Notice of Proposed OSC Policy: OSCP - 57-603 - Defaults by Reporting Issuers in Complying with Financial Statement Filing Requirements
Notice of Proposed OSC Policy: OSCP - 57-603 - Defaults by Reporting Issuers in Complying with Financial Statement Filing Requirements
NOTICE OF PROPOSED ONTARIO SECURITIES COMMISSION POLICY 57 - 603
DEFAULTS BY REPORTING ISSUERS IN COMPLYING WITH
FINANCIAL STATEMENT FILING REQUIREMENTS
Background
Where a reporting issuer (a "Defaulting Reporting Issuer") is identified by the OntarioSecurities Commission (the "Commission") as being in default of the requirements to fileannual or interim financial statements (a "Financial Statement Filing Requirement"), theCommission can respond in a number of ways.
In the past, the Commission generally:
(i) placed the Defaulting Reporting Issuer on the defaulting issuer list pursuant tosubsection 72(9) of the Securities Act (Ontario) (the "Act"); and
(ii) imposed a temporary order to cease all trading in securities of the DefaultingReporting Issuer, followed by a "permanent" order to cease all trading in securitiesof the issuer pursuant to section 127 of the Act.
The rationale for the Commission's previous practice of pursuing a cease trade orderagainst the issuer was founded on concerns that:
(i) without statutorily prescribed interim and audited annual financial statements, theremay not be adequate information in the securities marketplace to properly supportinformed trading decisions in respect of securities of the issuer; and
(ii) the integrity and fairness, or confidence in the integrity and fairness, of the capitalmarkets, may be compromised if trading in securities of the reporting issuer ispermitted to continue during the period of default (at a time when there isheightened potential that certain persons or companies may have access toinformation that would otherwise be reflected in the financial statements that thereporting issuer is in default of filing).
More recently, the Commission has, in certain instances, varied the practice of ceasetrading the securities of a Defaulting Reporting Issuer where, for example, the default wasattributable to insolvency proceedings against the issuer. In these instances, theCommission has considered the adequacy of existing disclosure in the securitiesmarketplace concerning the issuer. Where the Commission has been satisfied that,notwithstanding the default, there has been adequate disclosure in the marketplace topermit reasonably informed trading, the Commission has abstained from issuing a ceasetrade order on the issuer ("Issuer Cease Trade Order") in order to permit the DefaultingReporting Issuer a period of time to restructure its affairs.
The Commission has determined to reconsider its approach to Defaulting ReportingIssuers and express its views in the form of a policy, having particular regard to thefollowing:
(i) despite the failure by a reporting issuer to file prescribed financial statements, theremay still be adequate information in the securities marketplace to supportreasonably informed trading;
(ii) to prohibit all trading in securities of the issuer may result in hardship to existingsecurity holders; and
(iii) an Issuer Cease Trade Order may have the effect of insulating management of theissuer from being held accountable for fulfilling its responsibilities to securityholders of the issuer.
In the Commission's view, the approach described in the attached Policy 57-603 Defaultsby Reporting Issuers in Complying with Financial Statement Filing Requirements, whilesubstantively different from past practice, serves to effectively balance the joint purposesof the Act to provide protection to investors from unfair, improper or fraudulent practicesand to foster fair and efficient capital markets and confidence in capital markets.
Purpose of the Proposed Policy
The purpose of the Policy is to state principles, criteria and factors to be considered by theCommission in responding to a default by a reporting issuer in complying with a FinancialStatement Filing Requirement.
The purpose of the Policy is to also state:
(i) the manner in which the Commission interprets the application of section 75 of theAct in circumstances where a reporting issuer determines that it will not comply, or,subsequently determines that it has not complied, with a Financial Statement FilingRequirement; and
(ii) practices to be followed by the Commission to make the default list available forpublic inspection.
Summary of Proposed Policy
The substance and purpose of the proposed Policy are to outline the Commission'srevised approach to issuers who are in default of the requirements of the Act to file annualand interim financial statements. Part 1 of the Policy contains definitions of terms used inthe Policy that are not otherwise defined in the Act and sets out the purpose of the Policy.
