Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

NI 51-101 was originally implemented in September 2003 and amended in 2005 and 2007.  The latest set of proposed amendments were published for comment on December 18, 2009 and open for comment until March 2010. The Notice of Amendments identified eight commenters and summarized their comments,  together with CSA responses. Changes were made to the proposed amendments in response to the comments but such changes were not considered material. 

Amendments will be made to the forms and companion policy (51-101CP) related to NI 51-101.  Consequential amendments will also be made to item 5.5 of Form 41-101F1 Information Required in a Prospectus and CSA Staff Notices 51-324 and 51-327 to reflect changes to NI 51-101.

Prior to the Amendments, section 14.2 of NI 81-106 required investment funds to calculate net asset value in accordance with Canadian generally accepted accounting principles (Canadian GAAP).  Maintaining this requirement after the introduction of section 3855 would mean that investment funds would have to change long-standing industry valuation practices. This would potentially have had adverse consequences to investment fund securityholders. The Canadian Securities Administrators (CSA) granted exemptive relief, permitting investment funds to calculate net asset value for purposes other than financial statements without giving effect to section 3855. This exemptive relief, originally set to end no later than September 30, 2007, was extended until the earlier of (i) September 30, 2008; and (ii) the effective date of the amendments to NI 81-106 to address this issue. As noted, amendments to NI 81-106 were made effective as of September 8, 2008.

Amendments to NI 81-106 in force September 8, 2008

The NI 81-106 Amendments permit investment funds to have two different net asset values: one for financial statement purposes, which is to be prepared in accordance with Canadian GAAP (being referred to as “net assets” under NI 81-106 following the NI 81-106 Amendments); and another for all other purposes, including unit pricing (being referred to as “net asset value” under NI 81-106 following the NI 81-106 Amendments). Under the NI 81-106 Amendments, section 3.6 of NI 81-106 has been amended to require that the notes to the financial statements disclose the net asset value per security as at the date of the financial statements compared to the net assets per security as shown on the statement of net assets and to provide an explanation of the differences between these amounts.

The NI 81-106 Amendments remove the requirement in section 14.2 of NI 81-106 to calculate net asset value in accordance with Canadian GAAP and replace it with a requirement to calculate the net asset value of an investment fund using the fair value of the investment fund’s assets and liabilities. For this purpose, fair value of assets and liabilities means the market value based on reported prices and quotations in an active market (see section 14.2(1.2)(a), NI 81-106). When the current market value is not available or the manager of the investment fund determines that it is unreliable, fair value means a value that is fair and reasonable in all relevant circumstances (see section 14.2(1.2)(b), NI 81-106). The NI 81-106 Amendments require that the manager maintain a record of the determination of fair value and the reasons supporting that determination (section 14.2(1.4)).   Section 14.2 of NI 81-106 has also been amended to require the manager to establish and maintain policies and procedures for determining fair value of the investment fund’s assets and liabilities. Section 9 of the Companion Policy to NI 81-106 has been amended to provide guidance in this regard and provides that the policies and procedures should be approved by the manager’s board of directors. Section 9 of the Companion Policy has also been amended to provide guidance for determining fair value.

Is there anything investment funds currently in existence should be doing?

• Review and assess internal policies and procedures to  determine what changes, if any, will be required to comply with section 3855 as regards financial statements (in consultation with internal and external auditors).
• Review constating documents and material contracts to determine if any amendments are required.
  • The constating documents of most investment funds stipulate a methodology for calculating net asset value (for issuances, redemptions, the calculation of management fees, etc.) and if the methodology refers to Canadian GAAP, the fund may need to follow section 3855, unless amendments are implemented. If amendments are necessary, the fund must determine whether those amendments can be implemented without shareholder approval.
• Contact all service providers and/or pricing or information sources to ensure that net asset value is being calculated appropriately and to ensure that information is available to permit compliance with s. 3855 for financial statement reporting purposes.
• Consider if a press release or other disclosure is required to inform investors of a change in the valuation methodology.

Is there anything investment funds currently being formed should be doing?

• Review draft material contracts, including all third party contracts to ensure they accurately reflect the calculation of net assets and net asset value.
• Review prospectus disclosure to ensure that it accurately describes methods of calculating net asset value.

