Notice of Proposed Policy: OSCP - 51-601 - Reporting Issuer Defaults

NOTICE OF PROPOSED ONTARIO SECURITIES COMMISSION
POLICY 51-601 AND RESCISSION OF ONTARIO SECURITIES COMMISSION
POLICY NO. 2.5REPORTING ISSUER DEFAULTS

 

Purpose of Proposed Policy

The purpose of the proposed Policy is to outline the views of the Ontario Securities Commission (the "Commission") on determining if a reporting issuer is in default, maintaining a list of defaulting reporting issuers and issuing certificates of no default as required under the Securities Act (Ontario) (the "Act"). This Policy is intended to inform all interested parties of the guidelines followed and the factors considered by the Commission in determining if a reporting issuer is in default, how the list will be compiled and made available to the public, and to provide information as to the procedure for obtaining a certificate of no default.

The proposed Policy is an initiative of the Commission and will be adopted as a policy in Ontario. The proposed Policy replaces OSC Policy Statement No. 2.5 - Certificates of No Default Under Subsection 71(8) [72(8)] and List of Defaulting Issuers Under Subsection 71(9) [72(9)] of the Securities Act.

Terms used in the proposed Policy that are defined or interpreted in the definition instruments in force in Ontario should be read in accordance with those definition instruments, unless the context otherwise requires.

Background

The Commission originally adopted the predecessor Policy Statement to OSC Policy Statement No. 2.5, OSC Policy Statement No. 3-46, in May of 1980. OSC Policy No. 3-46 was subsequently re-numbered as OSC Policy Statement No. 2.5 on December 24, 1982 with technical amendments but without substantive change.

The proposed Policy was first issued for comment on April 11, 1997, under the title Certificate of No Default Under Subsection 72(8) and List of Defaulting Issuers Under Subsection 72(9) of the Securities Act. The proposed Policy is being republished due to the extensive nature of the changes contained therein and to the time elapsed since the initial issuance for comment.

Summary of Proposed Policy

The proposed Policy outlines guidelines followed by the Commission in determining if a reporting issuer is in default. The Policy provides that a reporting issuer will generally not be considered to be in default unless the reporting issuer is in default of a significant requirement of the Act or the regulations, determined in part with reference to the continuous and timely disclosure requirements of the Act and the regulations. However, the guidelines contained in the Policy should not be considered exhaustive in determining the default status of reporting issuers.

The Commission notes that paragraph 3.3 (2) 4 of the Policy states that even if financial statements have been filed within the prescribed time period, a reporting issuer will be considered to be in default if it is determined that a deficiency in those financial statements or in the issuer’s continuous disclosure record is so significant as to constitute default. The Policy further specifies that while a determination in this regard would ordinarily be made only after a hearing, the reporting issuer could be considered to be in default during the period before the hearing if the deficiency is clear and significant. While this provision in the Policy is similar to an existing provision in OSC Policy No. 2.5, and to a provision contained in the version of the proposed Policy that was issued for comment in 1997, the Commission draws readers’ attention to the fact that the provision now applies to deficiencies in any part of an issuer’s continuous disclosure record, not just to deficiencies in financial statements, and to the prospect that this provision will be more actively applied in future than has been customary in the past, and specifically requests comments on this aspect of the Policy.

The Commission also notes that the list of defaulting reporting issuers described in the Policy will be made available through an on-line bulletin board, accessible through the home page of the Commission’s web site at http://www.osc.gov.on.ca. It is anticipated that the list will be made available in this form prior to the finalization of the Policy. The Policy has been drafted to reflect the Commission’s intention in this regard.

In addition, the Policy informs interested parties as to the availability and form of the certificate of no default issued inconnection with an issuer's reporting issuer and default status. The Policy provides that it is the practice of the Commission to accept requests for a certificate of no default from any interested party. The Policy has been updated to deal with filings through SEDAR. Changes to OSC Policy No. 2.5 are described in footnotes to the Policy.

Related Instruments

The proposed Policy is related to subsection 72(8) of the Securities Act which provides for the issuance of a certificate of no default on which the seller is entitled to rely, and subsection 72(9) of the Securities Act, which provides for the making of a list of defaulting reporting issuers by the Commission. The proposed Policy is also related to proposed Policy 57-603, Defaults by Reporting Issuers in Complying with Financial Statement Filing Requirements, which describes the principles, criteria and factors to be considered by the Commission in issuing cease trade orders as a response to defaults by reporting issuers.


Unpublished Materials

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


Comments

Interested parties are invited to make written submissions with respect to the proposed Policy. Submissions received by February 8, 2001 will be considered.

