Notice of Proposed 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 (Repe

NOTICE OF PROPOSED RULE 51-501 AND COMPANION POLICY 51-501CPAIF,
AND MD&A AND PROPOSED RESCISSION OF OSC POLICY
STATEMENT NO. 5.10ANNUAL INFORMATION FORM AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Substance and Purpose of Proposed Rule

Ontario Securities Commission Policy Statement No. 5.10 Annual Information Form and Management's Discussion andAnalysis of Financial Condition and Results of Operations ("Policy 5.10") came into force on November 10, 1989. Policy5.10 was introduced by the Ontario Securities Commission (the "Commission") to enhance investor understanding ofan issuer's business by providing supplemental analysis and background material to allow a fuller understanding of thenature of the issuer, its operations and known prospects for the future. Policy 5.10 was designed to address the unevenquality and considerable variation in the presentation of discussion and analysis of annual financial statements bycreating a uniform framework within which issuers could provide a meaningful discussion and analysis of past corporateperformance 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, which 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 therefore necessaryto facilitate an adequate assessment of an issuer's recent history and outlook for the future.

Proposed Rule 51-501 (the "Rule") reformulates Policy 5.10 and also introduces a requirement for MD&A to be providedin relation to interim financial statements ("interim MD&A"). Unlike Policy 5.10, the proposed Rule does not prescribein full the contents of an AIF and MD&A, other than interim MD&A. Instead, it cross references proposed Form 44-101F1 AIF, which sets out the contents of an AIF including annual MD&A. Proposed Form 44-101F1 reformulatesAppendix A to National Policy Statement No. 47 and contains revisions thereto.

While issuers are not required to provide interim MD&A until the proposed Rule is in force, the Commission encouragesissuers, as a matter of relevant corporate disclosure, to comply with the proposed Rule as soon as practicable.

Substance and Purpose of Proposed Companion Policy

The purpose of proposed Companion Policy 51-501 CP is to provide additional guidance to assist reporting issuers incomplying with their obligations under the proposed Rule.

Summary of Proposed Rule

Part 1 specifies that, except as otherwise provided in Ontario securities laws, the proposed Rule applies to all reportingissuers, other than mutual funds, that have shareholders' equity or revenues in excess of $10,000,000 or marketcapitalization on the last day of the financial year of $75,000,000 or more in the financial year of the issuer completedimmediately preceding the coming into force of this rule or in any subsequent financial year. Under Policy 5.10, thetest was based only on the financial year immediately preceding the most recently completed financial year and did notinclude a market capitalization test. The addition of a market capitalization test is to ensure that companies withsignificant market capitalization are subject to the requirements of this Rule even if revenue or shareholders equity doesnot exceed the threshold. Once an issuer has shareholders' equity or revenues in excess of $10,000,000 or the marketcapitalization at the end of a financial year is $75,000,000 or more, it is subject to the requirements of this Rule goingforward. Reporting issuers will not be exempt from this Rule if at some future date the shareholders' equity andrevenues fall below $10,000,000 or market capitalization falls below $75,000,000.

Section 1.2 provides details for the calculation of the aggregate market value of an issuer's outstanding equity securitiesreferred to in paragraph 1.1(1)(b).

A reporting issuer that meets the threshold in Part 1 is required under subsection 2.1(1) of the proposed Rule to file anAIF in accordance with proposed Form 44-101F1 for its most recently completed financial year and each financial yearthereafter within 140 days of its year-end. The reference to Form 44-101F1 represents a change from Policy 5.10, andis intended to ensure the same instructions for the preparation of an AIF and the same content of an AIF apply to allissuers, other than mutual funds.

Subsection 2.1(2) specifies that issuers are not required to file an AIF for financial years ended prior to the coming intoforce of this Rule.

Issuers that have securities registered, or a reporting obligation, under specified sections of the 1934 Act are permittedunder subsection 2.1(3) of the proposed Rule to file the AIF in the form of a current annual report under the 1934 Act.Issuers that do so are required under Part 2 to file with the AIF an undertaking to provide other public disclosuredocuments of the issuer to any person or company, upon request to the secretary of the issuer.

