Final Rule and Companion Policy: OSC Rule - 51-501 - AIF and MD&A and Proposed Rescission of OSC Policy Statement No. 5.10 Annual Information Form and Management's Discussion and Analysis of Financial Condition and Results of Operations (Repealed by 51-80
Final Rule and Companion Policy: OSC Rule - 51-501 - AIF and MD&A and Proposed Rescission of OSC Policy Statement No. 5.10 Annual Information Form and Management's Discussion and Analysis of Financial Condition and Results of Operations (Repealed by 51-80
NOTICE OF RULE 51-501 AIF AND MD&A AND COMPANION POLICY
51-501CPAND RESCISSION OF OSC POLICY STATEMENT NO.
5.10 ANNUAL INFORMATION FORM AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Notice of Rule and Companion Policy
The Ontario Securities Commission (the "Commission") has, under section 143 of the Securities Act (Ontario) (the"Act"), made Rule 51-501 AIF and MD&A (the "Rule") and adopted Companion Policy 51-501CP (the "CompanionPolicy").
The Rule and the material required by the Act to be delivered to the Minister of Finance was delivered for approvalon October 13, 2000. If the Minister approves the Rule or does not approve, reject or return the Rule to theCommission for further consideration, the Rule will come into force on January 1, 2001, the effective date containedin the Rule.
The Companion Policy will become effective concurrently with the Rule.
The Commission has also rescinded Ontario Securities Commission Policy 5.10 Annual Information Form andManagement's Discussion and Analysis of Financial Condition and Results of Operations ("Policy 5.10") effectiveMay 31, 2001.
Substance and Purpose of Proposed Rule
Policy 5.10 came into force on November 10, 1989. Policy 5.10 was introduced by the Commission to enhanceinvestor understanding of an issuer's business by providing supplemental analysis and background material to allowa fuller understanding of the nature of the issuer, its operations and known prospects for the future. Policy 5.10 wasdesigned to address the uneven quality and considerable variation in the presentation of discussion and analysis ofannual financial statements by creating a uniform framework within which issuers could provide a meaningfuldiscussion and analysis of past corporate performance and future prospects.
The introduction to Policy 5.10 notes that there are certain constraints on the amount of information that can beeffectively conveyed in financial statements that are subject to generally accepted accounting principles. Importanttransactions, events and conditions are not always fully reflected in the financial statements, nor are they easilyexpressed in dollar amounts. Additional disclosure and analysis beyond the financial statements is thereforenecessary to facilitate an adequate assessment of an issuer's recent history and outlook for the future.
The Rule reformulates Policy 5.10 and also introduces a requirement for MD&A to be provided in relation to interimfinancial statements ("interim MD&A"). Unlike Policy 5.10, the proposed Rule does not prescribe in full the contentsof an AIF and MD&A, other than interim MD&A. Instead, it cross references Form 44-101F1 AIF, which sets out thecontents of an AIF and Form 44-101F2 MD&A, which sets out the contents of MD&A. Forms 44-101F1 and 44-101F2 reformulate Appendix A to National Policy Statement No. 47 and contain revisions thereto. Forms 44-101FIand 44-101F2 were approved by the Commission on September 12, 2000 and are expected to come into force onDecember 31, 2000.
Changes Made to the Proposed Rule
The Commission published proposed Rule 51-501 AIF and MD&A (the "Proposed Rule") for comment on March 10,2000 ((2000) 23 OSCB 1787). In response to the request for comments, the Commission received submissions fromtwenty-one commentators. A summary of the comments received together with the Commission's response to thecomments is contained in Appendix A to this notice. Appendix B to this notice provides a list of the commentators onthe Proposed Rule. The Commission would like to thank each commentator for taking the time to provide theirvaluable comments.
As a result of comments received and further consideration of the Proposed Rule by the staff of the Commission,certain changes have been made to the Proposed Rule which are contained in the Rule. The Commission does notconsider any of the changes to be material and therefore has not published the changes for comment. For a detaileddiscussion of the contents of the Proposed Rule please refer to the notice published with the Proposed Rule ((2000)23 OSCB 1783). The following is a summary of the changes made to the Proposed Rule:
Part 1
Part 1 was amended to include a new section 1.1 containing two new definitions. The definitions are of the terms"annual MD&A" and "interim MD&A". The terms were used in the Proposed Rule although not consistently and theywere not defined. Unqualified references to MD&A in the Proposed Rule have been changed in the Rule to clarifywhether the reference is to annual or interim MD&A. The definitions have been included to ensure an understandingof the terms.
Part 1 has also been amended to add new subsection (2) to section 1.2. The new subsection clarifies when theprovisions of the Rule become applicable to subject issuers. The subsection provides that the requirement under theRule to file annual MD&A applies for financial years ending on or after January 1, 2001. The subsection also providesthat the requirement to file interim MD&A applies for interim periods beginning on or after January 1, 2001.
In response to comments received, section 1.3 has been modified such that the market capitalization test is based onthe average market price over a period of time rather than a single point in time. The revised market capitalizationtest (an average over a twenty day period) is now consistent with the test for junior issuers contained in Rule 41-501General Prospectus Requirements.