Comments should be sent, in duplicate to:

John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 1903, Box 55
Toronto, Ontario M5H
E-mail:[email protected]

A diskette containing comments (in DOS or Windows format, preferably WordPerfect) should also be submitted.

Questions may be referred to:

John Hughes
Manager, Continuous Disclosure
Ontario Securities Commission
(416) 593-3695
E-mail:[email protected]

Joanne Peters
Senior Legal Counsel
Continuous Disclosure
Ontario Securities Commission
(416) 593-8134
E-mail: [email protected]

Proposed Policy

The text of the proposed Policy follows, together with footnotes that are not part of the Policy but have been included to provide background and explanation.

Text of Proposed Rescission of OSC Policy Statement No. 2.5.

The text of the proposed rescission of OSC Policy Statement No. 2.5 is:

"OSC Policy Statement No. 2.5 entitled "Certificate of No Default Under Subsection 71(8) [72(8)] and List of Defaulting Issuers Under Subsection 71(9) [72(9)] of the Securities Act" is rescinded."


DATED: December 8, 2000.


ONTARIO SECURITIES COMMISSION POLICY 51-601

REPORTING ISSUER DEFAULTS

TABLE OF CONTENTS


PARTTITLE

PART 1GENERAL

1.1 Rationale for Certificate of No Default and List
of Defaulting Reporting Issuers

PART 2 DETERMINATION IF AN ISSUER IS A REPORTING ISSUER

2.1 List of Reporting Issuers

PART 3 DETERMINATION IF A REPORTING ISSUER IS IN DEFAULT

3.1 List of Defaulting Reporting Issuers
3.2 Minor Non-compliance does not Constitute Default
3.3 Guidelines as to When Non-compliance Constitutes Default
3.4 Ability to Cure an Existing Default
3.5 Guidelines Not Exhaustive
3.6 Filing Considerations

PART 4 NOTIFICATION OF DEFAULT STATUS

4.1 Notification Ordinarily not Provided

PART 5 AVAILABILITY AND FORM OF CERTIFICATE OF NO DEFAULT

5.1 Who May Request a Certificate
5.2 Issuance of Certificates
5.3 Form of Certificate

PART 6 FORM OF CERTIFICATE OF NO DEFAULT UNDER SUBSECTION 72(8) OF THE ACT

6.1 Form of Certificate

PART 1GENERAL

1.1Rationale for Certificate of No Default and List of Defaulting Reporting Issuers

(1) In certain circumstances, holders of securities purchased under certain exemptions from the prospectus requirements cannot resell the securities without a prospectus, except under another exemption, unless, among other things, the issuer of the securities is not in default of any requirement of the Act or the regulations.

(2) The certificate provided under subsection 72(8) of the Act and the list of defaulting reporting issuersmaintained by the Commission for public inspection under subsection 72(9) of the Act are intended to enable prospective sellers of securities to determine if the issuer of the securities is in default.

(3) A determination that a reporting issuer is in default carries numerous possible consequences in addition to those described in subsection (1), affecting, but not limited to such matters as the imposition of cease trade orders and the inability to file a short form prospectus.

(4) The Commission is consequently aware that many interested parties other than prospective sellers of securities, including prospective purchasers of an issuer's securities, rely on certificates of no default and the list of defaulting reporting issuers. This Policy is intended to inform all interested parties of the guidelines followed and factors considered by the Commission in determining if a reporting issuer is in default, and to provide information as to the procedure for obtaining a certificate of no default.


PART 2DETERMINATION IF AN ISSUER IS A REPORTING ISSUER

2.1 List of Reporting Issuers

(1) The Commission maintains an overall list of reporting issuers in addition to a list of those that are in default.

(2) The certificate provided by the Commission under subsection 72(8) of the Act sets out if the issuer is a reporting issuer and if so, if it is on the list of those reporting issuers that are in default. The Commission relies primarily upon the list of reporting issuers described in subsection (1) and staff's internal review in issuing a certificate as it relates to an issuer's reporting issuer status.

(3) Despite subsection (2), the Commission's list of reporting issuers is not represented to be, nor can it be, an exhaustive list of reporting issuers given the breadth of the definition of the term "reporting issuer". For example, corporations subject to the requirements of the Business Corporations Act may have offered securities to the public within the meaning of that statute but may not have filed material with the Commission, with the result that they are not included on the Commission's list.

In addition, the Commission does not undertake to review the corporate status of issuers on an ongoing basis, with the result that corporations that have been dissolved may continue to appear on the list of reporting issuers.

(4) The Commission will respond to oral inquiries as to whether an issuer is a reporting issuer appearing on the list of reporting issuers, but oral responses should not be relied upon. An interested party should obtain a certificate under subsection 72(8) of the Act if the interested party wants a definitive statement as to whether the Commission's records indicate that an issuer is a reporting issuer.

