On November 9, 2012, staff of the Ontario Securities Commission (the OSC) issued OSC Staff Notice 51-720 - Issuer Guide for Companies Operating in Emerging Markets (the Guide) to assist boards and management of emerging market issuers (EMIs) on their governance and disclosure practices. From the Staff’s perspective, EMIs are generally understood to be Canadian public companies with significant business operations in emerging markets.

While the guide is not intended to be exhaustive or to create new legal obligations (or, for that matter, modify existing ones), it:

  1. Highlights eight potential areas of risk which may warrant further scrutiny by EMIs;
  2. Sets out questions that directors and management of EMIs should consider in addressing risks of doing business in emerging markets; and
  3. Outlines Staff’s expectations regarding compliance with existing disclosure requirements.

Notwithstanding that, as indicated by its title, the Guide is primarily directed at EMIs, staff expects that other issuers and market participants will also find it useful.


The Guide follows a regulatory review by the OSC to assess the quality and adequacy of the compliance with disclosure and other regulatory requirements by selected EMIs, as well as the adequacy of the gatekeeper roles played by their auditors and underwriters and the exchanges on which they had listed. Staff’s findings and recommendations were published in OSC Staff Notice 51-719 Emerging Markets Issuer Review earlier in March.

Eight Areas to Consider For EMIs

In the Guide, staff identifies eight areas for consideration for EMIs, highlights matters to consider and sets out disclosure tips to assist EMIs and their boards in assessing risks and complying with securities laws. Staff points out that those eight areas of consideration do not constitute an exhaustive list, and that these issues may be considered along with other matters that the board and management determine to be appropriate.

The areas of risk identified by the Guide are summarily discussed below. For a more fulsome discussion, see the Guide.

Business and operating environment

The board and management of an EMI must have a thorough understanding of the political, cultural, legal and business environments of the EMI. The Guide reminds EMIs that their disclosure documents should allow an investor to understand their business model as well as issues, risks and characteristics unique to operating in the relevant emerging market.

Language and cultural differences

Boards should devise appropriate policies and procedures to overcome the inherent language and cultural barriers of operating in an emerging market. They should also be mindful of placing full reliance on local management, or local board members who may not be independent of the company, and should develop mechanisms to obtain, where required, independent input from other sources.

Corporate structure

Boards should design a corporate structure that takes into account the political, legal and cultural realities of the relevant emerging market. Boards should assess whether the corporate structure facilitates (or hinders) the conduct of the company's business, whether the corporate structure is necessary or desirable given the company’s operating environment (that is, whether it aligns with its operating environment), the risks associated with the corporate structure and how the board monitors and addresses those risks.

Related parties

As a result of differences in local business practices, cultural norms and legal requirements, transactions with other companies in the same group (i.e., the company’s parent company and fellow subsidiaries) or with parties linked to its shareholders, directors or management, or other related party transactions, may represent a heightened risk for EMIs. Accordingly, boards of EMIs should ensure that policies and procedures are in place to identify and independently evaluate and approve related party transactions.

Risk management and disclosure

Boards should have a clear understanding of the legal, regulatory, political and cultural risks impacting the company and evaluate these risks in the context of the particular emerging market and how they impact operations. Boards should consider that risk analysis and mitigation techniques that may be appropriate in the North American business context may be less effective in emerging markets.

Internal controls

The unique risks of operating in an emerging market magnify the importance of strong and efficient internal controls. Time zone, language and cultural differences can make communication especially complicated and may hinder the accuracy and timeliness of financial reporting that properly reflects the business decisions made in the local jurisdiction. Appropriate internal controls can provide checks and balances on the local operations to reduce the risks of inaccurate financial reporting and ensure that appropriate information is reported on a timely basis.

Use of and reliance on experts

Boards should keep in mind that industry professionals in emerging markets may not be subject to the same rules of professional conduct as they would be in Canada. Boards will therefore need to assess the quality of the advice provided and their ability to rely on the advice.

Oversight of the external auditors

The audit committee of an EMI should ensure that external auditors have appropriate expertise and experience to carry out the audit, and that it can effectively oversee the external auditor’s work.