A new section 1.4 has been added to the Rule to include an exemption from the application of the Rule where anissuer subject to the Rule has not met the thresholds in section 1.2 for three consecutive financial years. This newsection was added in response to comments received.
Part 2
A new subsection (4) has been added to section 2.1 to require that where an issuer files an AIF prepared inaccordance with U.S. forms, the AIF must be filed as nearly as practicable contemporaneously with the filing of theform with the SEC.
Subsection (5) (subsection (4) in the Proposed Rule) has been amended to remove the permission given to issuers tocharge for the provision of copies of AIFs filed on U.S. forms.
Part 4
A new subsection (3) has been added to section 4.1 to require that interim MD&A prepared in accordance with U.S.requirements, as permitted in subsection (2), be filed as nearly as practicable contemporaneously with the filing ofthe interim MD&A with the SEC.
Substance and Purpose of the Companion Policy
The purpose of the Companion Policy is to provide guidance to assist reporting issuers in complying with theirobligations under the Rule.
Changes to the Proposed Companion Policy
The Commission published proposed Companion Policy 51-501CP to Rule 51-501 AIF & MD&A (the "ProposedCompanion Policy") for comment on March 10, 2000 ((2000) 23 OSCB 1791) contemporaneously with the ProposedRule.
As a result of comments received, changes made to the Proposed Rule and further consideration of the ProposedCompanion Policy by the staff of the Commission, certain changes have been made to the Proposed CompanionPolicy which are contained in the Companion Policy. The Commission does not consider any of the changes to bematerial and has therefore not published the changes for comment. For a detailed discussion of the contents of theProposed Companion Policy please refer to the notice published with the Proposed Companion Policy ((2000) 23OSCB 1783). The following are the significant changes made to the Companion Policy.
Part 1
A new section 1.2 has been added to the Companion Policy to help clarify the application of new subsection 1.2(2) ofthe Rule. The new subsection of the Rule is discussed above.
Part 2
More guidance is provided on interim MD&A in subsection 2.3 in response to comments. New subsection 2.3(5) hasbeen included in the Companion Policy to clarify that the Commission is not mandating the form of interim MD&A,only the content.
Authority for the Rule
The following sections of the Act provide the Commission with authority to make the Rule. Paragraph 143(1)22authorizes the Commission to prescribe requirements in respect of the preparation and dissemination and other use,by reporting issuers of documents providing for continuous disclosure that are in addition to the requirements underthe Act, including requirements in respect of an annual information form and supplemental analysis of financialstatements. Paragraph 143(1)24 authorizes the Commission to require issuers or other persons and companies tocomply, in whole or in part, with Part XVIII (Continuous Disclosure), or rules made under paragraph 143(1)22 of theAct. Paragraph 143(1)39 authorizes the Commission to make rules requiring or respecting the media, format,preparation, form, content, execution, certification, dissemination and other use, filing and review of all documentsrequired under or governed by the Act, the regulations or the rules and all documents determined by the regulationsof the rules to be ancillary to the documents.
Related Instruments
The Rule and Companion Policy are related to the Rule, National Instrument 44-101 Short Form ProspectusDistributions, Form 44-101F1 and Form 44-101F2.
Text of Rescission of Ontario Securities Commission Policy Statement No. 5.10
Policy Statement 5.10 is replaced by the Rule.
The text of the rescission is:
"Ontario Securities Commission Policy Statement No. 5.10 Annual Information Form and Management'sDiscussion and Analysis of Financial Condition and Results of Operations is hereby rescinded effective May31, 2001"
Questions concerning the Rule may be referred to:
Lisa EnrightSenior Accountant, Continuous Disclosure
Ontario Securities Commission
e-mail: [email protected]
(416) 593-3686
James McVicar
Legal Counsel, Corporate Finance
Ontario Securities Commission
e-mail:[email protected]
(416) 593-8154
DATED: October 27, 2000.
APPENDIX A
SUMMARY OF COMMENTS RECEIVED ON PROPOSED RULE 51-501 AND COMPANION POLICY 51-501CP
The following is a summary of the twenty-one comment letters received together with the Commission's responses. The Commission thanks all commentators for their valuable input.
General Comments
Comments
Seven commentators supported the basic thrust of the AIF and MD&A Rule. Two commentators indicated that theyalready provide the disclosure required by this Rule. One commentator noted that the proposal was extremelydifficult to read and comprehend. In the commentator's view, the proposal was not written in user friendly plainEnglish.
Response
The Commission is of the view that the disclosure requirements in the AIF and MD&A Rule will significantly enhancefinancial reporting especially with regard to interim reporting. In respect of the drafting comment, the Commission isconstrained to some extent by the current legislation and drafting convention. Where possible, the drafting has beensimplified. Further guidance has been provided in the Companion Policy to assist comprehension.
Specific Comments
1. Harmonization with CSA Jurisdictions
Comment
Three commentators urged the Canadian jurisdictions to work together to harmonize the regulation of financialdisclosure.
