OSC Staff Notice: 51-703 - Implementation of Reporting Issuer Continuous Disclosure Review Program, Corporate Finance Branch

ONTARIO SECURITIES COMMISSION STAFF NOTICE 51-703
IMPLEMENTATION OF REPORTING ISSUER CONTINUOUS DISCLOSURE REVIEW PROGRAM,CORPORATE FINANCE BRANCH

The quality and timeliness of information disclosed to the capital markets by reportingissuers ("RI's") pursuant to the continuous disclosure ("CD") obligations under theSecurities Act (Ontario) (the "Act") has always been a focus of the Ontario SecuritiesCommission ("OSC"). However, in order to better focus attention on this area, last yearthe OSC created a Continuous Disclosure Team within its Corporate Finance Branchsolely dedicated to CD issues. The Continuous Disclosure Team is responsible for:

• the review of continuous disclosure filings made by RI's;
• addressing policy issues in the area of continuous disclosure; and
• monitoring of external sources (such as the press) for possible CD issues.

The Continuous Disclosure Team currently has 16 members including; lawyers,accountants, financial examiners and support staff.

The goals of the Continuous Disclosure Team include:

• increasing awareness of continuous disclosure issues; and
• effecting greater discipline in the marketplace with respect to continuousdisclosure requirements and obligations under the Act.

Over the past year, the Continuous Disclosure Team has focussed the majority of itsattention on policy matters in the CD area including:

• surveying issuers on their corporate disclosure practices;
• proposing a rule to enhance annual and interim reporting (Proposed Rule52-501 Financial Statements);
• proposing a rule to enhance AIF and MD&A disclosure (Proposed Rule 51-501 AIF & MD&A ;
• proposing a policy which outlines the OSC's views regarding filing defaultsand the use of cease trade orders (Proposed OSC Policy 57-603 Defaultsby Reporting Issuers in Complying with Financial Statement FilingRequirements); and
• development of a national electronic insider trade reporting system.

These policy initiatives were in addition to conducting CD reviews. Over 90 files wereopened in the fiscal year ended March 31, 2000. The CD reviews conducted to date havefocussed on the following types of issues: Y2K disclosure, selective disclosure, timelydisclosure, accounting issues, and qualified audit reports. The majority of these reviewswere initiated based on monitoring press articles, complaints from the public and referralsfrom other OSC branches.

Beginning July 1, 2000, the Continuous Disclosure Team will commence the full-scaleimplementation of the OSC's CD Review Program, consistent with the recommendationsof the Allen Committee and the SEC's stated approach. The CD Review Program willresult in every RI being reviewed on a regular basis. The OSC's goal is for RI's with anOntario head office to be subject to a CD review, on average, once every four years.

In order to prepare RI's for the full-scale implementation, staff is using this Notice tocommunicate the general features of the CD Review Program as well as the impact ourincreased focus on continuous disclosure will have on prospectus and rights offeringcircular reviews performed by staff.

What is a CD Review?

RI's will be subject to either a full, issue-oriented or limited review based on selectivereview criteria. Like the selective review approach to prospectus review, the responsibilityfor full compliance with applicable securities legislation, policies and practices remainswith RI's and their advisors. The fact that a RI has not been selected for full review in agiven year in no way detracts from such responsibility. These levels of CD review aresimilar to those used by the Corporate Finance teams in the review of prospectus filings.The Continuous Disclosure Team is also responsible for the review of insider trade reportfilings. The following is a summary of what each of these reviews would entail.

Full Review

A RI selected for a full review will have, at a minimum, its entire continuous disclosurerecord for the past year reviewed by the Continuous Disclosure Team. The financialstatement review will cover a two year period. In certain cases, staff will extend the scopeof the review to prior years depending on the results of staff's initial review of thedisclosure record.

A full review typically encompasses a RI's financial disclosure (including interim andannual financial statements) as well as other types of corporate disclosure including AIFs,MD&A, material change reports, proxy circulars, information circulars and press releasesas well as a review of the issuer's web site. Staff also typically monitors press articles andother sources such as public complaints concerning the RI as a means of gatheringinformation about the RI and its disclosure practices. The review may also include areview of trading activity, industry data, analysts' reports, transcripts of investor/analystmeetings and Internet Bulletin Boards, as appropriate.

Issue-oriented Review

An issue-oriented review will focus on a specific issue or possibly a particular industry.Examples of future reviews include the review of interim reports, MD&A, proxy materials,executive compensation disclosure, or review for compliance with new accountingstandards.

Limited Review

A limited review will encompass a smaller portion of a RI's continuous disclosure record.Generally, if no significant issues were noted as a result of this review, staff will notify theRI that the review has been completed.

