Amendments to National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) and consequential amendments to other instruments are intended to streamline regulations regarding forward-looking information (FLI) and provide clarified expectations.
Currently, National Policy 48 (NP 48) specifies how future-oriented financial information (FOFI) is to be prepared, disclosed and updated in certain types of disclosure and offering documents. After many years of confusion with the scope and breadth of NP 48, the Canadian Securities Administrators (CSA) have decided to revoke NP 48 and replace it with new FLI and FOFI disclosure requirements. These requirements will be added to NI 51-102 and are expected to be effective as of December 31, 2007.
Key Features of the Amendments
The requirements in the amended NI 51-102 will apply to all FLI disclosed by a reporting issuer, other than FLI contained in oral statements. The Companion Policy 51-102CP makes clear that these FLI requirements apply not only to information filed with securities regulators, but also amongst other things, news releases, website material and marketing materials.
Under the new rules an issuer may not disclose FLI unless it has a "reasonable basis" for the FLI. In addition, disclosure of any material FLI must comply with each of the following elements:
- FLI must be identified as such;
- Users must be cautioned that actual results may vary from the FLI and material risk factors that could cause actual results to differ materially from the FLI must be identified;
- The material factors or assumptions used to develop the FLI must be stated; and
- The issuer must describe its policy for updating FLI if it includes procedures in addition to those described in the section of NI 51-102 dealing with updates to FLI required in the Management's Discussion and Analysis (MD&A) or MD&A supplement.
These may sound familiar as some of the above requirements comprise elements of the defence to misrepresentation in FLI as contained in the secondary market civil liability provisions of the Securities Act (Ontario) and the securities legislation of other provinces.
FOFI and Financial Outlooks
FOFI and financial outlooks comprise a subset of FLI and, in addition to those set out above, further requirements exist for this category of FLI. In preparing FOFI or a financial outlook, a reporting issuer must:
- Use assumptions that are "reasonable and appropriate in the circumstances";
- Limit the period covered by the FOFI or financial outlook to a period for which the information in the FOFI or financial outlook can be reasonably estimated;
- Use the accounting policies the reporting issuer expects to use to prepare its historical financial statements for the period covered by the FOFI or the financial outlook;
- State the date management approved the FOFI or financial outlook; and
- Explain the purpose of the FOFI or financial outlook and caution readers that the information may not be appropriate for other purposes.
Disclosure Requirements Relating to Previously Disclosed Material FLI
NI 51-102 will also require that a reporting issuer must discuss in its MD&A or MD&A supplement, disclosure relating to updates, comparison to actual results and withdrawal of material FLI. Exceptions are available from the inclusion of such information in certain circumstances where the prescribed disclosure has already been included in a news release.
The amendments to NI 51-102 will be complemented by the revocation of NP 48, as well as amendments to various other instruments, rules, policies and forms. Amendments to the Companion Policy to NI 51-102 will include interpretation guidelines, while other instruments and forms will be amended to clarify that the FLI requirements in NI 51-102 apply to documents such as short and long form prospectuses, rights offering circulars and offering memoranda prepared in Form 45-106F3 and F4. The contents of offering memoranda in general (i.e. those not governed by National Instrument 45-106 Prospectus and Registration Exemptions) are governed by securities legislation at the provincial or territorial level, and it remains to be seen whether these requirements will be uniformly adopted in all Canadian jurisdictions for such offering memoranda as well. At the time of writing this update the Ontario Securities Commission had proposed amendments to its rules, also effective December 31, 2007, that will require any document that qualifies as an "offering memorandum" in Ontario to comply with these new FLI disclosure requirements. These new FLI disclosure requirements will apply to all reporting issuers, but also to non-reporting issuers in certain prescribed circumstances.
Implementation and transition
The new FLI requirements are scheduled to come into force on December 31, 2007.