Response
The Commission supports harmonization with the other CSA jurisdictions and as such has kept the CSA jurisdictionsinformed as the Rule was developed. The Commission will continue to work towards harmonization with the otherCSA jurisdictions.
2. Coordination with NI 44-101 Short Form Prospectus Distributions ("NI 44-101")
Comment
One commentator recommended that NI 44-101 should specifically list quarterly MD&A as one of the documents tobe incorporated by reference in a short form prospectus, if an issuer is required to prepare it.
Response
The Commission agrees that quarterly MD&A should be required to be incorporated by reference in a short formprospectus. Consequently NI 44-101 contains this requirement in Form 44-101F3 Item 12.1(1) paragraph 7.
3. Fourth Quarter MD&A
Comment
One commentator was of the view that a discussion of the fourth quarter results should be included in the annualMD&A requirements outlined in NI 44-101. This commentator also recommended that since NI 44-101 is notcurrently effective, a Staff Notice be issued indicating that issuers may incorporate quarterly MD&A by reference in ashort form prospectus.
Response
The Commission agrees that it is important for investors to have an understanding of the events of the fourth quarter.Annual MD&A is required to include summary quarterly information for the last eight quarters (see Form NI 44-101F2Item 2(1)). In addition, annual MD&A requires the issuer to describe and quantify any events or items that have hada material impact on the issuer's financial condition, cash flows or results of operations during the issuer's fourthquarter including extraordinary or infrequently occurring items, year-end or other adjustments and disposals ofbusiness segments (Form NI 44-101F2 Item 1(2)). These requirements are in line with the SEC's requirements andat this time the Commission is not proposing to require additional disclosure.
At this time, it is anticipated that NI 44-101 will become effective on December 31, 2000. It is further anticipated thatthe Rule will become effective January 1, 2001. Since there is only a one day difference in the effective dates, aStaff Notice to encourage the inclusion of quarterly MD&A by reference in a short form prospectus was notconsidered necessary.
4. Interrelationship with the Integrated Disclosure System Proposal
Comment
One commentator recommended that the Supplementary Information Form (SIF) as outlined in the ConceptProposal for an Integrated Disclosure System (IDS Proposal) be introduced without delay for all issuers. Thecommentator was of the view that this would greatly improve the quality of continuous disclosure.
Response
The comment has been passed on to the CSA committee working on the IDS Proposal. The Commission and theCSA will be giving due consideration to the continuous disclosure obligations of issuers, including the filing of a SIF,in the context of moving towards an integrated disclosure regime. However, at the current time, the Commission isonly proceeding with the changes outlined in this Rule.
5. Relief from Requirements
Comments
Four commentators were of the view that requiring issuers to comply in perpetuity with the AIF and MD&Arequirements once they become subject to the Rule even though an issuer subsequently falls below the applicationthresholds could prove burdensome. Commentators suggested including a provision that would relieve issuers of therequirements after a certain period of time had passed during which the issuer was consistently below thethresholds.
Response
The Commission agrees that it would be appropriate to provide relief from the requirements to prepare an AIF andMD&A once an issuer has fallen below the thresholds for a period of time and has included a new subsection 1.3 inthe Rule to address this issue. The Rule now provides that once an issuer falls below the thresholds for threeconsecutive years it is not required to file an AIF and MD&A, until such time as it again meets or exceeds thethresholds.
6. Interim MD&A in Year of Initial Public Offering
Comments
Two commentators noted that in the year an issuer makes an initial public offering (the "IPO") it would be exemptfrom the filing of interim MD&A, until after the completion of the year in which the IPO is made even if it exceededthe thresholds at the time of the IPO. This commentator suggested that the Rule be changed such that the issuerwould be required to file interim MD&A in the year of the IPO.
Response
Annual MD&A forms the base document from which the interim MD&A is developed. An issuer would not have beenrequired to prepare annual MD&A for the year ending prior to its IPO and thus in the Commission's view, it would notbe appropriate to require the issuer to prepare interim MD&A until annual MD&A has been filed by the issuer. As aresult, no change has been made to the Rule.
7. Calculation of Market Capitalization for Threshold Test
Comments
Three commentators suggested that the market capitalization test be based on the average market price over aperiod of time rather than a single point in time.
Response
The Commission agrees and has made changes to subsection 1.2 of the AIF and MD&A Rule to address this issue.The revised market capitalization test (an average over a twenty day period) is now consistent with the test for juniorissuers contained in Rule 41-501 General Prospectus Requirements.
8. Foreign Issuers
Comment
One commentator indicated that it was necessary to clarify that the 10-K filed in lieu of the AIF is required to be filedwithin the earlier of the time periods required by the OSC and the SEC and is to be filed with the OSC at the sametime it is filed with the SEC.
Response
The Commission agrees and has addressed this issue in subsection 2.1(4) by requiring an issuer that files an AIF inthe Form of a 10-K or a 20-F to file the AIF, as nearly as practicable, contemporaneously with the filing of the Form10-K or a 20-F with the SEC.