PART 3 DETERMINATION IF A REPORTING ISSUER IS IN DEFAULT
3.1 List of Defaulting Reporting Issuers

(1)In responding to inquiries as to whether a reporting issuer is in default, the Commission relies primarily upon the list of defaulting reporting issuers that it maintains under subsection 72(9) of the Act and internal reviews conducted by staff.

(2)The list of defaulting reporting issuers is available via an on-line computer bulletin board, linked to the home page of the Ontario Securities Commission at http://www.osc.gov.on.ca.

(3)The list of defaulting reporting issuers is also available for public inspection in the offices of the Ontario Securities Commission during normal business hours.

(4)The list of defaulting reporting issuers is categorized to indicate separately those reporting issuers that are in default:

(a)because of a failure to file financial statements within the time periods prescribed by sections 77 and 78 of the Act;
(b)because of a failure to pay a fee required by the Act or the regulations;
(c)because, even though financial statements have been filed within the prescribed time period, they are deficient in one or more of the respects set out in paragraph 4 of subsection 3.3 (2);
(d) for any other reason.

(5) The Commission will provide oral confirmation as to whether a reporting issuer is in default based upon the appearance of its name on the list, but oral responses should not be relied upon. An interested party should obtain a certificate of no default if the interested party wants a definitive statement as to whether the Commission's records indicate that a reporting issuer is or is not in default.

3.2 Minor Non-compliance does not Constitute Default

(1)Given that the Act and the regulations contain a large number of requirements applicable to reporting issuers, it is impossible for the Commission to know at any time if there is some minor requirement of the Act or regulations that has been contravened by a reporting issuer.

(2)A reporting issuer will generally not be considered to be in default unless the reporting issuer is in default of a significant requirement of the Act or the regulations, determined in part with reference to the guidelines set out in subsection 3.3(2).

3.3 Guidelines as to When Non-compliance Constitutes Default

(1) For the purpose of subsection 3.2(2), the Commission is of the view that the significant requirements of the Act and the regulations include the continuous and timely disclosure requirements of the Act and the regulations. The resale restrictions associated with distributions made in reliance on the exemptions from the prospectus requirements are premised on the assumption that, since the issuer is a reporting issuer, compliance by it with the continuous and timely disclosure requirements will ensure that current information about the issuer is always available in the marketplace.

(2) The following are some of the guidelines used to determine if an issuer is in default under the continuous and timely disclosure requirements of the Act and the regulations for the purposes of maintaining the list of defaulting reporting issuers under subsection 72(9) of the Act and the issuance of certificates of no default, if in each case the relevant facts come to the attention of staff:

1.A reporting issuer that has not filed all required material change reports will be considered to be in default.

2.A reporting issuer that has filed a confidential report of a material change under subsection 75(3) of the Act but does not comply with the obligation to update the Commission under subsection 75(4) of the Act will be considered to be in default.

3.A reporting issuer that has not filed financial statements within the time periods prescribed by sections 77 and 78 of the Act will be considered to be in default.

4.Even though financial statements have been filed within the prescribed time period, a reporting issuer will be considered to be in default if:

(i) the financial statements omit a required statement, are not prepared on a comparative basis, or omit an auditor's report;

(ii)the auditor's report accompanying the financial statements does not comply with the requirements of generally accepted auditing standards and National Instrument
52-104 Basis of Accounting, Auditing and Reporting, once in force, or, until such time as National Instrument 52-104 is in force, is materially inconsistent with the guidelines of National Policy Statement 50 Reservations In An Auditor’s Report ; or

(iii)it is determined that some other deficiency in the financial statements or in the issuer’s continuous disclosure record is so significant as to constitute default.

Ordinarily, a determination described in clause (iii) would be made only after a hearing, but if the deficiency is clear and significant, the reporting issuer could be considered to be in default during the period before the hearing. Such a determination would be made by the Director, and would be made only after appropriate consideration of all facts and circumstances. Appropriate consideration of all facts and circumstances would include allowing the issuer an opportunity to present its views on the issue in writing and in person and to discuss those views with Staff, and an opportunity to be heard by the Director. When such a determination is made by the Director, written reasons would be provided to the issuer upon which the issuer can seek from the Commission a hearing and review of the Director’s decision.

5.Subject to compliance with section 82 of the Act, a reporting issuer that has not filed an information circular required by subsection 81(1) of the Act forthwith after it is sent to securityholders or an annual report required by subsection 81(2) within 140 days after the end of the issuer's last financial year will be considered to be in default.

6.A reporting issuer that has not filed an AIF and MD&A in accordance with Rule 51-501 AIF and MD&A, once in force, will be considered to be in default.

