Effective September 1, 2008, the Canadian Securities Administrators (CSA) adopted new National Policy 12-203 Cease Trade Orders for Continuous Disclosure Defaults (Policy). The Policy provides guidance to reporting issuers and other market participants as to how a CSA regulator will generally respond to certain “specified defaults” in respect of continuous disclosure requirements. More specifically, the Policy sets out the circumstances in which the CSA will issue a general cease-trade order (CTO) or a management cease-trade order (MCTO) and describes what actions issuers are required to undertake if subject to an MCTO.
Under the Policy, a “specified default” means the failure by a reporting issuer to file the following within the time prescribed by securities legislation, each of these filing obligations being a “specified requirement”: annual or interim financial statements, annual or interim management’s discussion and analysis, annual or interim management’s report of fund performance, annual information form or officers’ certification of financial statements. Numerous other continuous disclosure filings of a generally non-periodic nature, or in respect of which it may be unclear whether the issuer has triggered a filing requirement, have been excluded from the list of items that can result in a “specified default.” These include filings such as a material change report, technical disclosure or other reports required by National Instrument 43-101 Standards of Disclosure for Mineral Projects or National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities.
However, nothing in the Policy should be interpreted to limit the discretion of the CSA to (i) apply the Policy if a reporting issuer is in default of a continuous disclosure requirement that is not expressly listed as a specified default or in circumstances where a filing has been made but is deficient in content, or (ii) take further enforcement action in the event of a specified default.
The CSA consider a CTO the appropriate response to a specified default that is not likely to be rectified within a relatively short time and where the circumstances leading to the default are likely to continue. However, if the outstanding filing is expected to be made relatively quickly, and the default is not expected to be recurring, an MCTO may be an appropriate response to the default for an issuer that satisfies certain criteria set forth in the Policy. The Policy provides that an issuer that believes it will be unable to comply with a specified requirement should contact its principal regulator at least two weeks before the due date for the required filings and apply in writing for an MCTO instead of a general CTO against the issuer. The CSA will waive the two-week notice period only in circumstances where an issuer exercising reasonable diligence would not have been able to determine its inability to comply with a specified requirement at least two weeks before its due date.
The regulators will generally exercise a discretion to issue an MCTO only in circumstances where the issuer issues and files a default announcement (and, if applicable, a material change report) containing the requisite information. After the default announcement, and during the period of the MCTO, the regulators will generally exercise their discretion and issue a CTO unless the defaulting reporting issuer issues biweekly default status reports in the form of news releases containing the requisite information.
Therefore, in the unfortunate circumstance where a reporting issuer finds itself unable to comply with a continuous disclosure obligation, it may be able to mitigate the negative impact on the trading of its securities if it applies in writing for an MCTO sufficiently in advance of the due date for the required filing.