Part 2 of the Policy identifies the principles, criteria and other factors that underlie theCommission's revised approach. The fundamental change in practice encompassed by thePolicy is that in circumstances where a Defaulting Reporting Issuer provides alternateinformation to the marketplace as described in Part 3 of the Policy, the Commission will,for a period not exceeding two months, generally not impose an Issuer Cease Trade Orderbut will instead impose a cease trade order on trading in the issuer's securities by itsofficers, directors and insiders (a "Management and Insider Cease Trade Order"). Section2.2 provides that the two month period may be extended in certain circumstances wherea Defaulting Reporting Issuer is the subject of insolvency proceedings.
The Commission's views as to the content and filing of certain documents and disclosurewhich should generally be filed by any issuer subject to a Management and Insider CeaseTrade Order are set out in Part 3 of the Policy. Sections 3.1 and 3.5 deal with anannouncement of a default and an announcement that the default has been corrected. Adefault announcement is issued at the time the issuer goes into default and a defaultcorrection announcement is issued at such time as the issuer remedies the default.Furthermore, default status reports, which are dealt with in section 3.2, communicateongoing developments in the affairs of the Defaulting Reporting Issuer. These reportswould generally be issued at least every two weeks during the period of default. In orderto facilitate the issuance of a Management and Insider Cease Trade Order, section 3.1deals with keeping the Commission informed regarding the reporting issuer's officers anddirectors and those persons who served as such during the period covered by the financialstatements which are the subject of the default, as well as those insiders who are knownto the issuer. The Commission's view that an insolvent issuer should provide theCommission and the market with the information it is required to provide to its creditorsunder the applicable insolvency legislation is set out in section 3.3. Finally, section 3.4deals with any unaudited financial information which may be issued by a DefaultingReporting Issuer during the period of default.
Part 4 of the Policy notes that the Commission will post on its web site and periodicallypublish in the Bulletin a list of Defaulting Reporting Issuers prefaced by an investor alertrelated to the implications of a reporting issuer being in default.
Part 5 of the Policy outlines the basis on which staff will normally consider recommendingthat a cease trade order be revoked. It notes that, before revoking an Issuer Cease TradeOrder which has been outstanding for some time, the Commission may consider whetherthe issuer should bring its disclosure up to date by providing prospectus-level disclosure.
Finally, Part 6 of the Policy sets out the Commission's intention to apply the sameapproach to other continuous disclosure defaults.
Related Matters - Applications for Extensions of Filing Deadlines
In view of the Commission's revised approach, the Commission anticipates that, uponimplementation of the Policy, there will rarely be circumstances which will warrant theCommission granting a reporting issuer discretionary relief so as to extend the prescribedtime for the filing of financial statements. Accordingly, staff is reconsidering the status ofStaff Accounting Communique 5 - Filing Extensions for Continuous Disclosure FinancialStatements.
Development of National Policy
The Canadian Securities Administrators are working to develop a National Policy forresponding to defaults by reporting issuers in complying with Financial Statement FilingRequirements. If and when adopted, the National Policy would replace the Policy.
Related Instruments
The proposed Policy is related to Part XVIII and section 127 of the Act. It is also relatedto section 75 and subsections 72(8) and 72(9) of the Act, Ontario Securities CommissionPolicies 1.4 and 2.5 and the Commission notice entitled Revocation of Cease TradeOrders (1995) 18 OSCB 5.
Unpublished Materials
In proposing the Policy, the Commission has not relied on any significant unpublishedstudy, report, decision or other written materials.
Comments
Interested parties are invited to make written submissions with respect to the proposedPolicy. Submissions received by May 31, 2000 will be considered.
Submissions should be made in duplicate and delivered to the attention of:
John StevensonSecretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario, M5H 3S8
(416) 593-8145
A diskette containing the submissions (in DOS or Windows format, preferablyWordPerfect) should also be submitted. As the Act requires that a summary of writtencomments received during the comment period be published, confidentially of submissionscannot be maintained.
Questions may be referred to:
Heidi FrankenManager
Continuous Disclosure
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
(416) 593-8249
[email protected]
Robert F. Kohl
Senior Legal Counsel
Corporate Finance
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
(416) 593-8233
[email protected]
Rick Whiler
Senior Accountant
Corporate Finance
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
(416) 593-8127
[email protected]
Proposed Policy
The text of the proposed Policy follows, together with a footnote that is not part of thePolicy but has been included to provide background and explanation.