Subsection 2.1(4) permits certain issuers subsisting under the laws of a foreign jurisdiction to file their AIF within 180days, instead of 140 days, after year-end.

Section 2.2 applies to issuers incorporated, organized or continued under the laws of Canada or a jurisdiction thatprepare their AIF in the form permitted under subsection 2.1(3) and base the discussion in the MD&A on financialstatements prepared other than in accordance with Canadian GAAP. The Commission wants to ensure that, in suchcircumstances, Canadian securityholders, receive MD&A based on Canadian GAAP. Section 2.2 addresses thisconcern by requiring an issuer to file a supplement to the MD&A that discusses the financial statements prepared inaccordance with Canadian GAAP.

Part 3 of the proposed Rule sets out the requirements for the delivery of the annual MD&A. Section 3.1 requires anissuer to send the annual MD&A to all securityholders to whom it sends the annual audited financial statements to whichthe MD&A relates at the same time as it sends the annual audited financial statements. Section 3.1 provides that anissuer that prepares more than one document containing the annual audited financial statements is only required toinclude the MD&A in one of those documents.

Section 3.2 requires an issuer that has filed a supplement to its annual MD&A in order to discuss its financial statementsprepared in accordance with Canadian GAAP to also deliver that supplement to all securityholders to whom it sendsthe annual MD&A.

Part 4 of the proposed Rule deals with interim MD&A. Section 4.1 of the proposed Rule requires an issuer that isrequired to file an AIF for a financial year to file MD&A for its interim financial statements in the financial year followingthat year. This requirement represents a change from subsection (16) of Part 1 of Policy 5.10, which encouraged, butdid not require, issuers to provide significant MD&A disclosure with their interim financial statements. An issuer thathas securities registered, or a reporting obligation, under specified sections of the 1934 Act is permitted to prepare theMD&A for its interim financial statements in accordance with the 1933 Act.

Section 4.2 of the proposed Rule prescribes the content of the interim MD&A. Interim MD&A must include an updateof the analysis contained in the annual MD&A and a comparison of the issuer's financial condition, results of operationsand cash flows for the interim period to that at the year-end or that of the corresponding period in the previous year.

Under subsection 4.2(3), the interim MD&A is required to identify changes in results of operations that are material andany significant elements of the issuer's income or loss from continuing operations that do not arise from or are notnecessarily representative of the issuer's ongoing business. An issuer is also required under subsection 4.2(4) todiscuss in its interim MD&A any seasonal aspects of its business that have had a material effect upon its financialcondition, results of operations or cash flows.

Section 4.3 requires issuers to send their interim MD&A to securityholders concurrently with their interim financialstatements.

Sections 4.4 and 4.5 contain a filing and delivery requirement for a supplement to an issuer's interim MD&A discussingthe issuer's financial statements prepared in accordance with Canadian GAAP. This supplement is required if theissuer's interim MD&A discusses the issuer's financial statements prepared other than in accordance with CanadianGAAP.

Part 5 permits the Director to grant an exemption to the proposed Rule.

Summary of Proposed Companion Policy

Section 1.1 notes that the purpose of the proposed Companion Policy is to provide additional guidance to assistreporting issuers in complying with the proposed Rule.

Section 1.2 of the proposed Companion Policy clarifies that debt-only reporting issuers are subject to the requirementto prepare and file an AIF, including annual MD&A, and interim MD&A, but are not required to send the MD&A tosecurityholders.

Section 1.3 of the proposed Companion Policy provides that an issuer that files an AIF under proposed NI44-101 withinthe applicable time limits in the proposed Rule satisfies the requirement under the proposed Rule to file an AIF andMD&A for its financial year. The issuer is, however, still required to comply with the interim MD&A requirements of theproposed Rule because proposed Form 44-101F1 does not contain those requirements.