9. Supplement for Canadian GAAP Discussion
Comments
Two commentators were of the view that the requirement for domestic issuers that file a 10-K or 20-F in lieu of theAIF, to file a supplement to the MD&A that discusses the financial statements prepared in accordance with CanadianGAAP was not necessary. One of the commentators stated that the reconciliation of interim financial statements toCanadian GAAP is of limited use to investors and represents a substantial cost to issuers. Another commentatorrecommended that the wording of subsections 2.2(2)(b) and 4.4(2)(b) be amended to include a materiality thresholdsuch that the subsections would require a MD&A supplement that would cover items that would read materiallydifferently if they were based on financial statements of the issuer prepared in accordance with Canadian GAAP.
Response
The Commission is of the view that it is important for domestic issuers to provide annual and interim MD&A based onthe Canadian GAAP financial statements that they are required to prepare and send to security holders. However,the Commission recognizes that this may result in additional work for issuers and as such the Rule only requiresissuers to prepare a supplement that discusses any differences in the MD&A that would result if the MD&A werebased on Canadian GAAP financial. Issuers are not required to prepare a complete MD&A based on the CanadianGAAP financial statements.
The Commission agrees that materiality would be a consideration when preparing the Canadian GAAP supplement,as is the case generally in the disclosure of financial information. As such, the Commission is of the view that it isnot necessary to specifically state that materiality should be considered when preparing the Canadian GAAPsupplement.
10. Preparation of Interim MD&A
Comments
Four commentators recommended that the Commission provide additional guidance on the preparation of interimMD&A, specifically indicating that only material items need to be discussed in interim MD&A. One commentatornoted that while some discussion of year-to-date results is important, more prominence should be given to thediscussion of the most recent quarter. Two commentators suggested that interim MD&A focus on changes arisingduring the period that are likely to have a significant effect in the future rather than just providing an analysis of thehistorical financial results. One commentator indicated that it was unclear as to the extent of analysis of interiminformation required and recommended that the proposed requirement be revised to relate the interim analysis backto the framework set out for annual MD&A. Another commentator was of the view that the interim MD&A would bemore comprehensive and easier to read if it was prepared as a stand alone document.
Response
To address the issues raised by commentators additional guidance has been added to subsection 2.3 of theCompanion Policy. The Commission is of the view that annual MD&A is the starting point for the preparation ofinterim MD&A. In preparing interim MD&A, issuers may presume that readers have access to annual MD&A. InterimMD&A must include an update of annual MD&A with a discussion of the current quarter and year to date period withemphasis on changes that are likely to have a significant impact in the future. Although interim MD&A would coverboth the year to date and current quarter, generally this discussion would focus on the current quarter's results as theprevious quarter would have been analysed in either annual MD&A or a previous quarter's interim MD&A. Inaddition, interim MD&A must include a comparison of the results of the quarter's income statement and cash flowstatement with the corresponding period of the previous quarter and a comparison of the current balance sheet to thebalance sheet at the previous year end.
Subsection 2.3(5) has also been added to clarify that the Commission is not mandating the form of interim MD&A.Issuers are not required to prepare a formal glossy quarterly report nor are they prohibited from preparing the interimMD&A as a stand alone document. Issuers are encouraged to prepare interim MD&A in a format that providesinvestors with quality information on a timely basis.
11. Fourth Quarter MD&A
Comment
One commentator raised a concern over the lack of reporting required for the fourth quarter.
Response
The Commission agrees that quarterly information is important to investors. Although the annual financialstatements do not have a requirement to disclose the fourth quarter as a discrete period, the annual financialstatements have extensive note disclosure and are accompanied by annual MD&A which is more comprehensivethan quarterly MD&A. Annual MD&A also has a requirement to provide summary quarterly information for the lasteight quarters (NI 44-101F2 Item 2).
In addition, annual MD&A requires a description of the effect of any disposals of segments of business andextraordinary, unusual or infrequently occurring items as well as the aggregate effect and nature of year-end or otheradjustments which are material to the results of the fourth quarter.
12. Periods covered by MD&A
Comments
One commentator was of the view that it would be more relevant for issuers in the development stage to discusssignificant changes in the results of operations and cash flows for the most recent quarter in comparison to theimmediately preceding quarter rather than comparing to the same time period in the immediately preceding financialyear.
Response
The requirements for interim MD&A set a minimum standard for reporting issuers. Issuers are encouraged to provideadditional information that would enhance disclosure to investors and aid in the understanding of the issuer. Thismay include a quarter over quarter comparison, where appropriate.
13. Delivery of Interim MD&A
Comments
Eight commentators were of the view that the requirement to send interim MD&A concurrently with the interimfinancial statements could result in a delay of the reporting of results due to the time requirements for preparation ofthe interim MD&A. Some of these commentators indicated that the requirement would impose a costly, undulyonerous, paper-based requirement that does not reflect the current business environment and is not in harmonizationwith the SEC. On the other hand, one commentator was of the view that interim MD&A is an important supplementto the information contained in the interim financial statements and supports the Commission's proposal to requireinterim MD&A to accompany an issuer's interim financial statements.
