’s financial statements.

BACKGROUND

In April 2017, the CSA published Consultation Paper 51-404 – Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers (see our May 2017 Blakes Bulletin: Canadian Securities Administrators Seek to Reduce Regulatory Burdens for Reporting Issuers) to identify and consider areas of securities legislation that could benefit from a reduction of undue regulatory burden, without compromising investor protection or the efficiency of the capital markets. Since that date, various burden reduction projects have been identified and implemented by the CSA (see our June 2020 Blakes Bulletin: No Relief Required: New and Improved Canadian Rules for “At-The-Market” Equity Offerings; see our August 2020 Blakes Bulletin: The BAR Will Be Raised: CSA Increases Business Acquisition Report Triggers and Thresholds and see CSA Notice 43-310 Confidential Pre-File Review of Prospectuses), while the Ontario Securities Commission has also pursued a separate, but overlapping initiative of its own (see our November 2019 Blakes Bulletin: Burden Reduction: OSC Addresses 199 Problems).

COMBINED DISCLOSURE STATEMENTS

The Proposed Amendments would combine a non-venture issuer’s annual MD&A, AIF and annual financial statements in an annual disclosure statement and, in the case of interim financial periods, the issuer’s interim MD&A and interim financial statements in an interim disclosure statement. For venture issuers, as is currently the case, the preparation of an AIF would remain optional. Venture issuers that decide to prepare an AIF can choose to combine in one filing the venture issuer’s annual MD&A, AIF and annual financial statements or file a standalone AIF (in addition to the combined annual financial statements and MD&A). A venture issuer will continue to be able to satisfy the requirements for short form prospectus eligibility through the separate filing of an AIF. As drafted, the Proposed Amendments would not include Chief Executive Officer and Chief Financial Officer certifications under National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings within the proposed annual or interim disclosure statements, which will continue to be filed separately.

The CSA are of the view that, in addition to reducing burden and increasing reporting efficiency, a combined document should also be more intuitive for most cross-border investors as they are already familiar with the presentation of the financial statements, MD&A and AIF in one reporting document, such as Form 10-K, which is required to be filed with the U.S. Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934.

The Proposed Amendments provide that reporting issuers will be required to deliver their annual disclosure statement to certain investors. While current securities laws contain requirements in respect of the delivery of MD&A and financial statements to certain investors, there is no such requirement in respect of AIFs, resulting in the potential for an increased burden for issuers delivering a combined disclosure statement. The CSA is cognizant of this potential increased burden for issuers and have noted that the Proposed Amendments have been formulated in light of the “access equals delivery” model outlined in CSA Consultation Paper 51-405 – Consideration of an Access Equals Delivery Model for Non-Investment Fund Reporting Issuers that is currently under consideration by the CSA. Under the proposed “access equals delivery” model, providing electronic “access” to an annual disclosure statement and publishing a related notice that the annual disclosure statement is available would constitute delivery.

STREAMLINED DISCLOSURE REQUIREMENTS

The Proposed Amendments are intended to streamline existing disclosure requirements by eliminating information that is already available to investors outside of the continuous disclosure regime, consolidating redundant disclosures across different components of the continuous disclosure regime, and clarifying expectations of the CSA regarding responsive disclosure for applicable form requirements.

Eliminating Extraneous Disclosures

The CSA is proposing to streamline continuous disclosure documents by eliminating information that is already available to investors outside of the continuous disclosure regime, thereby reducing the burden on issuers of having to reproduce such information that is of limited incremental benefit to investors.

For example, the Proposed Amendments would eliminate the current AIF requirement to disclose security price ranges and volumes traded on a Canadian marketplace, given that this information can be easily obtained from the marketplaces. Similarly, if a class of securities of an issuer are traded on a foreign marketplace, but not on a Canadian marketplace, rather than having to disclose the price ranges and volume traded or quoted on the foreign marketplace, the issuer can simply disclose the address of the website or other publicly available source where the requisite price and trading volume information can be found. Further, issuers will only be required to identify Canadian and foreign marketplaces on which the issuer has applied for and received a listing, rather than all marketplaces on which the issuers securities are listed, including those marketplaces where an issuer has not taken formal steps to list its securities.