Insider Trade Report Review

Within the Continuous Disclosure Team certain staff have been dedicated to the reviewof insider trade report filings on an ongoing basis. The implementation of a nationalelectronic insider trade reporting system later this year will facilitate even greater scrutinyof insider trade reports by staff of the Continuous Disclosure Team.

Insider Trade Report reviews will normally be conducted separate and apart from theteam's review of continuous disclosure filings made by RI's. However, circumstances maywarrant the review of a RI and trade reporting by its Insiders concurrently.

How will Reporting Issuers be Selected for Review?

Certain RI's will be selected for review depending on the application of selective reviewcriteria. Criteria have been designed to select RI's in a given year where there appears tostaff to be greater risk that disclosure issues may exist. Factors that will be consideredwhen selecting a RI for review include, but are not limited to, the following: the length oftime since the last CD review by staff, a change in auditor, unusual fluctuations in earnings(outside industry norms), unusual Canadian/U.S. GAAP reconciliation items or a historyof prior defaults or prior non-compliance with securities requirements. Since the selectionprocess is risked based, some RI's may be reviewed more frequently than others due tostaff's assessment of their risk profile.

What is the CD Review Process?

When a RI is selected for CD review a notification letter will be sent to it notifying it thatit has been selected for a CD review and indicating the type of CD review (full, issue-oriented or basic). Depending on the nature of the issues identified during the CD reviewthe RI will either receive a comment letter or notification that the review has beencompleted.

The initial comment letter will request a response in writing within 2 to 4 weeks of the dateof the letter, depending on the complexity of the request. If necessary, additional commentletters will follow. Staff expect RI's to provide their response within the specified timeframe and will generally not grant extensions. Adherence to the time frames is necessaryto ensure timely resolution of issues. RI's should note that a comprehensive, completeresponse will allow staff to complete the CD review in an effective and timely manner andreduce the amount of follow up necessary.

What will the impact of staff's increased focus on CD be to the review ofprospectuses and rights offering circulars?

It has been determined that it is appropriate to review a selection of CD materials at thesame time as the "full review" of a prospectus. If an RI's prospectus is selected for fullreview, at a minimum the RI's website, its most recent annual report, and its materialchange reports filed in the past year will be reviewed by staff along with the prospectus.The materials selected for review will be noted in the staff's comment letter. The purposeof this expanded review is not to do a full scale CD review at the time of the prospectusreview but rather to ensure that any offering-related issues (eg. hyping on websites,inconsistencies between the annual report and material change report(s) disclosure andthe prospectus) are identified and resolved during the prospectus review process. Thisapproach remains consistent with staff's statutory mandate to review prospectuses, whileat the same time underlines the importance of the continuous disclosure record to themarketplace. This approach will not affect the timing of the staff prospectus reviewprocess.

Further, because the initial public offering ("IPO") prospectus comprises, in effect, thebase continuous disclosure document for an issuer, all IPO prospectuses filed for whichOntario is the principal regulator under the Mutual Reliance Review System forProspectuses and Annual Information Forms (the "Prospectus MRRS") will be selected forfull prospectus review by the Corporate Finance Teams. IPO prospectuses not filed underthe Prospectus MRRS will also be selected for full review.

Corporate Finance Staff will also consider the issuer's CD as part of its review of rightsoffering circulars.

How often will a RI be selected for CD review?

The goal of the review program is to review RI's on average once every four years, or putanother way, to review approximately 25% of issuers each year. As noted above, someissuers may be selected more often, others less often. Consistent with the SEC'sapproach, staff plans to achieve this through a combination of reviews of continuousdisclosure information and reviews of prospectuses and other offering documents.

How will issues identified in a CD review be resolved?

Staff will work with RI's to resolve issues in a timely manner and will be aggressive inpursuing matters arising from continuous disclosure reviews and enforcing therequirements of the Act through all available means.The Corporate Finance Branch worksclosely with the Enforcement Branch when determining the type of regulatory actionnecessary when staff believes a RI has breached the Act.

Is this a CSA initiative?

The CSA Continuous Disclosure Mutual Reliance Review System ("CD MRRS") committeeis working towards developing a system of mutual reliance for continuous disclosurereview. A CD MRRS approach is a vital part of a successful continuous disclosure reviewprogram to ensure all RI's in Canada are treated equitably regardless of their principalregulator.

For further information, please contact:

Continuous Disclosure Team

Heidi Franken
Manager, Continuous Disclosure
(416) 593-8249
[email protected]

Lisa Enright
Senior Accountant, Continuous Disclosure
(416) 593-3686
[email protected]

Corporate Finance Teams

Margo Paul
Manager, Corporate Finance Team 1
(416) 593-8136
[email protected]

Iva Vranic
Manager, Corporate Finance Team 2
(416) 593-8115
[email protected]

June 16, 2000