Response
The Commission is of the view that the requirement to send interim MD&A concurrently with the interim financialstatements does not impose an unduly onerous, paper-based requirement and as a result, no change has been madeto the Rule. The requirement to send interim financial statements is not new and the inclusion of additional textdevoted to interim MD&A should not result in a significant cost to the issuer.
Issuers concerned with delivery costs should keep in mind National Policy 11-201 Delivery of Documents byElectronic Means ("NP 11-201") which allows for documents to be delivered in electronic form. NP 11-201 states theviews of the CSA on how obligations imposed by securities legislation to deliver documents can be satisfied byelectronic means. Under NP 11-201, the CSA indicate that, as a general principle, the delivery requirements ofsecurities legislation may be satisfied by electronic means.
The Commission is also of the view that this requirement should not result in a delay in reporting financial results as,presumably, management would have analysed the interim financial statements and prepared interim MD&A inadvance of presenting the interim financial statement to the board of directors for its review. The Rule does notmandate the format in which interim MD&A is to be presented and does not suggest that issuer prepare a 'formalglossy' quarterly report. Issuers are encouraged to prepare interim MD&A in a format that provides investors withquality information on a timely basis.
14. Audit Committee Involvement
Comment
One commentator agreed with the Commission's view that MD&A should be reviewed by the issuer's auditcommittee to enhance reliability and accuracy.
Response
The Commission is of the view that the audit committee plays a key role in the corporate governance of issuers andshould be involved in the reporting process. This is an issue that the Commission will continue to monitor as part ofits work in the area of corporate governance and will revisit the matter when the new TSE/CDNX Joint Committee onCorporate Governance makes its final recommendations.
APPENDIX B
LIST OF COMMENTATORS
1. McCarvill Corporation by letter May 1, 2000
2. Talisman Energy Inc. by letter dated May 16, 2000
3. Canadian Society of Corporate Secretaries by letters dated May 19, 2000 and June 9, 2000
4. BDO Dunwoody LLP by letter dated May 26, 2000
5. Ogilvy Renault by letter dated May 30, 2000
6. Canadian Bankers Association by letter dated May 31, 2000
7. Shaw Industries Ltd. by letter dated May 31, 2000
8. The Bank of Montreal by letter dated June 1, 2000
9. Manulife Financial by letter dated June 5, 2000
10. Canadian Pacific by letter dated June 6, 2000
11. PanCanadian Petroleum Limited by letter dated June 8, 2000
12. British Columbia Securities Commission by letter dated June 9, 2000
13. The Canadian Institute of Chartered Accountants, Task Force of the Accounting and Assurance StandardsBoards by letter dated June 9, 2000
14. FEI Canada by letter dated June 9, 2000
15. NORTEL Networks by letter dated June 9, 2000
16. KPMG LLP by letter dated June 9, 2000
17. TD Financial Group by letter dated June 9, 2000
18. PricewaterhouseCoopers LLP by letter dated June 12, 2000
19. Royal Bank of Canada by letter dated June 13, 2000
20. Osler, Hoskin & Harcourt by letter dated June 14, 2000
21. Association for Investment Management and Research by letter dated June 26, 2000
ONTARIO SECURITIES COMMISSION RULE 51-501 AIF AND MD&A
TABLE OF CONTENTS
PART TITLE
PART 1 DEFINITIONS AND APPLICATION
1.1 Definitions
1.2 Application
1.3 Calculation of Aggregate Market Value of an Issuer's Equity Securities
1.4 Exemption
PART 2 FILING OF AIF
2.1 Filing of AIF
2.2 Filing of Annual MD&A Supplement for Canadian GAAP Discussion
PART 3 DELIVERY OF ANNUAL MD&A
3.1 Delivery of Annual MD&A
3.2 Delivery of Annual MD&A Supplement for Canadian GAAP Discussion
PART 4 INTERIM MD&A
4.1 Filing of Interim MD&A
4.2 Content of Interim MD&A
4.3 Delivery of Interim MD&A
4.4 Filing of Interim MD&A Supplement for Canadian GAAP Discussion
4.5 Delivery of Interim MD&A Supplement for Canadian GAAP Discussion
PART 5 EXEMPTION
5.1 Exemption
PART 6 EFFECTIVE DATE
6.1 Effective Date
ONTARIO SECURITIES COMMISSION RULE 51-501 AIF AND MD&A
PART 1 DEFINITIONS AND APPLICATION
1.1 Definitions - In this Rule
"annual MD&A" means, for an issuer, a MD&A for the annual financial statements of the issuer; and
"interim MD&A" means, for an issuer, a MD&A for the interim financial statements of the issuer.
1.2 Application
(1) Except as otherwise provided in Ontario securities law, this Rule applies to a reporting issuer, other thana mutual fund, if
(a) the issuer's shareholders' equity or revenues exceeded $10,000,000 in the financial year of theissuer completed immediately preceding the coming into force of this Rule or in any subsequentfinancial year; or
(b) the aggregate market value of the issuer's outstanding equity securities for which there was apublished market was $75,000,000 or more on the last day of the financial year of the issuercompleted immediately preceding the coming into force of this Rule or on the last day of anysubsequent financial year.
