Forward-Looking Statements in Securities Disclosures, Canadian Style

Fortune teller

Since Canada does not have a single, federal securities regulator, but rather the “joy” of separate provisional review and oversight, when the Ontario Securities Commission (OSC) speaks, we listen.

Recently the OSC assessed 60 Canadian public companies, with an eye toward their compliance with their relevant securities disclosure obligations. The results of its review may be a useful read as it includes guidance on complying with existing forward-looking disclosure requirements and practical examples to assist firms in preparing and presenting their forward-looking disclosure information.

Forward-looking information is of key interest to investors who want transparent and clear disclosure about current and future corporate operations and performance. Sadly, per the OSC:

The results of the review highlight the areas in which many reporting issuers require improvement in terms of disclosure compliance and sets out the expectation of prompt corrective action where necessary. [Emphasis added]

Coming off of the global financial crisis, a number of D&O claims focused on the failure to warn shareholders of the difficulties facing the firm; these claims were based on an alleged lack in the firm’s forward-looking information. So perhaps the timing of this review is not purely serendipitous. With what appears to be a clearly worded warning on existing non-compliance from the OSC, it would seem prudent to take their advice to heart.

Some Specific Areas for Improvement

According to the OSC, 40% of the firms reviewed did not disclose the events and circumstances affecting their previously reported forward-looking information that occurred during the period of the report. And only 33% of those reviewed provided a comparison of actual results to previously disclosed future financial outlook – which is potentially helpful to investors in considering the effectiveness of management and of the current and future business performance of the issuer.

Further, only 36% of filers included a quantified discussion of events and circumstances that are reasonably likely to cause actual results to differ materially from previously reported forward-looking information. Just an update of previously disclosed information without relating this to the underlying factors and assumptions potentially denies the real or potential investor insight on why and how the target has changed.

Ways to Change/Improve

The OSC set out a list of practice points for Canadian public companies to help generate clear, transparent disclosure on forward-looking information for investors.

  1. Quality of assumptions: Make these reasonable and specific to a reporting issuer, and include material factors as part of the financial disclosures.
  2. Timely updating of ongoing progress: Recap ongoing progress versus previously disclosed forward-looking disclosures, including the affirmation of targets, disclosure of affected material differences, and updates on trends likely to affect future performance.
  3. Key Performance Indicators — financial and non-financial: Disclosure of key objectives along with their related key performance indicators helps investors measure the success of corporate performance. Note these can be both quantitative and qualitative in nature.
  4. Separate Presentation: For clarity, having a separate section with all forward-looking information to enable investors to easily distinguish between forward-looking information and historical information. This can be done in a narrative format or through charts and tables.
  5. Role of the Audit Committee and Board of Directors: A key role in the oversight of forward-looking information is played by the audit committee and board of. They should review and approve the firm’s forward-looking disclosure before its dissemination, including the underlying assumptions being utilized

Warning

The OSC included a warning against the use of “generic and boilerplate” disclosures, including general boilerplate disclosure that don’t adequately describe the key assumptions used and how certain risks may impact future financial performance.

Securities regulators rarely like a one size fits all approach.

 



Actually, we listen when ever any securities regulator in Canada speaks, to be absolutely clear.

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
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