Interestingly, although ratings for securities of issuers and the ratings methodologies employed by credit rating organizations can be generally accessed by investors without incurring any costs, extensive disclosure concerning such matters is still proposed to be required in the AIF section of the new form requirements for the annual disclosure statement in the Proposed Amendments.

Eliminating Duplicative Disclosures

In recognition of the overlapping requirements for disclosure in financial statements, MD&A and AIFs, the CSA is proposing to eliminate duplicative disclosure requirements in order to reduce the burden on issuers, while investors will have less disclosure to read and can better focus on the key information.

For example, the Proposed Amendments would remove:

• The current MD&A requirement to disclose information regarding off-balance sheet arrangements, critical accounting estimates, changes in accounting policies and financial instruments and other instruments, each of which is required to be included in the financial statements under International Financial Reporting Standards (IFRS)

• The current MD&A requirement to disclose summary information for the eight most recently completed quarters and three mostly completely financial years given that this information can be located in previous continuous disclosure filings

• The current AIF requirement to disclose cash dividends or distributions declared, as well as any restrictions on payment of dividends or distributions, which are duplicative of requirements under IFRS

• The current AIF requirement to provide disclosure of prior sales of securities of the issuer during the most recently completed financial year given that this information is typically available in other disclosure made by the issuer, such as the MD&A or publicly available Form 45-106F1 Report of Exempt Distribution, where the issuer has filed such forms in connection with private placements

• The current AIF requirement to provide disclosure of any amendments to the articles or other constating or establishing documents of the issuer which can instead be referenced to being located in a prior AIF or prospectus, assuming the disclosure in such prior AIF or prospectus remains current

• The current AIF requirement to disclose how the issuer’s business has developed over the last three completed financial years, including with respect to any significant acquisitions completed during the most recently completed financial year, given that such information is available in other past continuous disclosure documents including applicable business acquisition reports

• The current AIF requirement to disclose the issuer’s transfer agent and registrar and the location of the registers of transfers given such information is already required to be disclosed in each issuer’s SEDAR profile

As the proposed annual disclosure statement would not include an issuer’s management proxy circular and the disclosure therein concerning compensation, governance and other requisite matters, the Proposed Amendments would not eliminate redundancies concerning cease trade order, bankruptcy, penalties and sanctions disclosure for directors, as well as disclosure of interests of management and others in material transactions, which will still be requisite disclosure within two continuous disclosure documents.

Consolidating, Reformulating or Relocating Similar Disclosure Requirements

Where there is more than one current requirement to disclose similar information in different ways or in different locations, the Proposed Amendments consolidate the requirements. This will reduce burden as issuers will not be required to prepare repetitive disclosure in response to similar disclosure requirements contained in multiple forms or sections. Investors will also benefit from a shorter and more focused document.

For example, the Proposed Amendments would:

• Consolidate the current MD&A requirements to discuss liquidity and capital resources given that these concepts are integrated and frequently discussed together

• Consolidate the current AIF requirement to disclose research and development elements with the current MD&A requirement to discuss operations

• Consolidate section 1.2 Overall Performance, subsection 1.3(2) Selected Annual Information, section 1.4 Discussion of Operations and instruction (iii) to section 1.5 Summary of Quarterly Results of Operations of the current MD&A requirements into one section in the new form requirements for the annual disclosure statement to provide for a more focused discussion on an issuer’s current operations

• Relocate sections 5.3 Additional Disclosure for Venture Issuers Without Significant Revenue and 5.4 Disclosure of Outstanding Share Data of NI 51-102 to the new form requirements for the annual disclosure statement so that all MD&A and AIF disclosure requirements can be found in one form

Clarifying or Improving Disclosures

Where current requirements are vague or otherwise unclear, the Proposed Amendments provide clarification by specifically identifying what the CSA expect from reporting issuers through changes to the requirements or instructions. This will reduce burden as reporting issuers should better understand the disclosure that is required. In addition, this should dissuade reporting issuers from providing unnecessary disclosure to ensure that they are not in default of disclosure requirements.