(2) A reporting issuer to which this Rule applies shall file
(a) annual MD&A for financial years of the issuer ending on or after January 1, 2001; and
(b) interim MD&A for interim periods of the issuer beginning
(i) on or after January 1, 2001 if the issuer filed an AIF for a financial year ending in 2000; or
(ii) the day after the end of the financial year for which the issuer files its first annual MD&A if theissuer did not file an AIF for a financial year ending in 2000.
1.3 Calculation of Aggregate Market Value of an Issuer's Equity Securities
(1) For the purposes of sections 1.2 and 1.4, the aggregate market value of the equity securities of an issueron the last day of a financial year is the aggregate of the market value on that date of each class of itsequity securities for which there is a published market, calculated by multiplying
(a) the simple average of the closing prices of the class of equity securities for each of the 20 mostrecent trading days on which there was a closing price; by
(b) the simple average number of equity securities of the class outstanding over that 20 trading dayperiod.
(2) For the purposes of the calculation under subsection (1), the closing price on the published market inCanada on which the class of equity securities is principally traded shall be used, unless there is nopublished market in Canada on which the class of equity securities is traded, in which case, the publishedmarket outside of Canada on which the class of equity securities is principally traded shall be used.
1.4 Exemption - Despite section 1.2, this Rule does not apply with respect to a financial year of a reporting issuerif
(a) neither the shareholders' equity nor the revenues of the issuer exceeded $10,000,000 in each of thethree immediately preceding financial years; and
(b) the aggregate market value of the issuer's outstanding equity securities for which there was apublished market was less than $75,000,000 on the last day of each of the three immediatelypreceding financial years.
PART 2 FILING OF AIF
2.1 Filing of AIF
(1) An issuer shall file an AIF prepared in accordance with Form 44-101F1 for each financial year within 140days after the end of the financial year.
(2) An issuer is not required to file an AIF under subsection (1) for a financial year ended prior to the cominginto force of this Rule.
(3) Despite subsection (1), an issuer that has securities registered under section 12 of the 1934 Act or has areporting obligation under subsection 15(d) of the 1934 Act may file an AIF in the form of a current annualreport on Form 10-K, or on Form 20-F, under the 1934 Act.
(4) An issuer that files an AIF under subsection (3) shall file the AIF as nearly as practicablecontemporaneously with the filing of the Form 10-K or Form 20-F with the SEC.
(5) An issuer that files an AIF under subsection (3) shall file with the AIF an undertaking to the Director to theeffect that the issuer will provide to any person or company, upon request to the secretary of the issuer
(i) one copy of the AIF of the issuer, together with one copy of any document, or the pertinentpages of any document, incorporated by reference in the AIF,
(ii) one copy of the comparative financial statements of the issuer for its most recently completedfinancial year for which financial statements have been filed together with the accompanyingreport of the auditor and one copy of the most recent interim financial statements of the issuerthat have been filed, if any, for any period after the end of its most recently completedfinancial year, and
(iii) one copy of the information circular of the issuer in respect of its most recent annual meetingof shareholders that involved the election of directors or one copy of any annual filingprepared instead of that information circular.
2.2 Filing of Annual MD&A Supplement for Canadian GAAP Discussion
(1) An issuer that has filed an AIF in a form permitted under subsection 2.1(3) shall file, concurrently with itsAIF, a supplement prepared in accordance with subsection (2) if the issuer
(a) is incorporated, organized or continued under the laws of Canada or a jurisdiction; and
(b) has based the discussion in the annual MD&A that forms part of its AIF on financial statementsprepared other than in accordance with Canadian GAAP.
(2) A supplement required to be filed by an issuer under subsection (1) shall restate, based on financialstatements of the issuer prepared in accordance with Canadian GAAP, those parts of the annual MD&Athat
(a) are based on financial statements of the issuer prepared in accordance with foreign GAAP; and
(b) would read differently if they were based on financial statements of the issuer prepared inaccordance with Canadian GAAP.
PART 3 DELIVERY OF ANNUAL MD&A
3.1 Delivery of Annual MD&A - An issuer shall send the annual MD&A to all securityholders to whom it sends itsannual audited financial statements
(a) concurrently with the sending to those securityholders of its annual audited financial statements towhich the annual MD&A relates; or
(b) if its annual audited financial statements appear in more than one document that are sent separatelyto securityholders, then concurrently with the sending to securityholders of one of the documentscontaining its annual audited financial statements to which the annual MD&A relates, so long as theannual MD&A is sent to securityholders within 140 days after the end of the financial year to whichthe annual MD&A relates.
3.2 Delivery of Annual MD&A Supplement for Canadian GAAP Discussion - An issuer required to file asupplement under section 2.2 shall send the supplement to all securityholders to whom it sends the annualMD&A, concurrently with the sending of the annual MD&A.
PART 4 INTERIM MD&A
4.1 Filing of Interim MD&A
(1) An issuer that is required to file an AIF for a financial year shall file in the following financial year,concurrently with the filing of its interim financial statements, an interim MD&A prepared in accordancewith section 4.2.