Section 2.1 of the proposed Companion Policy provides that an issuer may satisfy the obligation to send the MD&A tosecurityholders by including its MD&A in an annual report sent to its securityholders.

Section 2.2 of the proposed Companion Policy describes the purpose of the MD&A supplements for Canadian GAAPdiscussion that are required under the proposed Rule.

Section 2.3 of the proposed Companion Policy relates to the preparation of interim MD&A. Subsection 2.3(1) permitsan issuer to presume that users of its interim financial information have read or have access to the annual MD&A forthe preceding financial year. Subsection 2.3(2) of the proposed Companion Policy clarifies that it is not sufficient foran issuer to recite, without explanation, the amount of changes that are readily computable from the financialstatements. The proposed Companion Policy also provides that interim MD&A need not repeat numerical datacontained in the financial statements, although the issuer should include information that is available to the issuer anddoes not clearly appear in the issuer's financial statements. Subsection 2.3(3) of the proposed Companion Policydescribes how in the view of the Commission "materiality" should be considered in the context of addressing changesthat are material in the interim MD&A. Subsection 2.3(4) provides that an issuer may combine interim MD&A with theMD&A relating to annual financial statements if the interim financial statements are presented with the annual auditedfinancial statements.

Section 2.4 of the proposed Companion Policy states that in the Commission's view, MD&A should be carefullyconsidered and reviewed by the audit committee of an issuer, if it has an audit committee.

Section 2.5 of the proposed Companion Policy encourages issuers to refer to MD&A guides, reports on MD&A andfinancial statement reviews published by Commission staff from time to time.

Authority for Proposed Rule

The following sections of the Act provide the Commission with authority to adopt the proposed Rule. Paragraph143(1)22 authorizes the Commission to prescribe requirements in respect of the preparation and dissemination andother use, by reporting issuers of documents providing for continuous disclosure that are in addition to the requirementsunder the 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 proposed Companion Policy is related to the proposed Rule, proposed National Instrument 44-101 Short FormProspectus Distributions and Form 44-101F1.

Alternatives Considered

No alternatives to the proposed Rule were considered as the Commission believes that the preparation of AIF andMD&A by issuers is essential for the operation of fair and efficient capital markets and as a result must be mandated.

Unpublished Materials

In proposing the Rule and the Companion Policy, the Commission has not relied on any significant unpublished study,report, decision or other written materials.

Anticipated Costs and Benefits

Securityholders benefit from the disclosure available from MD&A and will benefit from increased disclosure availablefrom interim MD&A. The proposed Rule imposes costs on issuers in preparing the MD&A, although currently issuersare required to prepare annual MD&A. The proposed Rule imposes additional costs by mandating MD&A on interimfinancial statements. The Commission believes that the benefits of the proposed Rule significantly outweigh any costs.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions receivedby June 9, 2000 will be considered.

Submissions should be made to:

John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
e-mail: [email protected]

A diskette containing an electronic copy of the submissions (in DOS or Windows format, preferably WordPerfect) shouldalso be submitted. As the Act requires that a summary of written comments received during the comment period bepublished, confidentiality of submissions received cannot be maintained.

Questions may be referred to:

Heidi Franken
Manager, Continuous Disclosure
Ontario Securities Commission
e-mail: [email protected]
(416) 593-8249

Lisa Enright
Senior Accountant, Continuous Disclosure
Ontario Securities Commission
e-mail: [email protected]
(416) 593-3686

James McVicar
Legal Counsel, Continuous Disclosure
Ontario Securities Commission
e-mail:[email protected]
(416) 593-8154

Text of Proposed Rescission of Ontario Securities Commission Policy Statement No. 5.10

Ontario Securities Commission Policy Statement No. 5.10 is replaced by the proposed Rule.

The text of the proposed 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 uponthe date Rule 51-501 AIF and MD&A comes into force."

Proposed Rule and Companion Policy

The text of each of the proposed Rule and the Companion Policy follows. The footnotes do not form part of theproposed Rule and Companion Policy but have been included to provide background and explanation.

