Continuous disclosure issues are an important topic in securities regulation in the third quarter of 2012 as the CSA released the findings of their 2012 continuous disclosure review and also a staff notice on the proper use of a preliminary economic assessment (“PEA”) by mining issuers.

CSA’s Annual Continuous Disclosure Review Finds Deficiencies

On July 20, 2012, the CSA released CSA Staff Notice 51-337, Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2012. The CSA’s continuous disclosure review program has dual objectives - education and compliance, which are achieved by identifying specific deficiencies and also providing notice to market participants of common issues.

The CSA conducted an IFRS issue-oriented review by reviewing the financial statements of selected issuers in addition to their MD&A. Staff noted that the most common MD&A deficiency was issuers not clearly labeling and identifying the accounting principles used when they presented a mix of financial information in accordance with pre-changeover Canadian GAAP and IFRS.

The CSA also conducted a review of issuers engaged in oil and gas activities to assess compliance with requirements set out in National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities (NI 51-101). Noted deficiencies included: (i) lack of disclosure on significant factors and uncertainties; (ii) improper use of the terminology set out in the Canadian Oil and Gas Evaluation Handbook (COGEH); (iii) not including all required signatures on Form 51-101F3, Report of Management and Directors on Oil and Gas Disclosure; (iv) non-compliance with NI 51-101 and Revised CSA Staff Notice 51-327, Guidance on Oil and Gas Disclosure, concerning the disclosure of resources other than reserves; (v) no provision of appropriate cautionary language concerning the 6:1 boe conversion ratio of natural gas to oil so as to clearly discern between the energy equivalency and the market price equivalency; (vi) and lack of consistency and accuracy in the use of units of measurement and disclosure of reserves within and between disclosure documents.

CSA Concerned About Disclosure in Mining Technical Reports

On August 16, 2012, the CSA released CSA Staff Notice 43-307 Mining Technical Reports - Preliminary Economic Assessments. The notice addresses certain concerns of CSA staff regarding the use and disclosure of a preliminary economic assessment (“PEA”) by a mining issuer.

CSA staff stated that amendments to National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) that took place in 2011 are being misinterpreted by some issuers. The amendments in 2011, included a change in definition of a PEA so that they are no longer restricted to early-stage projects. This resulted, according to CSA staff, in issuers inappropriately using PEAs in several different ways: (i) using a PEA as a Proxy for a pre-feasibility study, (ii) preparing a PEA using inferred mineral resources, concurrently with or as an add-on or update to their Pre-Feasibility Study or Feasibility Study, (iii) disclosing results of potential economic outcomes for their material mineral properties that are not supported by a technical report; (iv) appearing to use “overly optimistic or highly aggressive assumptions” or methodologies that diverge significantly from industry best practices in the PEA; (v) disclosing the results of a PEA that includes projected cash flows for by-product commodities that are not included in the mineral resource estimate; and (vi) releasing PEAs where individuals are taking responsibility (full or partial) for technical reports that support the results of a PEA, while not possessing relevant experience. The notice provides guidance on avoiding these situations.

OSC Panel Provides Analysis on Insider Trading Provisions in OSA

On August 1, 2012, the OSC released a decision in an insider trading case, which contained analysis of the phrase “person or company in a special relationship with a reporting issuer” from section 76(5) of the Securities Act (Ontario). Section 76(5) prohibits a person from trading in the securities of an issuer with which the person is in a “special relationship” on the basis of material facts or material changes that have not been generally disclosed.

At an August 2008 golf tournament, Paul Donald, a former Research in Motion (“RIM”) executive, heard from another RIM executive that RIM was interested in acquiring Certicom. He promptly purchased $305,000 worth of Certicom shares and later made $295,000 when RIM completed its plan of arrangement in March 2009.

The OSC hearing panel decided that Donald’s actions did not constitute insider trading because RIM was not yet “proposing” any acquisition of Certicom in August 2008. Approval of RIM’s senior management had not occurred when Donald received the information. According to the panel, without a final decision, RIM could not be said to be “proposing” any action. Despite this finding, Donald’s actions were still found to be contrary to the public interest and a hearing (for which a decision has not yet been released) was scheduled for September 13, 2012, to determine the appropriate penalties for Donald. The OSC has the authority to levy fines or ban an individual from becoming an officer or director of a public company.