ONTARIO SECURITIES COMMISSION POLICY 57-603
DEFAULTS BY REPORTING ISSUERS IN COMPLYING WITH FINANCIAL STATEMENT FILING REQUIREMENTS
PART 1 GENERAL
1.1 Definitions
In this Policy:
"Alternate Information Guidelines" means the disclosure guidelines outlined in Part 3;
"Cease Trade Order" means an order under paragraph 2 of subsection 127(1) of the Actthat trading in securities of the reporting issuer by all persons or companies, or certainpersons or companies identified in the order, cease, either permanently, or, for such periodas is specified in the order.
"Default Announcement" means a news release and report referred to in section 3.1;
"Default List" means the list of defaulting reporting issuers maintained by the Commissionpursuant to subsection 72(9) of the Act;
"Defaulting Management and Other Insiders" means persons and companies who:
(i) are directors, officers or insiders of the Defaulting Reporting Issuerduring the period the Defaulting Reporting Issuer is in default; or
(ii) were directors, officers or insiders of the Defaulting Reporting Issuerduring the period covered by the financial statements which are thesubject of the default.
"Defaulting Reporting Issuer" means a reporting issuer identified by the Commission asbeing in default of a Financial Statement Filing Requirement;
"Default Status Report" means a news release and report referred to in section 3.2 of thisPolicy;
"Financial Statement Filing Requirement" means a requirement to file annual or interimfinancial statements in accordance with Part XVIII of the Act;
"Issuer Cease Trade Order" means a Cease Trade Order that all trading in securities ofa Defaulting Reporting Issuer cease, either permanently, or, for such period as is specifiedin the order; and
"Management and Insider Cease Trade Order" means a Cease Trade Order that tradingin securities of a Defaulting Reporting Issuer by persons or companies identified in theorder as Defaulting Management and Other Insiders cease, either permanently, or, forsuch period as is specified in the order.
1.2 Purpose
The purpose of this Policy is to state:
(i) certain principles, criteria and factors which the Commission willnormally consider in responding to a Financial Statement FilingRequirement default;
(ii) the manner in which the Commission interprets the application ofsection 75 of the Act in circumstances where a reporting issuerdetermines that it will not comply, or, subsequently determines that ithas not complied, with a Financial Statement Filing Requirement; and
(iii) practices to be followed by the Commission to make available forpublic inspection the Default List.
PART 2 RESPONDING TO DEFAULTS BY REPORTING ISSUERS OF FINANCIALSTATEMENT FILING REQUIREMENTS
2.1 Principles, Criteria and Other Factors
The following actions, among others, may be taken by the Commission to address aFinancial Statement Filing Requirement default:
(i) the Commission will respond to the default by placing the DefaultingReporting Issuer on the Default List; and
(ii) the Commission will usually consider issuing an Issuer Cease TradeOrder or a Management and Insider Cease Trade Order in respect ofthe Defaulting Reporting Issuer.
The Commission will, generally, respond to a Financial Statement Filing Requirementdefault by issuing a Management and Insider Cease Trade Order. This will generally bethe only Cease Trade Order issued if the Defaulting Reporting Issuer provides theinformation contemplated by the Alternative Information Guidelines and the default iscorrected within two months of the date of the default.
Where a Defaulting Reporting Issuer does not satisfy the Alternate Information Guidelinesor the default continues for more than two months, the Commission will normally considerthe immediate imposition of an Issuer Cease Trade Order and may also consider whetherEnforcement action against the directors and officers who failed to release the informationis appropriate. This is done on the basis that the objective of maintaining liquidity in thesecondary markets normally diminishes in importance relative to the importance offurnishing the marketplace with financial information in the form and within the time framesthat are statutorily prescribed.
2.2 Reporting Issuers That Are The Subject Of Insolvency Proceedings
In circumstances where:
(i) the Defaulting Reporting Issuer is the subject of insolvencyproceedings, and
(ii) pursuant to the provisions of the applicable insolvency legislation, theDefaulting Reporting Issuer has retained title to its assets and itsdirectors and officers continue to manage its affairs,
the Commission will generally not pursue an Issuer Cease Trade Order in respect of thereporting issuer for a limited period beyond two months, in order to accommodate arestructuring of the reporting issuer. (In the case of Canadian insolvency legislation, it isexpected that these circumstances would be restricted to a restructuring under theCompanies' Creditors Arrangement Act or Part III of the Bankruptcy and Insolvency Act).