Certain contracts no longer eligible for the "ordinary course of business" filing exemption

Currently, a reporting issuer is required to file a number of different types of material documents on SEDAR, including material contracts, other than those entered into in the ordinary course of business. As of March 17, 2008, the amendments will specifically provide that the following types of material contracts are not eligible for the "in the ordinary course of business" filing exemption and must be filed:

• a contract to which directors, officers, or promoters are parties other than a contract of employment;
• a continuing contract to sell the majority of the reporting issuer's products or services or to purchase the majority of the reporting issuer's requirements of goods, services, or raw materials;
• a franchise or licence or other agreement to use a patent, formula, trade secret, process or trade name;
• a financing or credit agreement with terms that have a direct correlation with anticipated cash distributions;
• an external management or external administration agreement (which, pursuant to the Companion Policy, includes an agreement with the issuer and a third party or the issuer and a parent or affiliate under which the latter provides management or other administrative services to the issuer); or
• a contract on which the reporting issuer's business is substantially dependent.

Provisions no longer eligible to be redacted or omitted

In addition, the amendments also state that the following types of provisions in a material contract that is filed may not be omitted or redacted:

• debt covenants and ratios in financing or credit agreements;
• events of default or other terms relating to the termination of material contracts; or
• other terms necessary for understanding the impact of the material contract on the business of the reporting issuer (which, the Companion Policy Guidance advises, may include the duration and nature of a patent, trademark, licence, franchise, concession or similar agreement, disclosure about related party transactions and contingency, indemnification, anti-assignability, take-or-pay or change-of-control clauses).

While certain provisions may still be omitted or redacted if an executive officer reasonably believes that disclosure of such provisions would be seriously prejudicial or would violate confidentiality provisions, the types of provisions listed above will nevertheless have to be disclosed. Issuers are advised to be mindful of these new requirements when negotiating confidentiality provisions. For contracts negotiated before the coming into force of these amendments the Companion Policy states that the issuer may apply for an exemption in order to avoid disclosing the types of provisions listed above, where the disclosure would violate a confidentiality provision. Such exemptions would only be required for contracts filed after March 17, 2008. 

Finally, the amendments also require that where any provision is omitted or redacted, the copy of the material contract filed on SEDAR must include a description of the type of information that has been omitted or redacted immediately after the omitted or redacted provision. The Companion Policy advises that a brief one-sentence description immediately following the relevant omitted or redacted provision should generally be sufficient to satisfy this requirement.

Issuers should note that along with the amendments to the Disclosure Instrument itself, the Companion Policy has also been significantly re-written with respect to the filing of material contracts. In addition to aspects of the Companion Policy mentioned above, it has also been amended to clarify that a material contract generally includes a schedule, side letter or exhibit referred to in the contract and any amendment to the contract. 

Impact on existing contracts that are still in force and on AIF disclosure

These amendments do not only apply to new contracts but may also impact upon contracts entered into on or after January 1, 2002 that are still in effect (existing contracts). If an existing contract was previously not filed on SEDAR based on the "ordinary course of business" exemption, issuers may need to reconsider whether the exemption still applies.

As mentioned above, if a contract has been negotiated (but not filed) prior to March 17, 2008 so as to prevent disclosure of certain provisions on account of confidentiality restrictions, the provisions should be reviewed to determine if exemptive relief is necessary in order to omit or redact those provisions. As well, the description provided of the issuer's material contracts in its annual information form should also be reviewed. To the extent that these amendments have an impact on contracts that have or have not been disclosed; they may also result in new or amended annual information form disclosure.
 

Originally adopted as of March 30, 2004 and amended effective June 6, 2005, Multilateral Instrument 52-109 Certifications of Disclosure in Issuers' Annual and Interim Filings (the Certification Rule) requires Canadian reporting issuers to file interim and annual certificates, certified by the chief executive officer and the chief financial officer of the issuer (or equivalent). For financial years ending on or before March 30, 2005, the required certificates were "bare" certificates only, and did not require certifications about the establishment, maintenance, design or evaluation of disclosure controls and procedures (or internal controls over financial reporting). However, commencing with the first full year ending after March 30, 2005 (which, for most issuers, is the year ended December 31, 2005), the certificates must include certifications regarding the establishment and maintenance of disclosure controls and procedures, including the design of such disclosure controls and procedures to provide "reasonable assurance" that material information relating to the issuer, including its consolidated subsidiaries, is made known to the certifying officers.

