Publication
title
Proposed Certification Rules
AUTHOR(S)
DATE
May 26, 2008
EXPERTISE
The Canadian Securities Administrators (the CSA) have published for public comment a new national instrument which, if enacted, would repeal and replace Multilateral Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings. The proposed National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings (the Proposed Instrument) and Companion Policy 52-109CP (the Companion Policy) were published by the CSA on April 18, 2008. The Proposed Instrument will expand the certification and disclosure requirements with respect to internal controls over financial reporting (ICFR) currently in place. It is the third set of proposals the CSA has published on ICFR, the most recent one being in March 2007 (the "2007 Proposals"). The Proposed Instrument will apply to all reporting issuers, other than investment funds, in all provinces and territories of Canada although venture issuers will be subject to reduced requirements. The requirements, if enacted in their current form, will apply in respect of financial periods ending on or after December 15, 2008. The Proposed Instrument and the Companion Policy are open for public comment until June 17, 2008.
REQUIREMENTS APPLICABLE TO NON-VENTURE ISSUERS
Currently, CEOs and CFOs of issuers, other than venture issuers and investment funds, are required to certify that:
- the annual and interim filings do not contain any misrepresentations;
- the financial statements together with the financial information included in the annual or interim filings fairly present in all material respects the financial condition, results of operations and cash flow of the issuer;
- they have designed disclosure controls and procedures (DC&P) and ICFR or caused them to be designed under their supervision;
- they have caused the issuer to disclose in its MD&A any change in the issuer's ICFR that has materially affected or is reasonably likely to materially affect the issuer's ICFR; and
- on an annual basis, they have evaluated the effectiveness of DC&P and caused the issuer to disclose their conclusions on the effectiveness in its MD&A.
The key features of the Proposed Instrument are:
- a non-venture issuer must establish and maintain DC&P and ICFR and must use a control framework to design its ICFR;
- in addition to the current certification requirements set out above, the CEO and CFO of a non-venture issuer must certify:
- the control framework used to design the issuer's ICFR;
- that they have evaluated, or caused to be evaluated, on an annual basis the effectiveness of the issuer's ICFR at the financial year end;
- on an annual basis, that the issuer has disclosed in its MD&A their conclusions about the effectiveness of ICFR based on such evaluation;
- that the issuer has disclosed in its interim or annual MD&A any "material weakness" relating to the design of its ICFR and in its annual MD&A any "material weakness" relating to the operation of its ICFR and included a description of such weakness, the impact of such 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 such weakness; and
- on an annual basis, that they have disclosed to the issuer's auditors and board of directors or audit committee any fraud involving management or employees who have a significant role in ICFR;
- the proposed certification allows the certifying officers to limit the scope of design of DC&P and ICFR to exclude controls, policies and procedures of proportionately consolidated entities, variable interest entities or any business that the issuer acquired not more than 365 days before the issuer's financial year end;
- the concept of "reportable deficiency" included in the 2007 Proposals has been replaced with the concept of "material weakness". A "material weakness" is defined to mean a deficiency, or 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. This definition has been harmonized with the U.S. ICFR definition of material weakness;
- like the 2007 Proposals, reporting issuers will not be required to obtain from their external auditors an internal control audit opinion concerning management's assessment of the effectiveness of ICFR. This represents a divergence from U.S. requirements and will reduce the costs faced by issuers;
- the Companion Policy to the Proposed Instrument provides guidance as to suitable control frameworks for ICFR. Common frameworks include the COCO Framework published by The Canadian Institute of Chartered Accountants, the COSO Framework published by The Committee of Sponsoring Organizations of the Treadway Commission, and the Turnbull Guidance published by The Institute of Chartered Accountants in England and Wales. The Companion Policy confirms the guidance set out in the 2007 Proposals that using a top-down, risk-based approach to ICFR and DC&P certification is appropriate. In addition, the Companion Policy provides guidance on how the use of third parties such as service organizations and specialists would affect the design and evaluation processes;
- as is currently the case, issuers who comply with the U.S. rules on certification and ICFR will be exempt from the Proposed Instrument provided that they file the U.S. certification and ICFR attestation report on management's assessment of ICFR with the Canadian securities regulators.
REQUIREMENTS APPLICABLE TO VENTURE ISSUERS
Currently, as a result of blanket orders or staff notices issued by the provincial securities regulators, venture issuers are not required to certify as to the design and effectiveness of DC&P or ICFR. This reduced certification will be maintained if the Proposed Instrument takes effect. Venture issuers will be allowed to file a "basic" certificate which will include no representations regarding DC&P or ICFR. However, such a certificate must include a note to readers explaining that it does not include any representations as to DC&P and ICFR. In addition, a venture issuer will not be required to discuss the design or operating effectiveness of DC&P and ICFR in its annual and interim MD&A. If a venture issuer wishes to discuss DC&P or ICFR in its MD&A, then it is suggested the same explanatory note to readers be included in the MD&A as is included in the basic certificate.
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.
Contacts
Francis R. Legault
Montréal
514.847.4495
flegault@ogilvyrenault.com
Profile
Geoffrey G. Gilbert
Ottawa
613.780.3764
ggilbert@ogilvyrenault.com
Profile
Anne-Marie Naud
Québec
418.640.5058
anaud@ogilvyrenault.com
Profile
Ava G. Yaskiel
Toronto
416.216.3902
ayaskiel@ogilvyrenault.com
Profile
Peter S. Noble
London
011.442.1912
pnoble@ogilvyrenault.com
Profile