To receive an extension, the issuer should make appropriate submissions to Commissionstaff significantly in advance of the expiry of the two month period. The Commission will,normally, expect the Defaulting Reporting Issuer to satisfy the provisions of the AlternateInformation Guidelines during the period of the extension.
PART 3 DISCLOSURE
3.1 Default Announcement
The Commission is of the view that, where a reporting issuer determines that it will notcomply, or, subsequently determines that it has not complied, with a Financial StatementFiling Requirement, this will generally represent a material change that should beimmediately communicated to the securities marketplace by way of a news release andreport of the material change in accordance with section 75 of the Act. However, even ifthis determination does not represent a material change, the Commission takes the viewthat the determination is normally important information that should be communicated tothe marketplace by way of news release and report (a "Default Announcement"), that isauthorized by a senior officer of the reporting issuer and is otherwise prepared and filedwith the Commission in the same manner as a news release and report of a materialchange referred to in section 75 of the Act.
The Commission is of the view that the Default Announcement should:
(i) identify the relevant Financial Statement Filing Requirement and the(anticipated) default;
(ii) disclose in detail the reason for the (anticipated) default;
(iii) disclose the current plans of the reporting issuer to remedy thedefault, including the date it is anticipated that the financialstatements, which are the subject of the Financial Statement FilingRequirement, will be filed (or, if there are no such plans oranticipated date, the fact that there are no such plans or date and thereasons why);
(iv) specify the date that is two months after the default and acknowledgethat the Commission may impose an Issuer Cease Trade Order if thedefault is not remedied by that time;
(v) confirm that the reporting issuer intends to satisfy the provisions ofthe Alternate Information Guidelines so long as it remains in defaultof the Financial Statement Filing Requirement;
(vi) disclose relevant particulars of any insolvency proceeding to whichthe reporting issuer is subject, including the nature and timing ofinformation that is required to be provided to creditors, together withconfirmation that the reporting issuer intends to file with theCommission throughout the period in which it is in default, the sameinformation it provides to its creditors at the times the information isprovided to the creditors and in the same manner as it would file amaterial change report under the Act; and
(vii) disclose any other material information concerning the affairs of thereporting issuer that has not been generally disclosed (which mayinclude unaudited financial statements).
In order to issue a Management and Insider Cease Trade Order instead of an IssuerCease Trade Order, the Commission will need the current address and current telephonenumber of each person or company referred to in paragraphs (i) and (ii) of the definitionof Defaulting Management and Other Insiders that is known to the Defaulting ReportingIssuer. This information should be delivered with the Default Announcement together withan undertaking to provide to the Commission, during the period of default which is thesubject of the Default Announcement, particulars of any changes to this information thatis known to the Defaulting Reporting Issuer.
3.2 Default Status Reports
The Commission takes the view that, after a Defaulting Reporting Issuer's DefaultAnnouncement, and during the period of the default which is the subject of the DefaultAnnouncement, a Defaulting Reporting Issuer should normally communicate to themarketplace by way of news release (a "Default Status Report"):
(i) any changes to the information contained in the DefaultAnnouncement, as revised by subsequent Default Status Reports;
(ii) particulars of any failure by the Defaulting Reporting Issuer in fulfillingits stated intentions with respect to satisfying the provisions of theAlternate Information Guidelines; and
(iii) any other material information concerning the affairs of the reportingissuer that has not been generally disclosed.
In order to keep the market continuously informed of any developments during thissensitive time, the Default Status Reports should normally be issued every two weeksfollowing the Default Announcement during the period of the default. If the Commission,at any time, issues an Issuer Cease Trade Order in respect of the Defaulting ReportingIssuer, Default Status Reports will no longer be necessary.
The Commission takes the view that, even where no information is required to becommunicated in accordance with paragraphs (i), (ii) and (iii) above, in order to keep themarket apprised of the current status and affairs of the Defaulting Reporting Issuer, thefact there is no such information to report during this period should normally becommunicated in a Default Status Report.