In addition to the content of the certificates, additional disclosure is also required in the issuer's annual MD&A: the certifying officer must confirm in the certificate that he or she has evaluated the effectiveness of the issuer's disclosure controls and procedures and has caused the issuer to disclose his or her conclusions about such effectiveness in the issuer's annual MD&A.

While the Certification Rule requires certifying officers to represent that they have evaluated the effectiveness of the issuer's disclosure controls and procedures and have caused the issuer to disclose their conclusions based on such evaluation in the annual MD&A (which, unlike changes in internal control over financial reporting, are not required to be disclosed in the interim MD&A), it does not specify the contents of the certifying officer's report on such evaluation. The Companion Policy to the Certification Rule suggests, however, that given that disclosure controls and procedures should be designed to provide, at a minimum, a reasonable assurance of achieving their objectives, the corresponding report in the MD&A should set forth, at a minimum, the conclusions of the certifying officers as to whether the controls and procedures are, in fact, effective at the "reasonable assurance" level.

Certifications regarding internal controls over financial reporting, including disclosure in annual and interim MD&A of any changes in the issuer's internal control over financial reporting, are not yet required. It is expected that issuers will be required to include such certifications in their annual and interim certificates (and corresponding disclosure in annual and interim MD&A) in respect of the first full year ending after June 29, 2006 (i.e. for most issuers, commencing with annual certificates and annual MD&A for the year ended December 31, 2006).

Unlike other Canadian governance or disclosure rules, the Certification Rule currently applies on the same basis to most Canadian reporting issuers (other than investment funds), with no separate standards or exemptions for venture issuers.

Corporate Governance Disclosure

Effective June 30, 2005, Canadian securities administrators also adopted National Instrument 58-101 Disclosure of Corporate Governance Practices (the Corporate Governance Rule) and the associated National Policy 58-201 Corporate Governance Guidelines (the Guidelines). The Corporate Governance Rule requires issuers to include prescribed corporate governance disclosure in their management information circulars or annual information forms and the Guidelines provide guidance on corporate governance matters in the form of suggested "best practices."

The Corporate Governance Rule applies to all reporting issuers, other than investment funds, issuers of asset-backed securities, designated foreign issuers, SEC foreign issuers, certain exchangeable security issuers, certain credit support issuers and certain subsidiary issuers. For most issuers, the specific disclosure items are set out in Form 58-101F1. However, venture issuers (those whose securities are not listed or quoted for trading on the TSX, a U.S. marketplace or a marketplace outside of Canada and the U.S.) are required to disclose only those items identified in Form 58-101F2.

Under the Corporate Governance Rule, if an issuer solicits proxies from its security holders for the purpose of electing directors to its board of directors (or the equivalent), the prescribed disclosure must be contained in its management information circular. For issuers who do not send management information circulars, the disclosure must be contained in the issuer's annual information form (or annual MD&A for venture issuers who do not file annual information forms).

The prescribed disclosure requires details of matters such as the identity and composition of the members of the board of directors, measures taken in respect of orientation and continuing education of directors, the process for identifying new candidates for the board, the process for determining compensation for directors and officers and whether the board, its committees and individual directors are regularly assessed with respect to their effectiveness or contribution. Additional requirements include disclosure about the following (if they exist): board mandate, written position descriptions for the board chair, committee chairs and the CEO, code of ethics or conduct, nominating committee or compensation committee (and their composition and function) and the identity and function of any other committees. Where these matters have not been formally addressed by the board (i.e. through the adoption of policies or descriptions), the Corporate Governance Rule requires in most instances that the issuer describe how the issuer's board deals with these matters.

In addition, the Corporate Governance Rule requires that if an issuer has adopted a written code of conduct (which is a recommended "best practice" under the Guidelines but is not mandatory), then it must file a copy of the code or any amendment to it on SEDAR no later than the date on which the issuer's next financial statements must be filed, unless a copy of the code or amendment has previously been filed.

