Current Developments: Canadian Securities and Auditing Matters June 2016 kpmg.ca
Canadian Securities and Auditing Matters This edition provides a summary of newly effective and forthcoming regulatory and auditing matters in Canada from April 1, 2016 to June 30, 2016. Canadian Securities: OSC Statement of Priorities Exempt Market Filings Cost Disclosure, Performance Reporting and Client Statements Canadian Securities: Proposals to Enhance the Obligations of Advisers, Dealers and Representatives toward their Clients Changes to TSX Disclosure Requirements for Compensation Arrangements TSX Proposes Issuer Website Disclosures OSC Rule to Modernize Framework for Distribution of Securities Outside of Ontario Auditing Matters Auditor Reporting Model 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 2
Canadian Securities: Canadian Securities: OSC Statement of Priorities In June 2016, the Ontario Securities Commission (OSC) issued Notice 11-775 Notice of Statement of Priorities for Financial Year to End March 31, 2017. The notice summarized key goals, the action plans/next steps related to priority issues impacting these goals, and how success would be measured and/or the expected outcomes. The five goals and related priority issues are set out below: Goals Deliver effective compliance, supervision and enforcement Promote financial stability through effective oversight Priority Issues Protect investors and foster confidence by upholding strong standards of compliance with our regulatory framework Actively pursue timely and impactful enforcement cases involving fraud and other serious securities law violations Increase transparency in the fixed income market through publications of corporate debt trading data Enhance OSC system risk oversight and OTC derivatives regulatory regime Goals Priority Issues Enhance oversight of industry cybersecurity preparedness Deliver strong investor protection Put the interests of investors first by implementing regulatory reforms that improve the advisor / client relationship Address compensation arrangements in mutual funds and empower investors through better disclosure Be an innovative, accountable and efficient organization Enhance OSC business capabilities and foster a dynamic, supportive and attractive workplace Deliver responsive regulation Increase oversight of the exempt market Improve education, engagement and alignment with investors interests through the OSC s Investor Office Monitor and assess the impact of recent regulatory reforms Closely monitor market structure changes and determine if additional regulatory responses are required Improve alignment with international standard setting Exempt Market Filings NI 45-106 Prospectus Exemptions has been amended to introduce a new harmonized report of exempt distribution, Form 45-106F1 Report Exempt Distribution, which is effective June 30, 2016. Investment fund issuers and noninvestment fund issuers that distribute securities under certain prospectus exemptions will be required to file Form 45-106F1. 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 3
Canadian Securities: In April 2016, the Canadian Securities Administrators (CSA) released Staff Notice (SN) 45-308 Guidance for Preparing and Filings Reports on Exempt Distribution under NI 45-106 Prospectus Exemptions to assist issuers, underwriters and their advisors to prepare for the transition to the new report. The SN includes: Tips for completing and filing the new form; Checklist of new information requirements; Frequently asked questions; and Transition to the new form. Also in April 2016, Multilateral CSA Staff Notice 13-323 Frequently Asked Questions about Making Exempt Market Offering and Disclosure Filings on SEDAR was issued. This SN provides clarity regarding which types of exempt offerings must be filed on the System for Electronic Document Analysis and Retrieval (SEDAR) and the access level that is appropriate on SEDAR: Auto-public public immediately, displays on SEDAR.com within 15 minutes; Private initially private, but if the regulator marks it public, it will display on SEDAR.com within 15 minutes; however, the participating jurisdictions have indicated that they do not anticipate marking such documents public to be displayed on SEDAR.com; and Private non-public will remain private, never displays on SEDAR.com. Cost Disclosure, Performance Reporting and Client Statements In April 2016, the CSA released Staff Notice 31-345 Cost Disclosure, Performance Reporting and Client Statements Frequently Asked Questions and Additional Guidance. This staff notice replaces Staff Notice 31-337 released in February 2014. Certain material which remains relevant from the earlier staff notice has been consolidated into this new staff notice. The frequently asked questions are organized into the following topics: general questions relationship disclosure information pre-trade disclosure of charges determining market value content and delivery of trade confirmation account statements and 14.14.1 additional statements position cost information security holder statements report on charges and other compensation investment performance report content of investment performance report delivery of report on charges and other compensation and investment performance report 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 4
Canadian Securities: Canadian Securities: Proposals to Enhance the Obligations of Advisers, Dealers and Representatives toward their Clients In April 2016, the Canadian Securities Administrators (CSA) published Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers and Representatives toward their Clients. The consultation paper is a step in the CSA s work toward improving the relationship between clients and their advisers, dealers and representatives (registrants). It follows comments on earlier consultations. The purpose of this consultation is to seek comment on proposed regulatory action aimed at enhancing the obligations of advisers, dealers and representatives toward their clients. It is the view of the CSA, based on their earlier consultations that the status quo must change. However, the different provincial commissions currently have different views as to the best way forward. Part 7 of the consultation paper describes in chart format the proposed targeted reforms and Part 8 discusses the proposed regulatory best interest standard under consideration. Comments on the consultation paper are due August 26, 2016. Changes to TSX Disclosure Requirements for Compensation Arrangements In May 2016, the Toronto Stock Exchange (TSX) proposed amendments to its to disclosure requirements for security based compensation arrangements, such as stock options plans or similar plans that would result in the issuance of securities from treasury. A new disclosure form, Form 15, requires disclosures in a tabular format. TSX-listed companies will be required to include in their proxy circulars: if an outstanding award includes a multiplier, the multiplier must be explained and the maximum payout must be used when disclosing the number of listed securities issuable; the annual burn rate for the past fiscal year would be required in all proxy circulars. The annual burn rate for the past three years would be required when a compensation plan is being approved by shareholders; and default vesting provisions would have to be summarized for all arrangements, including whether vesting is time-based and /or performance based. The TSX no longer requires listed companies to disclose in their proxy circulars information about the maximum number of securities available to insiders, the method for determining exercise prices and market appreciation of SARs, the ability to transform stock options into SARs, terms for stock options, causes of cessation of entitlements, previously approved amendments, assignability, financial assistance, and entitlements subject to shareholder ratification. The comment period for the proposal ended June 27, 2016. TSX Proposes Issuer Website Disclosures In May 2016, the TSX proposed amendments that would introduce a requirement that listed issuers maintain a publicly accessible website posting current copies of the following documents: constating documents; corporate policies that impact meetings of security holders and voting; security holder rights plans; 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 5
