Canada’s securities regulators have published new National Instrument 52-109 on CEO and CFO certifications and related MD&A (management’s discussion and analysis) disclosure. The new rule is substantially unchanged from the proposal published in April 2008 and discussed in Torys’ bulletin, Canada's Securities Regulators Release New Proposals on Internal Controls. The rule will apply to annual and interim filings of all reporting issuers (except investment funds) beginning with periods ending on or after December 15, 2008. This bulletin summarizes the new aspects of NI 52-109 in comparison with current requirements.
The new forms of annual and interim certificates for non-venture issuers appear at the end of this bulletin [to see the certificates please view the original document]. The forms of venture issuer certificates and other certificates to be used in certain special situations can be found in the Notice of National Instrument 52-109.
Highlights of the New Certification Requirements
- CEOs and CFOs of non-venture issuers will have to certify that they have evaluated the company’s internal control over financial reporting (ICFR).
- Material weaknesses will have to be disclosed in MD&A.
- Venture issuers’ certifications will not have to cover ICFR or disclosure controls and procedures (DC&P).
Evaluation of ICFR
Under NI 52-109, CEOs and CFOs will be required to certify annually that they have
- evaluated, or caused to be evaluated under their supervision, the effectiveness of the issuer’s ICFR; and
- disclosed in the annual MD&A their conclusions about the effectiveness of the issuer’s ICFR.
CEOs and CFOs will also have to certify annually that they have disclosed to the issuer’s auditors and either the board of directors or the audit committee any fraud involving management or other employees with a significant role in ICFR.
MD&A Disclosure of Material Weaknesses
If a material weakness exists in the design or operation of ICFR, the CEO and CFO will have to certify (quarterly for design weaknesses, but only annually for operational weaknesses) that the issuer’s MD&A discloses
- a description of the material weakness;
- the impact of the material weakness on the issuer’s financial reporting and ICFR; and
- the issuer’s current plans, if any, or any actions already undertaken for remediating the material weakness.
A “material weakness” is defined as “a deficiency, or a 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 is the same as the U.S. definition.
In designing DC&P and ICFR, issuers will be permitted to exclude proportionately consolidated entities, variable interest entities and businesses acquired not more than 365 days before the end of the financial period to which the certificate relates.1 Issuers will have to disclose any exclusions in MD&A and provide summary financial information for the excluded entities.
Venture Issuer Basic Certificates
The certificates filed by venture issuers will not have to refer to DC&P or ICFR, and venture issuers will not have to make the related MD&A disclosures. Instead, venture issuers’ certificates will have to include a note to readers explaining how the certificates differ from those of non-venture issuers.
Issuers must use a control framework to design their ICFR. The framework must be a suitable one that has been established using due process procedures, including the broad distribution of the framework for public comment. These are the same criteria as in the U.S. rules for selecting a control framework. Like the SEC, Canadian regulators have not mandated the use of any particular control framework. The companion policy to NI 52-109 refers to the following frameworks commonly in use:
- Risk Management and Governance: Guidance on Control (COCO Framework), published by The Canadian Institute of Chartered Accountants;
- Internal Control – Integrated Framework (COSO Framework), published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO); and
- Guidance on Internal Control (Turnbull Guidance), published by The Institute of Chartered Accountants in England and Wales.2
Certifications Following an IPO, a Reverse Takeover or Ceasing to Be a Venture Issuer
The first CEO and CFO certificates – whether for an annual or interim period – following an issuer’s IPO, reverse takeover or ceasing to be a venture issuer may omit all references to ICFR and DC&P. Instead, this initial certification will have to include a note to readers explaining how it differs from a regular certificate.
As under existing rules, cross-border issuers that comply with the SEC’s certification and internal control requirements will not have to comply with the new Canadian rules. In lieu of filing the Canadian certifications, these issuers will be able to file their SEC certifications, management’s report on internal control and the related auditor’s attestation with Canadian regulators.
Companion Policy Guidance
The companion policy describes how the securities regulators intend to interpret and apply new NI 52-109 and provides guidance on, among other things,
- fair presentation, financial condition and reliability of financial reporting;
- design of ICFR and DC&P and evaluation of their operating effectiveness;
- use of a service organization or specialist for ICFR;
- material weaknesses in ICFR, including compensating controls versus mitigating procedures;
- significant weaknesses in DC&P;
- the role of the board and audit committee, which would include, as part of the board’s review of the issuer’s annual MD&A, understanding why the certifying officers concluded that a deficiency or combination of deficiencies is or is not a material weakness;
- business acquisitions and certain long-term investments;
- venture issuer basic certificates and certificates for new reporting issuers; and
- certification of revised or restated annual or interim filings.