 

DATED: March 10, 2000.

 

ONTARIO SECURITIES COMMISSION RULE 51-501AIF AND MD&A

TABLE OF CONTENTS

PART TITLE

PART 1 APPLICATION

1.1 Application

1.2 Calculation of Aggregate Market Value of and Issuer's Securities

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

ONTARIO SECURITIES COMMISSION RULE 51-501 ⁽¹⁾AIF AND MD&A

PART 1 APPLICATION⁽²⁾

1.1 Application - Except as otherwise provided in Ontario securities law, this Rule applies to a reporting issuer,other than a mutual fund,⁽³⁾ if

(a) the issuer's shareholders' equity or revenues exceeded $10,000,000 in the financial year of the issuercompleted immediately preceding the coming into force of this Rule or in any subsequent financial year;or

(b) the aggregate market value of the issuer's outstanding equity securities for which there was a publishedmarket was $75,000,000 or more on the last day of the financial year of the issuer completedimmediately preceding the coming into force of this Rule or on the last day of any subsequent financialyear.^{(4) (5) (6)}

1.2 Calculation of Aggregate Market Value of an Issuer's Securities

(1) For the purposes of section 1.1, the aggregate market value of the equity securities of an issuer on adate is the aggregate of the market value of each class of its equity securities on the date, calculatedby multiplying

(a) the total number of equity securities of the class outstanding on the date; by

(b) the market price of the class of equity securities on the date on the published market in Canadaon which the security is principally traded or, if there is no published market in Canada on whichthe security is traded, the published market outside of Canada where the security is principallytraded.

(2) For the purposes of subsection (1),

(a) if the published market provides the closing price of securities of the class, the market price ofa class of equity securities on a date is an amount equal to the closing price of securities of theclass on the date or, if there was no closing price for the securities of the class on the date, theclosing price of the securities of the class on the most recent date there was a closing price ofthe securities of the class before the date; and

(b) if the published market does not provide the closing price of the securities of the class butprovides only the highest and lowest prices of securities traded on a particular date, the marketprice of a class of equity securities on a date is an amount equal to the average of the highestand lowest price for the securities on the date or, if the highest and lowest price for the securitiesis not provided for the date, the average of the highest and lowest price for the securities on themost recent date the highest and lowest price for the securities was provided before the date.

PART 2 FILING OF AIF⁽⁷⁾AND MD&A

2.1 Filing of AIF and MD&A

(1) An issuer shall file an AIF prepared in accordance with Form 44-101F1 for its most recently completedfinancial year and for each subsequent financial year within 140 days after the end of the financial yearto which the AIF relates.

(2) An issuer is not required to file an AIF under subsection (1) for a financial year ended prior to thecoming into force of this Rule.

(3) Despite subsection (1), an issuer that has securities registered under section 12 of the 1934 Act⁽⁸⁾ or hasa reporting obligation under section 15(d) of the 1934 Act may file an AIF in the form of a current annualreport on Form 10-K, or Form 20-F, under the 1934 Act.⁽⁹⁾

(4) Despite subsection (1), an issuer subsisting under the laws of a foreign jurisdiction⁽¹⁰⁾ that files an AIFin the form of a current annual report on Form 20-F under subsection (3) shall file the AIF within 180days after the end of its most recently completed financial year.⁽¹¹⁾

(5) An issuer that files an AIF under subsection (3) shall file with the AIF an undertaking⁽¹²⁾ to the Directorto the effect that the issuer will provide to any person or company, upon request to the secretary of theissuer and provided that the issuer may require the payment of a reasonable charge if the request ismade by a person or company that is not a securityholder of the issuer

(i) one copy of the AIF of the issuer, together with one copy of any document, or the pertinent pagesof 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 completed financialyear, and

(iii) one copy of the information circular of the issuer in respect of its most recent annual meeting ofshareholders that involved the election of directors or one copy of any annual filing preparedinstead of that information circular, as appropriate.

