The Ontario Securities Commission (OSC) issued OSC Staff Notice 51-721 – Forward-Looking Information Disclosure (the Notice) which deals with the disclosure of forward-looking information (FLI). The Notice summarizes the results of OSC staff review of FLI contained in continuous disclosure documents of reporting issuers in Ontario. The Notice (1) sets out the common areas of improvements identified from the review, and (2) provides practice points. The following provides an overview of the Notice.
FLI is disclosure about possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of action, and includes: (a) future-oriented financial information (FOFI) and (b) financial outlook. FLI is subject to the requirements under National Instrument 51-102 - Continuous Disclosure Obligation (NI 51-102) applicable to FLI. As noted in the Notice, such requirements apply regardless of whether FLI is on a website, in a news release or in management’s discussion and analysis (MD&A).
OSC staff indicate in the Notice that although FLI is not mandatory, it can be used to increase an investor’s understanding of a reporting issuer’s business and future prospects. However, as FLI is by definition likely to be less reliable than historical information because it is based on management’s best judgment and assumptions on how future trends will impact their business, OSC staff note that it is important that FLI be clearly identified so that readers understand the limitation of this information, and that readers understand the basis on which the FLI was determined, which basis must be reasonable.
If an issuer uses FLI, it must comply with the requirements under NI 51-102, which requirements, OSC staff note, can be divided into two parts:
- requirements relating to the initial disclosure of FLI, and
- requirements relating to the ongoing obligations to update, compare to actual results and, if appropriate, withdraw previously disclosed FLI.
Areas of Improvement
The Notice sets out the following four common areas of improvement that were identified by OSC staff in the review:
- clear identification of FLI
- disclosure of the material factors or assumptions used to develop FLI
- updating previously disclosed FLI
- comparison of actual results to the FOFI or financial outlook previously disclosed
Identification of FLI
In the Notice, OSC staff report that although most issuers include cautionary language which identifies the existence of FLI, less than half of the reporting issuer’s review clearly identified entity specific FLI. OSC staff further note that if the identification of FLI is general or boilerplate it is not helpful to users to specifically identify and understand the FLI.
Material Failure and Assumptions
In the Notice, OSC staff state that disclosure of specific relevant material factors or assumptions, including material risk factors underlying the FLI, is necessary for investors to understand how actual results may vary from FLI. OSC staff report that (1) 24% of reporting issuers reviewed did not disclose any material factors or assumptions used to develop their FLI, (2) 19% of reporting issuers only provided generic factors and assumptions within the cautionary statement, and (3) the majority of issuers reviewed did not quantify their assumptions. OSC staff state in the Notice that reporting issuers should provide reasonable, supportable and entity-specific assumptions and, whenever possible, assumptions should be quantified as this provides valuable information for investors.
Updating Previously Disclosed FLI
Under Section 5.8 of NI 51-102, a reporting issuer is required to discuss in the MD&A or in a press 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. The OSC staff report in the Notice that 40% of reporting issuers reviewed did not disclose the events and circumstances impacting their previously reported FLI that occurred during the period. In the OSC staff’s view, failure to provide disclosure of material differences in events and circumstances prevents investors from assessing how well the reporting issuer is progressing towards the achievement of its disclosed targets and objectives.
Comparison of Actual Results vs. FOFI and Financial Outlook in MD&A
Subsection 5.8(4) of NI 51-102 requires reporting issuers to provide a comparison in the MD&A if actual amounts differ materially from previously disclosed FOFI or financial outlook for that period. OSC staff report only 33% of reporting issuers reviewed provided such a comparison which the OSC staff considers to be important for investors in their assessment of the effectiveness of management and of the current and future business performance of the issuer.
OSC staff identify a number of practice points in the Notice, including:
Quality of Assumptions
Assumptions should be reasonable, qualitative, entity-specific and quantitative.
Timely Updating of Ongoing Progress
Updating of ongoing progress as compared to previously disclosed FLI and disclosure of expected material differences is informative information that should be provided to investors.
Key Performance Indicators - Financial and Non-financial
Disclosure of an issuer’s objectives along with their related key performance indicators helps an investor understand how well an issuer is progressing towards its objectives.
A separate section containing all FLI should be provided as it allows investors to easily identify information that constitutes material FLI.
Role of the Audit Committee and Board of Directors
As part of their oversight of FLI, the audit committee and board of directors should review and approve all FLI disclosure before it is publicly disclosed, including the underlying assumptions being used to develop the FLI.
The Notice concludes with a reminder that the OSC will continue to review continuous disclosure and as part of such review will assess FLI disclosure and that OSC staff expect corrective action to be taken if the disclosure does not comply with the FLI requirements.