Canadian Securities: security based compensation arrangements such as stock options plans; and certain corporate governance documents, including charters of board committees, code of ethical business conduct, position descriptions, board mandate, whistle-blower policies, anti-corruption polices and other environmental and social policies. Some of the above documents duplicate documents required under Canadian securities laws to be filed on the System for Electronic Document Analysis and Retrieval (SEDAR). The comment period for the proposal ended June 27, 2016 OSC Rule to Modernize Framework for Distribution of Securities Outside of Ontario In June 2016, the Ontario Securities Commission (OSC) proposed OSC Rule 72-503 Distributions Outside of Canada and Companion Policy which would replace existing found in a note entitled Interpretation Note 1 Distributions of Securities outside Ontario. The interpretation note provided that, where an issuer and intermediaries take reasonable precautions to ensure that securities distributed out of Ontario come to rest with investors outside of Ontario, and there are no other circumstances that would call into question the integrity of Ontario capital markets, the OSC would take the view that a prospectus was not required, nor was an exemption from the prospectus requirements necessary. The proposed rule should provide certainty to participants in cross-border transactions by providing explicit exemptions that respond to the challenges that issuers and intermediaries face in determining whether a prospectus must be filed or an exemption from the prospectus requirement must be relied on, and the effect of related dealer registration requirements, in connection with a distribution of securities to investors outside of Canada. Generally, the proposed rule provides exemptions from the prospectus requirement in respect of a distribution of securities to a person or company outside of Canada in the following circumstances: if the distribution is under a public offering document in the United States or a designated foreign jurisdiction; if a concurrent distribution is qualified under a final prospectus in Ontario; if the issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the distribution; and all other distributions, but subject to restrictions on resale to a person or company in a jurisdiction of Canada. The proposed rule also provides an exemption from the dealer and underwriter registration requirement in respect of a distribution of securities to a person or company outside of Canada on the following conditions: the head office or principal place of business of the person or company is in the United States, a designated foreign jurisdiction or Canada; in the case of a distribution to a purchaser in the United States, the person or company is appropriately registered with the SEC and Financial Industry Regulatory Authority (FINRA) and complies with all applicable regulatory requirements; in the case of a distribution to a purchaser located in a designated foreign jurisdiction, the person or company is registered in a category similar to dealer in that jurisdiction and complies with all applicable regulatory requirements; subject to a limited exception, the person or company does not carry on business as a dealer or underwriter from an office or place of business in Ontario; 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 6
Canadian Securities: other than the issuer or selling security holder, the person or company does not trade securities to, with or on behalf of anyone in Ontario; and the person or company relying on the exemption is not registered as a dealer in any jurisdiction of Canada. Issuers will be required to file the Form 72-503F Report of Distributions Outside of Canada electronically in Ontario, pursuant to OSC Rule 11-501 Electronic Delivery of Documents to the Ontario Securities Commission. Comments on the proposed rule are due September 28, 2016. 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 7
Auditing Matters Auditing Matters Auditor Reporting Model Background More Insight and Transparency In response to calls from users for the auditor s report to provide more than a pass/fail opinion, the International Auditing and Assurance Standards Board (IAASB), has issued new requirements on auditor reporting. Without changing the scope of an independent audit, these requirements open the door for the auditor to give users more insight into the audit and improve transparency. For listed companies, the engagement partner s name will need to be disclosed, as will the key audit matters (i.e., those areas where there were significant judgments or in which the auditor focused on during the audit). For more details, refer to KPMG s publication In the Headlines, Issue 2015/01. Update on the New Auditor Reporting Requirements International Canada United States New and revised auditor reporting standards issued by the IAASB effective for years ending on or after December 31, 2016. Auditing and Assurance Standards Board (AASB) is deliberating comments received on its invitation to comment. Considerations include deferral of adoption date and whether to allow early adoption. On May 11, 2016, the PCAOB issued its reproposal of The Auditor s Report on an Audit of Financial Statements when the auditor expresses an unqualified opinion. No adoption date has been specified. In their June 2016 meeting, the AASB in Canada discussed what effective date should be established for the new standards including whether there should be a staged implementation of reporting on key matters. The discussion included the consideration of whether to defer the adoption date for TSX-listed entities for years ending on or after December 15, 2018 from December 15, 2017, and to defer the adoption date for other than TSX-listed entities for years ending on or after December 15, 2019 from December 15, 2018. The matter of allowing early adoption was also under consideration. The AASB plans to issue a message from the Chair to update stakeholders on the key decisions reached and expects to approve the final standards at its next meeting in September 2016. 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 8
Auditing Matters The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. The KPMG name and logo are registered trademarks or trademarks of KPMG International. All rights reserved. Print Back Home 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 9