7.A reporting issuer that has not paid a fee required by the Act or the regulations will be considered to be in default.

3.4 Ability to Cure an Existing Default

A reporting issuer's name will be removed from the list of defaulting reporting issuers once the default has been cured by the filing of the correct document, the correction of the deficiency in the continuous disclosurerecord or the remittance of the applicable fee.

3.5 Guidelines Not Exhaustive

(1) The guidelines described in subsection 3.3(2) do not represent an exhaustive description of the circumstances in which a reporting issuer may be considered to be in default.

(2) A reporting issuer may be considered to be in default and notified that this is the case for a clear failure to comply with a significant requirement of the Act or regulations, whether or not specifically described in subsection 3.3(2).

(3) If a failure to comply described in subsection 3.5(2) is not clear, or the significance of the requirement is not obvious, the reporting issuer will be notified in advance of any intention to treat the reporting issuer as being in default and given an opportunity to be heard by the Commission if a hearing is requested. In these circumstances, the reporting issuer would not be included on the list of defaulting reporting issuers pending the hearing.

3.6 Filing Considerations

(1) National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR) requires, or, in some cases, allows for the electronic transmission of documents to the Commission for filing. The National Instrument provides that a document transmitted electronically using the SEDAR system is filed on the day that the electronic transmission of the document is completed (although in some cases a filing will not trigger time periods under the Act until the next business day if not completed by 5:00 p.m. on the due date).

(2) The SEDAR system allows a filer to determine whether the electronic transmission of the document has been completed and provides the filer with the date and time of the event. Given the nature of the documents required to be filed electronically using SEDAR, if electronic transmission of a filing required to be made using the SEDAR system is not completed when due and no unanticipated technical difficulties have occurred, the issuer may become a defaulting reporting issuer for purposes of the Act.

(3) In cases where documents need not be transmitted electronically using the SEDAR system, the mailing or sending of a document to the Commission does not in itself constitute compliance with the filing requirements of the Act or the regulations. A reporting issuer that relies on the postal system may become a defaulting reporting issuer if the mail is delayed or the document is lost in the mail. A reporting issuer that sends a document to the Commission by facsimile may become a defaulting reporting issuer if the document is not received. The issuer should retain the facsimile verification as evidence that the facsimile was received by the Commission.

PART 4 NOTIFICATION OF DEFAULT STATUS

4.1 Notification Ordinarily not Provided

Except as described in paragraph 4 of subsection 3.3 (2), in subsection 3.5(3) and in extraordinary circumstances, such as if the securities of the issuer are being cease traded, a reporting issuer ordinarily is not notified of the addition of its name to, or the deletion of its name from, the list of defaulting reporting issuers.



PART 5 AVAILABILITY AND FORM OF CERTIFICATE OF NO DEFAULT

5.1 Who May Request a Certificate

It is the practice of the Commission to accept a request for a certificate of no default from any interested party.

5.2 Issuance of Certificates

The Commission recommends making a request for a certificate of no default at least two business days before the desired date of issuance.

5.3 Form of Certificate

(1) The general form of certificate of no default issued under subsection 72(8) of the Act is set out in section 6.1.

(2) The Commission may issue a modified form of the certificate of no default set out in section 6.1 if circumstances require the inclusion of additional qualifications or otherwise do not permit the issuance of the standard form of certificate.

PART 6 FORM OF CERTIFICATE OF NO DEFAULT UNDER SUBSECTION 72(8)
OF THE ACT

6.1 Form of Certificate

ONTARIO SECURITIES COMMISSION CERTIFICATE UNDER SUBSECTION 72(8) OF THE SECURITIES ACT (ONTARIO)

NAME OF ISSUER:

1.The above-named issuer is/is not (inapplicable provision is deleted) included in a list of issuers known to the Commission to be reporting issuers.

2.(APPLICABLE ONLY IF THE ISSUER IS INCLUDED IN THE LIST OF REPORTING ISSUERS INDICATED IN PARAGRAPH 1.)

The above-named reporting issuer is/is not (inapplicable provision is deleted) included in a list of defaulting reporting issuers maintained by the Commission under subsection 72(9) of the Securities Act (the "Act").

A reader of this Certificate is encouraged to consult Commission Policy 51-601, which contains guidelines and other information relevant to the issuance of this Certificate.

This Certificate relates only to compliance with certain provisions of the Act and the regulations made under the Act. It has no bearing on compliance with other laws or on the financial or other position of the issuer.

While the Commission uses reasonable efforts to ensure the accuracy of this Certificate, it disclaims any responsibility for any claims, demands, actions, suits, losses, costs, damages, expenses and liabilities consequent upon any inaccuracy in this Certificate.


ONTARIO SECURITIES COMMISSION