On March 20, 2012, the Ontario Securities Commission (OSC) released a Report (the Report) addressing certain challenges posed by emerging market issuers. The Report contained the results of a review of 24 issuers listed on Canadian exchanges with significant business operations in emerging markets. The Report seeks to strike a balance between attracting issuers to Canadian capital markets and protecting the integrity of those markets. A full copy of the Report (OSC Staff Notice 51-719) can be found here.

Notably, the Report did not focus solely on emerging market issuers, but also addressed professionals and other service providers who assist the emerging market companies with gaining access to Canadian capital markets. The OSC has noted that the integrity of Canadian capital markets is potentially threatened by global factors and that, in addition to issuers’ senior officers and boards, auditors, underwriters and the exchanges are also “gatekeepers” with important roles in this regard. The Report sets out the OSC’s concerns, including issues regarding disclosure, compliance and risk management, as well as recommendations for each of the participants.

Emerging Market Issuers

The OSC stated that in certain cases boards of directors and audit committees of emerging market issuers have been deficient in their oversight of management and sense of responsibility for the company’s stewardship.

The OSC expressed concerns regarding:

  • corporate governance, including the physical separation between a board and a company’s operations, language barriers, and differences in local culture and business practices;
  • overreliance by boards of directors on senior management;
  • complexity, appropriateness and transparency of corporate structures;
  • oversight of related party transactions; and
  • assurance that risk management and internal controls properly reflect the foreign jurisdiction’s political, legal and cultural environment.

To address these concerns, the OSC recommends:

  • improving corporate governance practices with an understanding of the foreign jurisdiction;
  • clarifying the regulatory expectations of CEOs and CFOs with respect to conducting diligence to support certifications for emerging market issuers;
  • improving disclosure to investors of corporate structures and risk factors;
  • maintaining books and records in Canada;
  • considering minimum Canadian director residency requirements; and
  • considering minimum foreign language competency for Canadian-resident directors.


The OSC is concerned that auditors have in some instances not sufficiently scrutinized the information provided to them by emerging market issuers and/or foreign auditors.

In particular, the OSC is concerned with:

  • the level of professional scepticism and the failure to independently verify information;
  • an insufficient understanding of the local culture, business practices and language;
  • the extent of delegation of the audit of underlying operations to foreign auditors; 
  • the inability of the OSC to access audit working papers; and
  • language barriers affecting the audit function.

To respond to the concerns, the OSC recommends that auditors:

  • address situations where regulators are unable to access working papers and foreign audit files of Ontario reporting issuers; and
  • work with the Canadian Public Accounting Board and other professional bodies to address issues raised by the Report.


The OSC emphasized that underwriters were uniquely placed to verify information regarding an issuer, its operations and management in prospectus offerings and listing applications.

The OSC’s principal concerns included:

  • the variety of due diligence practices and their levels of thoroughness;
  • a low level of professional scepticism;a low appreciation or understanding of the foreign jurisdiction; 
  • failures to adhere to underwriters’ internal processes; and
  • the lack of due diligence documentation.

The OSC recommended that underwriters:

  • establish a consistent and transparent set of requirements for conducting due diligence;
  • ensure these requirements include processes that address areas such as operational structures;
  • internal controls and risk management; local business practices, politics and culture;
  • asset ownership; related party transactions; and key review areas; and
  • develop best practices for documentation, due diligence calls and site visits.


The OSC identified exchanges as important gatekeepers by setting listing standards for issuers.

The OSC’s concerns centred on:

  • whether the current specific requirements for emerging market issuers are adequate, including the absence of a requirement for emerging market issuers to maintain a meaningful Canadian presence;
  • a lack of transparency when exchanges waive listing requirements for emerging market issuers; and
  • the reliance by exchanges on third party experts to conduct due diligence.

The OSC recommends that exchanges:

  • assess whether additional listing requirements are necessary for emerging market issuers;
  • provide greater transparency when listing requirements are waived;
  • review their reliance on third parties’ due diligence; and
  • review the role of sponsors in bringing emerging market issuers to market.

Next steps for the OSC, issuers and professionals

Following the conduct of its review, the OSC referred a number of files to its enforcement branch for further assessment and intends to continue the work identified in its report in cooperation with other provincial securities regulators and professional bodies.

Issuers as well as the professional entities who work with them would benefit from reviewing their practices in light of the concerns identified by the OSC and its suggested recommendations.