2.2 Filing of Annual MD&A Supplement for Canadian GAAP Discussion⁽¹³⁾

(1) An issuer that has filed an AIF in a form permitted under subsection 2.1(3) shall file, concurrently withits AIF, 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 MD&A⁽¹⁴⁾ 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&Aforming part of the issuer's AIF that

(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 MD&A that forms part of its AIF to all securityholdersto whom it sends its annual audited financial statements

(a) concurrently with its annual audited financial statements to which the 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 one of the documents containing its annual audited financialstatements to which the MD&A relates, so long as the MD&A is sent to securityholders within 140 daysafter the end of the financial year to which the MD&A relates.⁽¹⁵⁾

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 MD&A thatforms part of its AIF, concurrently with the MD&A.

PART 4 INTERIM MD&A⁽¹⁶⁾

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 its interim financial statements, the MD&A, prepared in accordance with section 4.2,for its interim financial statements.

(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 section 15(d) of the 1934 Act may file the MD&A for itsinterim financial statements prepared in accordance with paragraph (b) of Item 303 of Regulation S-Kof the 1933 Act.⁽¹⁷⁾

4.2 Content of Interim MD&A

(1) An issuer's MD&A for its interim financial statements shall include

(a) an update of the analysis of the issuer's financial condition in the annual MD&A that forms partof the issuer's AIF for the most recently completed financial year;

(b) an analysis of the issuer's results from operations and cash flows for the most recentlycompleted interim period; and

(c) a comparison of the issuer's financial condition, results of operations and cash flows as at thedates and 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 issueris provided and the corresponding year-to-date period of the issuer's preceding financialyear; 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 an income statement of the issueris provided and the corresponding year-to-date period of the issuer's preceding financialyear; and

(b) the most recent quarter of the issuer's financial year, and the corresponding quarter of thepreceding financial year.

(3) An issuer's MD&A for its interim financial statements shall identify changes in results of operations thatare material and any significant elements of the issuer's income or loss from continuing operations thatdo not arise from, or are not necessarily representative of, the issuer's ongoing business.⁽¹⁸⁾

(4) An issuer's MD&A for its interim financial statements shall include a discussion of any seasonal aspectsof the issuer's business that have had a material effect upon its financial condition, results of operationsor cash flows.⁽¹⁹⁾

4.3 Delivery of Interim MD&A - An issuer shall send the MD&A referred to in subsection 4.1(1) or (2) to allsecurityholders to whom it sends its interim financial statements to which the MD&A relates, concurrently withthe interim financial statements.

4.4 Filing of Interim MD&A Supplement for Canadian GAAP Discussion

(1) An issuer that has filed the MD&A for interim financial statements prepared in accordance withparagraph (b) of Item 303 of Regulation S-K of the 1933 Act shall file, concurrently with its interimfinancial statements, a supplement prepared in accordance with subsection (2) if the issuer

(a) is incorporated, organization or continued under the laws of Canada or a jurisdiction; and

(b) has based the discussion in the MD&A for its interim financial statements 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 interimfinancial statements of the issuer prepared in accordance with Canadian GAAP, those parts of theMD&A for the issuer's interim financial statements that

(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. ⁽²⁰⁾

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 interimfinancial statements to which the supplement relates, concurrently with the interim financial statementsprepared in accordance with Canadian GAAP.

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.

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 additional guidance to assist reporting issuers in complyingwith their obligations under Rule 51-501.

1.2 Debt-Only Reporting Issuers

The Rule requires all reporting issuers that exceed the thresholds in section 1.1 of the Rule, other than mutualfunds, to file an AIF, including annual MD&A, and interim MD&A for the years required under the Rule. Thisincludes reporting issuers that are reporting issuers solely because they have debt securities outstanding.However, debt-only reporting issuers are not required under the Rule to send the annual or interim MD&A tosecurityholders.