It is the Commission's view that every Default Status Report should be prepared,authorized, filed and communicated to the securities marketplace in the same manner asthat specified in section 3.1 for a Default Announcement.
3.3 Information Respecting Defaulting Reporting Issuers Which Are Subjectto Insolvency Proceedings
The Commission takes the view that, where a Defaulting Reporting Issuer that is thesubject of insolvency proceedings retains title to its assets and its directors and officerscontinue to manage its affairs, the Defaulting Reporting Issuer should simultaneously issuea news release and file a report disclosing the same information it provides to its creditorsin the same manner as a news release and report of a material change referred to insection 75 of the Act. This is in addition to the Default Announcement and Default StatusReports.
3.4 Financial Information in Default Announcements or Default StatusReports
The Commission reminds issuers that any unaudited financial information which iscommunicated to the marketplace should, except in certain circumstances involvinginsolvency, be directly derived from financial statements which have been prepared andpresented in accordance with generally accepted accounting principles. In DefaultAnnouncements and Default Status Reports, this information should be accompanied bycautionary language that the information has been prepared by management of theDefaulting Reporting Issuer and is unaudited.
3.5 Default Correction Announcement
The Commission is of the view that, once the Financial Statement Filing Requirementdefault is remedied, the reporting issuer should communicate that information to thesecurities marketplace in the same manner as that specified in section 3.1 of this Policyfor a Default Announcement.
PART 4 COMMISSION PUBLICATION OF INFORMATION RESPECTING ADEFAULTING REPORTING ISSUER
4.1 Publication of Default Status and Cease Trade Orders
The Commission proposes to include on its Web Site www.osc.gov.on.ca and publish ona periodic basis in its Bulletin a current Default List prefaced by an explanation in thenature of an "investor alert", which describes the implications of a reporting issuer beingin default of a Financial Statement Filing Requirement.
The Commission expects that this information will be relevant to existing and prospectivesecurity holders of Defaulting Reporting Issuers, as well as to registrants in their dischargeof suitability and know-your-client obligations.(1)
PART 5 REVOCATION OF CEASE TRADE ORDERS
5.1 Revocation of Cease Trade Orders
Where a Management and Insider Cease Trade Order or an Issuer Cease Trade Orderhas been issued as a consequence of the Financial Statement Filing Requirement default,the Commission will consider revoking the order:
(i) upon the Defaulting Reporting Issuer complying with the FinancialStatement Filing Requirement; and
(ii) provided the Defaulting Reporting Issuer is not otherwise in defaultof any requirement of the Act or regulations which would cause thereporting issuer to be placed on the Default List.
The Commission's consideration of any application for revocation will be based upon itsreview of the financial statements which are submitted, the period of time the issuer hasbeen the subject of a Cease Trade Order, and any other factors or circumstances whichit determines to be of significance in the particular case. In particular, the Commissionmay consider whether, before revoking an Issuer Cease Trade Order that has beenoutstanding for some time, the issuer should also bring its disclosure up to date byproviding prospectus-level disclosure.
PART 6 DEFAULTS OF OTHER CONTINUOUS DISCLOSURE REQUIREMENTS
6.1 Defaults of Other Continuous Disclosure Requirements
The scope of this Policy is limited to Financial Statement Filing Requirement defaults.Defaults of other continuous disclosure requirements will be addressed on a case-by-casebasis in a manner similar to that set out in this Policy. In particular, the Commission mayconsider applying the approach set out in this Policy where a reporting issuer is in defaultof a continuous disclosure requirement that is analogous to a Financial Statement FilingRequirement (for example, a failure to file an Annual Information Form in accordance withthe requirements of the proposed rule, once adopted, to reformulate Ontario SecuritiesCommission Policy 5.10).
1 The Toronto Stock Exchange and CDNX have each confirmedto the Commission their intention to halt, for an appropriate period following noticeof default, all trading in securities of a reporting issuer on their exchanges, immediatelyupon being notified of a default by the issuer in complying with a Financial Statement FilingRequirement, so as to ensure proper dissemination to the securities marketplaceof information concerning the default. These Exchanges have also confirmed thatthey will identify a Defaulting Reporting Issuer by an electronic marker.