(2) Despite subsection (1) and section 4.2, an issuer that has securities registered under section 12 of the1934 Act or has a reporting obligation under subsection 15(d) of the 1934 Act may file an interim MD&Aprepared in accordance with paragraph (b) of Item 303 of Regulation S-K under the 1934 Act.
(3) An issuer that files an interim MD&A under subsection (2) shall file the interim MD&A as nearly aspracticable contemporaneously with the filing of the Form 10-Q or Form 6-K with the SEC.
4.2 Content of Interim MD&A
(1) An issuer's interim MD&A shall include
(a) an update of the analysis of the issuer's financial condition in the annual MD&A for the most recentlycompleted financial year;
(b) an analysis of the issuer's results from operations and cash flows for the most recently completedinterim period; and
(c) a comparison of the issuer's financial condition, results of operations and cash flows as at the datesand for the periods set out in subsection (2).
(2) The dates and periods are:
1. For financial condition, the date of the balance sheet for the issuer's most recently completedfinancial year and the date of its most recent interim balance sheet.
2. For results of operations
(a) the most recent financial year-to-date period for which an income statement of the issuer isprovided and the corresponding year-to-date period of the issuer's preceding financial year;and
(b) the most recent quarter of the issuer's financial year, and the corresponding quarter of thepreceding financial year.
3. For cash flows
(a) the most recent financial year-to-date period for which a cash flow statement of the issuer isprovided and the corresponding year-to-date period of the issuer's preceding financial year;and
(b) the most recent quarter of the issuer's financial year, and the corresponding quarter of thepreceding financial year.
(3) An issuer's interim MD&A shall identify changes in results of operations that are material and anysignificant elements of the issuer's income or loss from continuing operations that do not arise from, or arenot necessarily representative of, the issuer's ongoing business.
(4) An issuer's interim MD&A shall include a discussion of any seasonal aspects of the issuer's business thathave had a material effect upon its financial condition, results of operations or cash flows.
4.3 Delivery of Interim MD&A - An issuer shall send the interim MD&A referred to in subsection 4.1(1) or (2) to allsecurityholders to whom it sends its interim financial statements to which the interim MD&A relates, concurrentlywith the sending to those securityholders of the interim financial statements.
4.4 Filing of Interim MD&A Supplement for Canadian GAAP Discussion
(1) An issuer that has filed an interim MD&A prepared in accordance with paragraph (b) of Item 303 ofRegulation S-K under the 1934 Act shall file, concurrently with the filing of its interim MD&A, a supplementprepared in accordance with subsection (2) if the issuer
(a) is incorporated, organized or continued under the laws of Canada or a jurisdiction; and
(b) has based the discussion in the interim MD&A on financial statements prepared other than inaccordance with Canadian GAAP.
(2) A supplement required to be filed by an issuer under subsection (1) shall restate, based on interim financialstatements of the issuer prepared in accordance with Canadian GAAP, those parts of the interim MD&Athat
(a) are based on financial statements of the issuer prepared in accordance with foreign GAAP; and
(b) would read differently if they were based on financial statements of the issuer prepared inaccordance with Canadian GAAP.
4.5 Delivery of Interim MD&A Supplement for Canadian GAAP Discussion - An issuer required to file asupplement under section 4.4 shall send the supplement to all securityholders to whom it sends its interim MD&Ato which the supplement relates, concurrently with the sending of the interim MD&A.
PART 5 EXEMPTION
5.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditionsor restrictions as may be imposed in the exemption.
PART 6 EFFECTIVE DATE
6.1 Effective Date - This Rule comes into force on January, 1, 2001.
COMPANION POLICY 51-501CP TO ONTARIO SECURITIES COMMISSION RULE 51-501AIF AND MD&A
PART 1 GENERAL
1.1 Introduction
The purpose of this Companion Policy is to provide guidance to assist reporting issuers in complying with theirobligations under Rule 51-501. It provides the Commission's views with respect to certain relevant matters.
1.2 Implementation
Rule 51-501 applies to annual MD&A for financial years ending on or after January 1, 2001. It applies to interimMD&A for interim periods beginning (i) on or after January 1, 2001 if the issuer filed an AIF for a financial yearending in 2000; or (ii) the day after the end of the financial year for which the issuer files its first annual MD&Aif the issuer did not file an AIF for a financial year ending in 2000. Annual MD&A is the foundation upon whichinterim MD&A is built. Consequently, the requirement to file interim MD&A does not arise until an annual MD&Ahas been filed. For example, interim MD&A for the interim period beginning February 1, 2001 and followinginterim periods must be filed if an issuer has an obligation to file an AIF for the financial year ending October 31,2000. If an issuer is subject to an obligation to file an AIF for the first time for the financial year ending January31, 2001, interim MD&A must be filed and delivered for the interim period beginning February 1, 2001 andfollowing interim periods. Refer to Appendix A for further examples.
