Canada: The Path To Simplified Disclosure: CSA Propose Consolidating Financial Statements, MD&A And AIF Into Single Disclosure Document

Proposed amendments to Canadian continuous disclosure rules would consolidate and clarify certain disclosure requirements under NI 51-102, while eliminating other redundant obligations.

• On May 20, 2021, the Canadian Securities Administrators (CSA) proposed amendments to continuous disclosure rules that would combine a reporting issuer's financial statements, management's discussion and analysis (MD&A) and, where applicable, annual information form (AIF) into a single reporting document.
• Disclosure requirements considered redundant or duplicative would be eliminated, while others would be clarified.
• The CSA also announced that they are considering permitting venture issuers to voluntarily report on a semi-annual basis.
• The proposed amendments are open for comment until September 17, 2021, with the final version of the rules expected to be published in September 2023 and come into effect on December 15, 2023.

On May 20, 2021, the Canadian Securities Administrators (CSA) proposed amendments to National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) that would (i) combine the financial statements, MD&A, and where applicable, the AIF of reporting issuers (other than investment funds) into a single annual or interim disclosure statement; (ii) eliminate, consolidate or clarify certain disclosure requirements in the MD&A and AIF; and (iii) address gaps in existing disclosure requirements with a small number of new requirements.

The proposed amendments are a result of a consultation process going back to early 2017. As we discussed in a previous post, the CSA published a consultation paper in April of that year that identified areas of securities legislation where the regulatory burden on issuers could be reduced, and asked for stakeholder feedback on potential options.

Meanwhile, the Ontario Securities Commission (OSC) also initiated a public consultation process on burden reduction in 2019 which proposed revisiting certain continuous disclosure requirements with the goal of eliminating duplicative disclosure requirements and consolidating annual and quarterly filings into singular reporting documents. In addition, the Ontario Capital Markets Modernization Taskforce, a group tasked with making recommendations to modernize Ontario's capital markets regulation, published final recommendations in January 2021 intended to improve the competitiveness of Ontario's capital markets. These recommendations included consolidating reporting and regulatory requirements and reducing the frequency of continuous disclosure filings.

The proposed amendments to NI 51-102 are ultimately intended to address feedback received from stakeholders and would, according to the CSA, reduce reporting issuers' regulatory burden while enhancing the "quality and usability of the disclosure to be provided to investors."

A New Combined Disclosure Statement

The proposed amendments would require that (non-investment fund) reporting issuers combine financial statements, MD&A and, where applicable, the AIF into a singular, periodic disclosure document:

According to the CSA, combining financial disclosures in this way would increase reporting efficiency while also providing more intuitive disclosure for cross-border investors familiar with streamlined reporting documents prepared by U.S. issuers.

Eliminating, Consolidating or Clarifying Requirements

The proposed amendments also seek to eliminate certain disclosure requirements where duplication or redundancies exist, including the following requirements:

• information regarding critical accounting estimates in an MD&A, as it is also required in the financial statements under Canadian GAAP applicable to publicly accountable enterprises (Canadian GAAP);
• disclosure in an AIF with respect to cash dividends or distributions declared to the extent such information is required in the financial statements under Canadian GAAP; and
• summary information for the eight most recently completed quarters in an MD&A.

The proposed amendments also seek to consolidate obligations that require reporting of similar information in different ways, such as the current MD&A requirements to discuss liquidity and capital resources.

In instances where requirements are considered vague or unclear, the proposed amendments seek to provide clarification. For example, the proposed amendments would clarify that a summary from a technical report containing the required disclosure could also be used to satisfy the AIF requirement in regard to mineral projects and that the technical report would not be required to be incorporated by reference.

Disclosure Gaps

A limited number of new requirements have also been proposed to address gaps in disclosure obligations. For example, venture issuers would be required to provide a description of their business in their MD&A.

According to the CSA, while the addition of new obligations to address gaps could be viewed as increasing issuers' regulatory burden, the new requirements are generally intended to clarify existing expectations as set out in various staff notices and comment letters.

Other Proposed Changes

Other changes that would be introduced by the proposed amendments include:

• removing references to a variety of materiality qualifiers such as "material", "significant", "critical", "major" and "fundamental" throughout the MD&A and AIF forms, except where used as part of a defined term or a term used in prospectus rules. Disclosure would be subject to a general instruction that issuers are to focus on material information in completing all form requirements;
• application of a delivery requirement for the annual disclosure statement to investors, which would occur pursuant to the "access equals delivery" model currently under consideration;
• allowing issuers to rely on exemptions from the requirements to prepare, file or deliver annual or interim filings that were granted prior to the effective date of the proposed amendments;
• updating the guidelines on risk factor disclosure in the AIF to suggest that the disclosure be in tabular form and identify for each risk factor the nature of the risk, its description, the seriousness of the risk and the related risk mitigation strategy; and
• updating prospectus form requirements in order to maintain alignment between the continuous disclosure and prospectus regimes.

The proposed amendments would not impact the current annual and interim filing deadlines.

Seeking Feedback on Semi-Annual Reporting for Venture Issuers

Notably, the CSA are also seeking stakeholder feedback on a potential framework to allow venture issuers to report on a semi-annual basis. The CSA have been considering the potential for semi-annual reporting for some time, noting in 2017 that it has been permitted in the United Kingdom, Australia and some European Union countries. While the CSA did not propose specific amendments at this time, the changes being considered would:

• be limited to venture issuers that are not SEC issuers;
• implement semi-annual reporting on a voluntary basis; and
• require alternative disclosure for interim periods where financial statements and MD&A would not be filed.

Under the framework, venture issuers would have to file a notice after either opting into or out of semi-annual reporting, and those adopting semi-annual reporting would have to file alternative disclosure providing certain information. Where a venture issuer loses eligibility to file semi-annually (due to becoming a SEC issuer or ceasing to be a venture issuer), it would have to file applicable interim filings that were not otherwise filed in the year it lost eligibility. Venture issuers reporting on a semi-annual basis would still be able to use the short form prospectus offering system.

Whether semi-annual filings would provide much benefit to venture issuers remains to be seen. Venture issuers are currently permitted to satisfy interim MD&A disclosure requirements by providing a short discussion about their business, financial condition, financial performance and cash flows, known as "quarterly highlights". Meanwhile, venture issuers seeking to report on a semi-annual basis could experience push-back from investors due to concerns with the timeliness of financial information. As such, semi-annual reporting may only be a practical consideration for smaller venture issuers.

Next Steps

The CSA are accepting comments on the proposed amendments and venture issuer semi-annual reporting framework, until September 17, 2021. The CSA have also set out a number of specific questions for stakeholders to consider in providing feedback.

A final version of the amendments is not expected until 2023, and the CSA are aiming for a December 15, 2023 effective date. Proposed transition provisions would require issuers to file an annual disclosure statement for their first financial year ending on or after December 15, 2023, with the option for issuers to voluntarily file an annual or interim disclosure statement on or after December 15, 2023.

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