On June 29, 2007, the Canadian Securities Administrators ("CSA") released Staff Notice 58-303 (the "Corporate Governance Staff Notice"). The Staff Notice contained the results of a review of compliance with corporate governance disclosure requirements under National Instrument 58-101 Disclosure of Corporate Governance Practices (the "Corporate Governance Instrument"). The compliance review found deficiencies both in response rate and in the quality of disclosure of many of the reporting issuers surveyed.

On the same day, the CSA also released Staff Notice 52-318 (the "Audit Committee Staff Notice"), which contained the results of a follow-up review of compliance with the requirements of Multilateral Instrument 52-110 Audit Committees (the "Audit Committee Instrument"). This review also found an inadequate level of compliance by many of the reporting issuers surveyed.


The Corporate Governance Instrument came into force in June 2005, along with the companion National Policy 58-201 Corporate Governance Guidelines (the "Corporate Governance Policy"). The Corporate Governance Policy is intended to provide guidance on corporate governance practices. The Corporate Governance Instrument, on the other hand, is mandatory and requires reporting issuers, with some narrow exceptions, to disclose their corporate governance practices. 

Reporting issuers are required to disclose information about board independence, board mandate, position descriptions, orientation and continuing education for board members, ethical business conduct, nomination of directors, compensation of directors and officers and assessments of the board, committees and individual directors. Additionally, if the reporting issuer has adopted or amended a written code of business conduct and ethics, the code must be filed on SEDAR.

The Audit Committee Instrument, which came into force in most jurisdictions in March 2004, has three broad requirements (subject to certain exemptions for venture issuers): audit committee members must be financially literate and independent; the audit committee must be given all the responsibilities set out in the Audit Committee Instrument; and reporting issuers must disclose prescribed audit committee information in their SEDAR filings.

Results of the Compliance Reviews: Where Issuers Fall Down

The corporate governance compliance review sampled 65 TSX and 35 venture issuers‘ corporate governance disclosure and analyzed whether their disclosure met the Corporate Governance Instrument's requirements, both from the perspective of response rate (whether the information was disclosed) and of the quality of disclosure (whether disclosure provided meaningful information). The review found non-compliance in both areas.

Response rates to the required information ranged from 70-94%, depending on the category. Response rate, which indicates compliance in form but not necessarily in substance, however, is only part of the story.

According to the CSA, simply making disclosure is not sufficient. The quality of the disclosure must give "clear and complete accounts" of governance practices in order to provide "meaningful information to capital market participants," otherwise issuers will not meet the Corporate Governance Instrument's requirements. The Corporate Governance Staff Notice provides several examples of areas where issuers fall down due to inadequate quality of disclosure. Some of the recurring themes are:

  • the use boilerplate language;
  • inappropriate cross-references to information posted on issuer websites;
  • the use of brief and/or general disclosure, for example, corporate governance practices are not adequately described, the way in which a practice achieves its purpose is
  • not clear or both; and
  • disclosure that is "vague and uninformative", for example, disclosure of the amount of directors' compensation but not the process by which it is determined.

As a result of non-compliance with the Corporate Governance Instrument, 38% of the issuers were required by the securities regulatory authorities to take action, including being required to restate and refile their management information circulars.

The audit committee compliance review sampled 15 TSX and 10 venture issuers and found that only 72% of these issuers met all of the Audit Committee Instrument's requirements. All issuers surveyed were found to have financially literate audit committee members, although the CSA warns that the assessment of financial literacy must be considered carefully and should be supportable on the basis of the member's background or education. All TSX issuers surveyed met the requirement of having independent audit committee members, as did 60% of the venture issuers surveyed, despite the fact that venture issuers are exempt from this requirement.

The area that caused difficulty for issuers was the responsibilities of the audit committee. The Audit Committee Instrument requires that specified responsibilities be assigned to the audit committee, for example, overseeing the work of the external auditor and reviewing financial statements before they are released. Thirty-three percent of the TSX issuers surveyed and 20% of venture issuers surveyed failed to assign all of the responsibilities prescribed under the Audit Committee Instrument. As a result, the issuers found to be in non-compliance with the Audit Committee Instrument were required to provide undertakings to address the deficiencies.

Compliance with the Corporate Governance Disclosure and Audit Committee Requirements in Light of the Staff Notices

The CSA is concerned with the level of non-compliance found in both reviews, both in form and in substance. Both Staff Notices suggest that further selective review will be carried out to determine compliance with the Corporate Governance and Audit Committee Instruments and that appropriate regulatory action will be taken for non-compliance. In Ontario, it should be noted that pursuant to Ontario Securities Commission Policy 51-601 Reporting Issuer Defaults the Ontario Securities Commission may put an issuer in default of its reporting issuer status for deficient corporate governance and audit committee disclosure in an annual information form or management information circular.

The Staff Notices show that there are serious deficiencies in corporate governance reporting and audit committee responsibilities and this should act as a wake-up call to issuers. We recommend that issuers review their corporate governance disclosure, keeping in mind the CSA's comments about the level of detail required, the use of boilerplate language and the requirement to provide "meaningful information" to market participants. We also recommend that issuers "audit" their audit committee to ensure that the committee is meeting member qualification, responsibility and reporting requirements.