1.3 Interrelationship with NI 44-101

National Instrument 44-101 Short Form Prospectus Distributions ("NI 44-101") requires most issuers to filean AIF in order to be qualified to distribute securities under a short form prospectus. Form 44-101F1, whichis the form of AIF, also contains the MD&A requirements. An issuer that files an AIF under NI 44-101 within140 days after its financial year end, or if permitted, under subsection 2.1(4) of the Rule within 180 days afterits financial year end, satisfies the requirement to file an AIF and MD&A for its financial year under the Rulewithout filing a separate AIF under the Rule. 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 the Rule to send the MD&Ato its securityholders by including the 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 the Ruleto 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 discuss the issuer's financial statements prepared in accordance withCanadian GAAP. It is not necessary for the supplement to restate the MD&A in its entirety. Instead, thesupplement should focus on those parts of the MD&A that are affected by the fact that the issuer has preparedits financial statements in accordance with foreign GAAP instead of Canadian GAAP and restate those partsbased on financial statements prepared in accordance with Canadian GAAP.

2.3 Interim MD&A

(1) In preparing the interim MD&A, issuers may presume that readers of the MD&A have read or haveaccess to the MD&A for the annual financial statements. Issuers should discuss the current period inthe interim MD&A and how it compares to the corresponding period in the previous year, includingcommentary on any known trends or uncertainties that have had or that the issuer reasonably expectswill have a favourable or unfavourable effect. A discussion that would largely duplicate the disclosurecontained in the annual MD&A need not be repeated. For example, a discussion of the externaleconomic and industry factors affecting the issuer need not be repeated if those factors are substantiallyunchanged from the annual MD&A. A statement that those factors remain substantially unchangedwould suffice. On the other hand, when external factors or the specific circumstances of an issuer havechanged subsequent to the end of the most recently completed financial year, disclosure is required.For example, significant changes in the nature and extent of an issuer's use of financial instrumentswould 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 shouldinclude information that is available to the issuer and does not clearly appear in the issuer's financialstatements.

(3) In preparing the interim MD&A, issuers are required to address changes that are material. Materialityis a matter of judgement in particular circumstances, and should generally be determined in relationto an item's significance to investors, analysts and other users of the information. An item ofinformation, or an aggregate of items, is considered by the Commission to be material if it is probablethat its omission or misstatement would influence or change an investment decision with respect to theissuer's securities. In considering whether items are material, issuers should consider the potentialsignificance of items individually rather than on a net basis where factors have an offsetting effect. Anissuer should also take into account both quantitative and qualitative factors. This concept ofmateriality is consistent with the financial reporting notion of materiality contained in the Handbook.

(4) An issuer may combine the interim MD&A with the MD&A relating to the annual financial statement, ifthe issuer's interim financial statements to which the MD&A relates are presented together with itsannual audited financial statement.⁽²²⁾

2.4 Review by Audit Committee - In the Commission's view, if an issuer has an audit committee, MD&A shouldbe carefully considered and reviewed by the audit committee.

2.5 Additional Guidance - Commission staff from time to time publishes MD&A guides, reports on MD&A andfinancial statement reviews. Issuers are encouraged to refer to this material.

1. The proposed Rule is derived from Ontario Securities Commission Policy 5.10 Annual Information Form and Management'sDiscussion and Analysis of Financial Condition and Results of Operations.

2. A general definition rule has been adopted as Rule 14-501 Definitions. It contains definitions of certain terms used in more thanone rule. Rule 14-501 also provides, among other things, that terms used in a rule and defined or interpreted in section 1 of theSecurities Act or subsection 1(2) of the Regulation will have the respective meaning given to them in the Securities Act or theRegulation, as appropriate. Rule 14-501 also incorporates terms defined in subsection 1.1(3) of National Instrument 14-101Definitions. National Instrument 14-101 contains, among other things, definitions for terms used in more than one nationalinstrument.

3. The exclusion of a mutual fund picks up the exemption in subsection (2) of Part I of OSC Policy 5.10. The reference to "commoditypools" has been deleted as a commodity pool is a mutual fund.