For example, the Proposed Amendments would:

• Clarify that the discussion of a reporting issuer’s financial condition, financial performance and cash flows in the MD&A must include an analysis of the most recently completed financial year as compared to the prior year

• Clarify that a summary from a technical report can be used to satisfy the AIF requirement applicable to reporting issuers with mineral projects, and the entire technical report is not required to be incorporated by reference into the AIF

• Generally remove qualifiers such as “material”, “significant”, “critical”, “major” and “fundamental”, instead having all disclosure requirements be subject to the qualification that issuers are to focus on material information

• Add the term “cash flows” to the instruction that the MD&A is intended to give a balanced discussion of its “financial condition, financial performance and cash flows”, therefore allowing for a complete and consistent presentation of the issuer’s financial disclosure requirements

• Enhance the instruction on MD&A disclosure concerning overall performance to clarify that the issuer’s discussion and analysis must be both quantitative and qualitative to support the analysis, and should, when helpful, present key drivers management is utilizing in managing the business

• Add an MD&A disclosure requirement to provide qualitative and quantitative discussion of any debt covenants to which the issuer is subject

Although the concept of materiality would be simplified and consolidated under the Proposed Amendments, risk factor disclosure would still provide for risks to be discussed in order of seriousness from the most serious to the least serious; a new instruction would suggest that “seriousness” refers to an impact/probability assessment. The Proposed Amendments would ask issuers to consider, but not as a strict requirement, presenting risk factor disclosure in a manner, such as the tabular form or any other suitable manner, that clearly identifies for each risk factor: (a) the nature of the risk factor; (b) its description; (c) the issuer’s impact/probability assessment (i.e., its seriousness); and (d) the issuer’s corresponding risk mitigation strategy.

While the Proposed Amendments would relocate and rephrase parts of the AIF disclosure requirements concerning the effects of environmental protection legislation and social or environmental policies implemented by the issuer, the CSA did not take this opportunity to expand the ESG disclosure requirements and require more detailed reporting on such matters.

OTHER POTENTIAL CHANGES

Semi-Annual Reporting: The Proposed Amendments do not introduce specific provisions concerning semi-annual reporting, but rather propose a framework for consideration and comment pursuant to which semi-annual reporting would be voluntary and available only to venture issuers that are not SEC issuers, with alternative disclosure required for interim periods where financial statements and MD&A are not filed.

Prospectus Disclosures: The Proposed Amendments would modify the prospectus disclosure requirements in a similar manner as the MD&A and AIF form requirements to, for example: relocate the requirements for Additional Disclosure for Venture Issuers Without Significant Revenue and Disclosure of Outstanding Share Data to being within the MD&A form; provide streamlined securities trading price and volume disclosure in a manner consistent with that proposed for the AIF form; and have issuers consider tabular risk factor disclosure as is proposed for the AIF form. The objective of the Proposed Amendments impact on the prospectus disclosure requirements is to maintain alignment between the prospectus and continuous disclosure regimes.

Refilings: The Proposed Amendments introduce and, in particular, ask for feedback on the revised requirements concerning the refiling of isolated components of a combined disclosure statement (e.g., refiling just the annual MD&A).

Penalties or Sanctions Disclosure: The Proposed Amendments would reduce the lookback period relating to the requirement to disclose any settlement agreements entered into with a securities regulatory authority by directors, officers or significant shareholders to a 10-year period (currently, no disclosure is required of a settlement agreement entered into before December 31, 2000, unless the disclosure would likely be important to a reasonable investor in making an investment decision).

WHAT NEXT?

The Proposed Amendments are being published by the CSA for a 120-day comment period expiring on September 17, 2021 and, subject to notice and comment process and required approvals, the final amendments are expected to be published in September 2023 and (together with applicable transition provisions) be effective on December 15, 2023.

For further information, please contact:

Matthew Merkley       416-863-3328
Jeremy Ozier               416-863-5824
Raees Nakhuda          416-863-5837

or any other member of our Capital Markets group.