1.3 Debt-Only Reporting Issuers
Rule 51-501 requires all reporting issuers that exceed the thresholds in section 1.2 of Rule 51-501, other thanmutual funds, to file an AIF, including annual MD&A, and interim MD&A for the periods required under Rule 51-501. This includes reporting issuers that are reporting issuers solely because they have debt securitiesoutstanding. However, debt-only reporting issuers are not required under Rule 51-501 to send the annual orinterim MD&A to securityholders.
1.4 Interrelationship with NI 44-101
National Instrument 44-101 Short Form Prospectus Distributions ("NI 44-101") requires most issuers to file anAIF in order to be qualified to distribute securities under a short form prospectus. Form 44-101F1, the form ofAIF, incorporates Form 44-101F2, the form of annual MD&A. An issuer that files an AIF under NI 44-101 within140 days after its financial year end satisfies the requirement to file an AIF for its financial year under Rule 51-501 without filing a separate AIF under Rule 51-501. The interim MD&A filing requirement is in addition to therequirement to file annual MD&A.
PART 2 MD&A
2.1 Sending of Annual MD&A - An issuer may satisfy the obligation in section 3.1 of Rule 51-501 to send theannual MD&A to its securityholders by including the annual MD&A in an annual report sent to securityholders.
2.2 MD&A Supplement for Canadian GAAP Discussion - A Canadian issuer that files its AIF in the form of acurrent annual report on Form 10-K, or Form 20-F, under the 1934 Act and prepares MD&A based on financialstatements that have been prepared in accordance with foreign GAAP is required under section 2.2 of Rule 51-501 to file a supplement to its annual MD&A and under section 4.4 to file a supplement to its interim MD&A. Thepurpose of the supplement is to identify, and to restate based on financial statements prepared in accordancewith Canadian GAAP, those parts of the MD&A that would have been different if the MD&A had been based onthe financial statements prepared in accordance with Canadian GAAP. The supplement does not need to restatethe MD&A in its entirety.
2.3 Interim MD&A
(1) In preparing the interim MD&A, issuers may presume that readers of the MD&A have read or have accessto the annual MD&A. Issuers should discuss both the current quarter and the year-to-date period in theinterim MD&A and how they compare to the corresponding periods in the previous year, includingcommentary on any known trends or uncertainties that have had or that the issuer reasonably expects willhave a favourable or unfavourable effect. Prominence should be given to the discussion of the currentquarter and how events and changes occurring in the quarter will affect the issuer. The interim MD&Ashould include a discussion of changes that are likely to have a significant impact in the future. Adiscussion that would largely duplicate the disclosure contained in the annual MD&A need not be repeated.For example, a discussion of the external economic and industry factors affecting the issuer need not berepeated if those factors are substantially unchanged from the annual MD&A. A statement that thosefactors remain substantially unchanged would suffice. On the other hand, when external factors or thespecific circumstances of an issuer have changed subsequent to the end of the most recently completedfinancial year, disclosure is required. For example, significant changes in the nature and extent of anissuer's use of financial instruments would require discussion.
(2) In preparing the interim MD&A, it is not sufficient for an issuer to recite, without explanation, the amountof changes from period to period that are readily computable from the financial statements. Thediscussion need not repeat numerical data contained in the financial statements. The issuer should includeinformation that is available to the issuer and does not clearly appear in the issuer's financial statements.
(3) In preparing the interim MD&A, issuers are required to address changes that are material. Materiality isa matter of judgement in particular circumstances, and should generally be determined in relation to anitem's significance to investors, analysts and other users of the information. An item of information, or anaggregate of items, is considered by the Commission to be material if it is probable that its omission ormisstatement would influence or change an investment decision with respect to the issuer's securities.In considering whether items are material, issuers should consider the potential significance of itemsindividually rather than on a net basis where factors have an offsetting effect. An issuer should also takeinto account both quantitative and qualitative factors. This concept of materiality is consistent with thefinancial reporting notion of materiality contained in the Handbook.
(4) An issuer may combine the interim MD&A with the annual MD&A, if the issuer's interim financialstatements to which the interim MD&A relates are presented together with its annual audited financialstatements.
(5) The Commission is not mandating the form of the interim MD&A. Issuers are not required to prepare aformal glossy quarterly report. Issuers are encouraged to prepare the interim MD&A in a format thatprovides investors with quality information on a timely basis.
2.4 Review by Audit Committee - In the Commission's view, if an issuer has an audit committee, MD&A shouldbe carefully reviewed and considered by the audit committee.
2.5 Additional Guidance - Commission staff from time to time publishes MD&A guides and reports on MD&A andfinancial statement reviews. Issuers are encouraged to refer to this material.
APPENDIX A TO COMPANION POLICY 51-501CP TO ONTARIO SECURITIES COMMISSION RULE 51-501AIF & MD&A
Implementation Examples
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Financial Year End |
October 31 | October 31 | December 31 | December 31 |
| Filed AIF for 2000 financial year | ||||
| Q1, 2001 Interim MD&A
Q2, 2001 Interim MD&A Q3, 2001 Interim MD&A |
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| Filed AIF for 2001 financial yearunder Rule 51-501 |
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| Q1, 2002 Interim MD&A
Q2, 2002 Interim MD&A Q3, 2002 Interim MD&A |
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