The Canadian Securities Administrators (CSA) recently released CSA Staff Notice 51-341 setting out the results of their Continuous Disclosure Review Program for fiscal 2014.
The Program is used to evaluate compliance of reporting issuers (RIs) with continuous disclosure obligations and how regulators reacted in the year to deficiencies including referrals of RIs to enforcement, commencement of cease-trading proceedings, placing RIs on the default list, forcing refilings, and requiring changes in future RI filings.
The CSA conducted fewer reviews in fiscal 2014 (a 26% year-over-year decrease), but these reviews led to more serious consequences for issuers.
Almost twice as many issuers (almost 90 issuers) were referred to enforcement, cease-traded or placed on the default list this year (enforcement action), approximately 1 out of every 10 issuers reviewed. Overall, more than 75% of this year’s review outcomes required issuers to take some action to improve their disclosure or resulted in enforcement action. Last year, this figure was below 50%. The 2014 results are indicative of what the CSA is calling “a focused approach on obtaining more substantive outcomes”.
Common Deficiencies Noted by the CSA
Financial Statement Deficiencies
Disclosure of Interests in Other Entities: Some RIs that changed the definition of control and joint control of joint arrangements based on new IFRS standards provided insufficient explanations for the basis of the change.
Revenue Recognition: Some RIs recorded revenues in a manner inconsistent with their role as either principal or agent collecting amounts for a third party.
Impairment of Assets: Some RIs provided insufficient information about the events and circumstances that led to the recognition or reversal of an impairment loss and the amount of impairment loss recognized or reversed during the period.
Management’s Discussion and Analysis (MD&A) Deficiencies
Non-GAAP Measures: Some RIs made adjustments to EBITDA to make the metric look more positive, which could be seen as potentially misleading or confusing to investors.
Forward Looking Information: Some RIs failed to sufficiently disclose the material factors or assumptions used to develop forward looking information.
Additional Disclosure for Venture Issuers Without Significant Revenue: Some RIs presented exploration expenditures on a property-by-property basis without giving the required breakdown by material components.
Other Regulatory Disclosure Deficiencies
Executive Compensation: Some RIs did not include sufficient explanation in their Compensation Discussion and Analysis (CD&A) as to how each element of compensation is tied to each named executive officer’s performance. In many cases, the CD&A did not fully describe how executive compensation decisions were made. The CSA noted that this was of particular concern with regard to performance goals and similar conditions.
Filing of News Releases and Material Change Reports (MCRs): Many RIs filed news releases and/or MCRs at inappropriate times and with inadequate content. The CSA also noted that some RIs either do not file their news releases and/or MCRs or fail to do so on a timely basis.
Mineral Projects: Some RIs engaged in mineral exploration and mining activities were deficient in complying with a number of disclosure requirements, including:
- how “reasonable prospects for economic extraction” were established for projects with mineral resource estimates, including the key assumptions, parameters and methods;
- insufficient discussion of any potential social or community related requirements and plans for advanced properties and the status of any negotiations or agreements with local communities;
- failure to provide the required context and justification for capital and operating cost estimates for advanced properties;
- inadequate information related to economic analysis information for advanced properties, particularly the practice of disclosing only pre-tax cash flows or only up-side sensitivity analysis;
- lack of disclosure related to project-specific risks and uncertainties that could reasonably be expected to affect the reliability or confidence in the information presented;
- incomplete disclosure of the “key findings” about the mineral property in the summary section; and
- missing required statements in the qualified person’s certificate.