These disclosure requirements replace the corporate governance disclosure previously required under the TSX Company Manual, and compliance is to be jointly enforced by the TSX and securities regulatory authorities.

The Guidelines set out suggested "best practices" relating to certain corporate governance matters and are not meant to be prescriptive. According to the purpose and application section of the Guidelines, issuers are "encouraged to consider" the Guidelines in developing their own corporate governance practices. The suggested best practices set out in the Guidelines include:

• maintaining a majority of independent directors on the board of directors,

• appointing an independent chair or lead director for the board,

• holding regularly scheduled meetings of independent directors (without non-independent directors and management),

• adopting a written board mandate,

• developing position descriptions for the chair of the board, the chair of each board committee, and the chief executive officer,

• providing each new director with comprehensive orientation, and providing all directors with continuing education opportunities,

• adopting a written code of business conduct and ethics,

• appointing a nominating committee and a compensation committee composed entirely of independent directors (with a written charter for each), and

• conducting regular assessments of the board effectiveness, as well as the effectiveness and contribution of each board committee and each individual director.

Audit Committee Disclosure

Also originally adopted as of March 30, 2004 and amended effective June 30, 2005, Multilateral Instrument 52-110 Audit Committees (the Audit Committee Rule) governs the functions and powers of the audit committee and requires issuers to provide certain prescribed disclosure regarding its composition and functions as set out in Form 52-110F1 (or Form 52-110F2 for venture issuers).

Like the Corporate Governance Rule, the Audit Committee Rule also applies to all reporting issuers other than investment funds, issuers of asset-backed securities, designated foreign issuers, SEC foreign issuers, certain exchangeable security issuers, certain credit support issuers and certain subsidiary issuers.

Pursuant to the Audit Committee Rule, each reporting issuer to whom the rule applies is required to have an audit committee comprised of a minimum of three directors, who are all, subject to certain exemptions, independent of the issuer. The Audit Committee Rule also mandates that the audit committee of the issuer:

• have a written charter that sets out its mandate and responsibilities,

• recommend to the board of directors:

• the external auditor to be nominated for the purpose of preparing or issuing an auditor's report or performing other audit, review or attest services for the issuer; and

• the compensation of the external auditor,

• be directly responsible for overseeing the work of the external auditor,

• pre-approve non-audit services to be provided to the issuer or its subsidiary entities by the issuer's external auditor,

• review the issuer's financial statements, MD&A and annual and interim earnings press releases before the issuer publicly discloses this information,

• be satisfied that adequate procedures are in place for the review of the issuer's public disclosure of financial information extracted or derived from the issuer's financial statements, other than the public disclosure referred to above, and periodically assess the adequacy of those procedures,

• establish "whistle-blower" procedures for:

• the receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and

• the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters, and

• review and approve the issuer's hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of the issuer.

The prescribed disclosure required under the Audit Committee Rule must be included in the issuer's annual information form. Where the management of the issuer solicits proxies from security holders for the purpose of electing directors to the issuer's board of directors (or equivalent), the issuer must include a cross-reference in the management information circular to the section in the issuer's AIF that contains this disclosure. The prescribed disclosure includes disclosure of the text of the audit committee's charter, its composition, including relevant education and experience of its members, as well as disclosure regarding reliance on certain exemptions from the requirements of the Audit Committee Rule, a description of its pre-approval policies and procedures, if any, and the aggregate amount of fees billed by the issuer's external auditor for the last two fiscal years, segregated based on "audit fees," "audit-related fees," "tax fees" and "all other fees."

While the disclosure required under the Audit Committee Rule is not new (as it applied commencing on the earlier of the issuer's first annual meeting after July 1, 2004 and July 1, 2005) the Audit Committee Rule was amended effective June 30, 2005. These amendments included a clarification of the definition of "independence" (part of which also applies to the Corporate Governance Rule and the Guidelines), technical amendments to the definitions of the terms "venture issuer" and "control" and changes to the exemptions for controlled companies and to the form of disclosure required for venture issuers to include a section on "relevant education and expertise."