OSC provides guidance on disclosure of forward-looking information
The Ontario Securities Commission (the "OSC") has issued OSC Staff Notice 51-721 – Forward-Looking Information Disclosure (the "Notice") which summarizes the OSC's review of the forward-looking information ("FLI") disclosure of 60 reporting issuers from several industries.
FLI is disclosure about possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of actions. While disclosure of FLI is not mandatory, many issuers provide FLI in their continuous disclosure documents, news releases, marketing materials and websites. The requirements relating to FLI are in National Instrument 51-102 – Continuous Disclosure Obligations ("NI 51-102"). When prepared properly and in compliance with the applicable requirements, FLI should provide valuable insight about an issuer's business and how that issuer intends to attain its corporate objectives and targets. Compliance with the FLI requirements is also critical for issuers since proving compliance can provide a defence against a civil action for a misrepresentation in FLI.
The Notice highlights that boilerplate language relating to FLI does not satisfy issuers' obligations under NI 51-102 and provides guidance and examples to assist issuers in preparing FLI.
OSC staff identified four common areas where improvement is needed for FLI disclosure:
- Identification of FLI
- Disclosure of the material factors or assumptions used to develop FLI
- Updating previously disclosed FLI
- Comparison of actual results to previously disclosed FLI
Identification of FLI
NI 51-102 requires issuers to clearly identify material FLI. A majority of the issuers reviewed failed to clearly identify FLI specific to the business of the issuer. Boilerplate disclosure identifying words that indicate FLI, such as "believes, "may", "likely" or "plans" or similar words, or stating generally that all statements dealing with expected or anticipated activities or events which may occur in the future are FLI, will not be sufficient.
Material factors or assumptions
OSC staff noted that the material factors and assumptions underlying FLI must be reasonable, supportable, entity-specific, tied to FLI and disclosed. Where possible, assumptions should also be quantified as this provides valuable information for investors. Of the issuers reviewed, less than one third provided all assumptions in detail specific to the FLI, while a significant number (24%) failed to provide any assumptions.
Updating previously disclosed FLI
Issuers are required to discuss in their MD&A or in a news release events and circumstances that are reasonably likely to cause actual results to differ materially from previously disclosed FLI and to disclose the expected differences. Only 36% of the issuers reviewed included the required discussion along with updated quantified differences, with 40% providing no discussion at all.
Comparison of actual results to previously disclosed FLI
Issuers are required to disclose and discuss in their MD&A material differences between actual results for the relevant period and any previously disclosed future-oriented financial information ("FOFI") or financial outlook. Both FOFI and financial outlook are FLI about prospective financial performance, financial position or cash flows that is based on assumptions about future economic conditions and courses of action; however, FOFI is presented in the format of a historical financial statement. Only 33% of the issuers reviewed provided this comparison.
OSC staff have provided several practice points in the Notice providing suggestions to assist issuers and their advisors in promoting clear, transparent disclosure for FLI. These practices points include:
Quality of assumptions: Assumptions should be reasonable and specific to an issuer, and material factors and assumptions should be provided where FLI is disclosed. Both qualitative and quantitative assumptions are informative and useful.
Timely updating of ongoing progress: Updating of ongoing progress as compared to previously disclosed FLI allows investors to assess corporate performance during the year. Affirmation of targets, disclosure of affected material differences and updates on trends likely to impact future performance is useful information to investors.
Key performance indicators: Key performance indicators provide investors with valuable and meaningful information about how the issuer is progressing towards its objectives and targets.
Separate presentation of FLI: Including FLI in a separate section enables investors to easily identify material FLI and distinguish it from historical information. The use of a table setting out objectives, key specific assumptions and risks will clarify the relationship between the FLI and its underlying key components.
Audit Committee and Board of Directors: The audit committee and board of directors play a key role in the oversight of FLI and should consider reviewing and approving all FLI, including the underlying assumptions, prior to public disclosure.
The Notice illustrates that disclosure of FLI needs improvement. The OSC notes that it will continue to assess FLI disclosure in their continuous disclosure and prospectus review programs and expects issuers who have not complied with the FLI requirements to take corrective actions. Given the importance of FLI to investors, the continued scrutiny of the OSC and the potential shield compliance can provide to issuers against certain claims for misrepresentation, issuers should ensure they comply with the FLI requirements when including FLI in their disclosure.