4. This requirement is new.

5. The $10,000,000 shareholders' equity/revenues threshold has been incorporated into this section rather than including a separateexemption for issuers that do not meet the threshold, as is the approach in OSC Policy 5.10. For the reasons given in theaccompanying notice, the Commission has broadened the test to include a market capitalization test as well as a revenue andshareholders' equity test.

6. Part 1, paragraph (5) of OSC Policy 5.10 exempts foreign issuers, other than SEC registrants required to file a Form 10-K or 20-Fwith the SEC, from the requirement to file an AIF. This exemption has been deleted on the basis of the general principle that allreporting issuers should file an AIF. However, relief may be available to certain issuers under National Instrument 71-101 Multi-Jurisdictional Disclosure System. In the course of reformulating OSC Policy 7.1 and related deemed rules, the Commission willconsider other circumstances in which relief may be available.

7. The term "AIF" is defined in Rule 14-501 Definitions as "an annual information form filed under Ontario securities law". Therequirement of Part I(1) of OSC Policy 5.10 that an issuer make disclosure for each material subsidiary or investee individually hasbeen deleted from the Rule on the basis that this requirement is covered by Instruction (5) contained in Appendix A to NP47 andin Instruction (11) to proposed Form 44-101F1, which is cross-referenced at subsection 2.1(1) of this Rule. Form 44-101F1replaces Appendix A to NP47. In addition, the provisions of OSC Policy 5.10 set out under the headings General Matters andExtent of Disclosure have been deleted on the basis that these provisions appear in substantially identical form in proposed Form44-101F1.

8. The term "1934 Act" is defined in National Instrument 14-101 Definitions as "the Securities Exchange Act of 1934 of the UnitedStates of America".

9. This reflects the alternate filing requirement for SEC registrants contained in subsection (4) of Part I of OSC Policy 5.10.

10. The term "foreign jurisdiction" is defined in National Instrument 14-101 Definitions as "a country other than Canada or a politicalsubdivision of a country other than Canada".

11. This corresponds to the time period for 20-F filers in proposed National Instrument 44-101 Short Form Prospectus Distributions.

12. This requirement to file an undertaking is new and reflects subsection 3.3(2) of proposed National Instrument 44-101.

13. This section applies to a Canadian issuer that files a 10-K or 20-F as its AIF and prepares MD&A based on financial statementsthat it has prepared otherwise than in accordance with Canadian GAAP. This section requires an MD&A that discusses theCanadian GAAP financial statements.

14. The term "MD&A" is defined in Rule 14-501 Definitions as "management's discussion and analysis of financial condition and resultsof operations prepared in accordance with Ontario securities law".

15. This comes from Part I(15) of OSC Policy 5.10.

16. The Commission is proposing the imposition of a requirement to prepare MD&A in respect of interim financial results. In connectionwith this initiative, the Commission is proposing in proposed Rule 52-501 Financial Statements the imposition of a requirement onall issuers to prepare and file an interim balance sheet and is proposing in proposed National Instrument 44-101 the imposition ofa requirement on issuers to discuss separately items that have had a material impact on the issuer in the fourth quarter.

17. The term "1933 Act" is defined in National Instrument 14-101 Definitions as meaning the Securities Act of 1933 of the UnitedStates of America, as amended from time to time.

18. This reflects Instruction 4 to paragraph (b) of item 303 of Regulation S-K.

19. This reflects Instruction 5 to paragraph (b) of item 303 of Regulation S-K.

20. This section applies to a Canadian issuer that files a 10-K or 20-F as its AIF and prepares MD&A based on financial statementsthat it has prepared otherwise than in accordance with Canadian GAAP. This section requires an interim MD&A that discussesthe Canadian GAAP interim financ A similar materiality concept is found in Form 44-101F1. The term "Handbook" is defined in National Instrument 14-101 Definitionsas meaning the Handbook of the Canadian Institute of Chartered Accountants, as amended from time to time.

22. This comes from Instruction 1 to paragraph (b) of item 303 of Regulation S-K.