There have been a number of developments regarding Canada’s insider reporting regime, which have recently come into force. As well, as IFRS becomes effective in Canada it will have implications for issuers’ ICFR. Finally, the Canadian Securities Administrators have issued proposed changes to executive compensation disclosure requirements with an implementation date of October 31, 2011. This update addresses these recent and proposed changes.

Deadlines for Insider Reporting

As a result of changes to Canada’s insider reporting regime earlier this year, effective November 1, 2010, the deadline for insiders to file their insider reports on the System for Electronic Disclosure by Insiders (SEDI) has been reduced to five calendar days (from 10 calendar days) from the date of the event giving rise to the requirement.

Other changes to Canada’s insider reporting regime came into effect on April 30, 2010. They included:

  • changes in the range of persons subject to insider reporting, which generally reduced the number of reporting insiders; and
  • a requirement to report all awards of share-based compensation, including deferred share units, restricted share units, performance share units, phantom stock, stock appreciation rights and phantom options, whether settled in stock or cash.

The Canadian Securities Administrators (CSA) confirmed in CSA Staff Notice 55-315 that an insider report (or an issuer grant report) for a share-based compensation award must be filed within five calendar days of each grant. However, if dividend equivalents are automatically payable on a stock-based compensation award in the form of additional units (and the participant cannot exercise any discretion respecting the form of such dividend equivalents), then the insider may report dividend equivalents received from April 30, 2010 to December 31, 2010, any time prior to March 31, 2011.

International Financial Reporting Standards and Internal Control Disclosures

International Financial Reporting Standards (IFRS) will be effective in Canada for reporting issuers beginning with their financial years starting on or after January 1, 2011. One area of the transition to IFRS which may not be receiving as much attention as it should is the impact of the transition to IFRS on an issuer’s disclosure controls and procedures and Internal Control over Financial Reporting (ICFR) and the corresponding disclosure concerning this impact. In a staff notice regarding the results of its certification compliance review, the CSA noted that 46% of non-venture issuers reviewed did not discuss the impact of the transition to IFRS on their ICFR and a further 37% only provided generic disclosure. CSA Staff Notice 52-327 also included a reminder that any change in ICFR that will, or is reasonably likely to, materially affect the issuer’s ICFR must be disclosed in the period in which the change first impacts the reliability of financial reporting and the preparation of financial statements in accordance with the issuer’s Generally Accepted Accounting Procedures (GAAP). In a recent Guide (Ontario Securities Commission Issuer Guide: Top 10 Tips for Public Companies Filing their First IFRS Interim Financial Statement), OSC staff stated their expectation that issuers will disclose material changes in their ICFR arising from IFRS in their Management Discussion and Analysis (MD&A) for the first quarter following conversion to IFRS, if not in their annual MD&A for the prior year.

Proposed Changes to Executive Compensation Disclosure

On November 19, 2010, the CSA issued a notice of proposed changes to executive compensation disclosure requirements with a proposed implementation date of October 31, 2011. The proposed changes would:

  • require disclosure of the experience of compensation committee members relevant to their responsibilities on the committee and their ability to make decisions on the suitability of compensation practices in light of the company’s risk profile;
  • where compensation depends on the achievement of performance goals which are based on broad corporate level financial performance metrics such as EPS, revenue and EBITDA, preclude issuers from omitting disclosure of the performance goals on the basis that disclosure would be “seriously prejudicial”;
  • require disclosure respecting the consideration of risks associated with the company’s compensation practices;
  • require specific disclosure respecting the ability of directors to exercise discretion to reduce or increase payouts with respect to performance-based compensation;
  • require disclosure of any significant changes to be made to the company’s compensation policies in the next financial year;
  • require disclosure of whether or not an NEO or director is permitted to hedge against declines in the issuer’s stock price affecting the value of their equity-based compensation;
  • if a compensation consultant retained by the directors, require a description of the work performed by the consultant and disclosure of the fees paid to the consultant and whether directors must pre-approve services provided by the consultant at management’s request;
  • require disclosure of the aggregate value of vested share-based awards which have not yet been paid out;
  • preclude companies from adding columns to the Summary Compensation Table; and
  • require the use of plain language.

Even though the 2010 Globe and Mail Board Games analysis awarded two points to issuers which disclosed amounts realized by named executive officers from the exercise of options during the year, the CSA confirmed that it does not intend to reintroduce such a requirement since the focus of executive compensation disclosure is the board’s compensation decisions, not the investment decisions of executive officers. In addition to welcoming comments on the proposals, the CSA is seeking comment on whether disclosure of non-compensatory amounts for defined contribution plans provides meaningful information. The deadline for comments is February 17, 2011.