Securities Law

BCN 2003/25 - "Investor Confidence" Rules - The BCSC Approach [BCN - Lapsed]

Published Date: 2003-06-27
Rescinded Date: 2012-07-18

Other members of the Canadian Securities Administrators (CSA) are publishing for comment the following proposals to adopt Canadian requirements based on the U.S. Sarbanes-Oxley Act of 2002 (SOX):

  • proposed Multilateral Instrument 52-108 Auditor Oversight (Auditor Oversight Rule),
  • proposed Multilateral Instrument 52-109 Certification of Disclosure in Companies’ Annual and Interim Filings (Certification Rule), and
  • proposed Multilateral Instrument 52-110 Audit Committees (Audit Committee Rule).

The Commission is not proposing to adopt the Certification and Audit Committee Rules, and is considering whether to adopt the Auditor Oversight Rule, because we think the issues they are trying to address are already dealt with more effectively in the BC Model - our draft legislative proposals published on April 15, 2003.

Our CSA colleagues say these proposed rules are necessary to address issues of investor confidence and to maintain the reputation of our capital markets internationally. They refer to a cost-benefit analysis prepared by and for the Ontario Securities Commission. It purports to show that the benefits to investors of the proposed rules will exceed the associated costs. We agree that cost-benefit analysis is a critical component of any decision to impose new corporate governance requirements on industry. Anecdotal evidence from the United States shows that the costs of implementing the SOX provisions are much higher than expected (a fact publicly acknowledged by the U.S. Securities and Exchange Commission), and the benefits are as yet unclear. We will therefore be studying the OSC cost-benefit analysis closely.

Our position on each of the three proposed rules is as follows:

1. Certification Rule
The Commission had initially thought we would go along with this proposal - who could object to having chief executive officers and chief financial officers stand behind their financial disclosure? After extensive discussions and consideration, however, we concluded that we did not support the Certification Rule for the following reasons:

  • The rule adds nothing meaningful to the existing legal duties of the officers to ensure that the issuer’s disclosure is not false or misleading.As is the case with securities legislation in other Canadian jurisdictions, the BC Securities Act prohibits a reporting issuer from making a misrepresentation (false statement or omission) in its disclosure filings. It is, therefore, illegal for an issuer to file financial information that misrepresents its financial affairs or condition. The directors and executive officers of the issuer are responsible (subject to due diligence defenses where appropriate) if the issuer violates its disclosure obligations. Requiring the CEO and CFO to certify that the issuer’s financial disclosure gives a fair presentation of the financial condition arguably adds nothing but a nuisance filing requirement.
  • It is the duty of all directors to ensure compliance with disclosure requirements. The proposed rule requires only two officers to certify. We are concerned that directors might be able to avoid responsibility by saying that they relied on the officers’ certificate.
  • The proposed disclosure certificate focuses on only one part of disclosure - financial reporting. In our view, this implies a lesser standard of compliance for other, potentially more important disclosure, like news releases.
  • There is no evidence that the certification will add any benefit. In fact, a study has been published that shows that certification was a “non-event” for issuers in the U.S. who were required to certify for the first time by August 14, 2002. This was reported in a publication from the Kelley School of Business, Indiana University, prepared by Utpal Bhattacharya, Peter Groznik and Bruce Haslem (September 2002).
  • We do not believe that the Certification Rule is the appropriate way to address issues of internal and disclosure controls. The BC draft legislation requires meaningful disclosure about an issuer’s internal and disclosure controls. We focus on the primary obligation of issuers to disclose everything that is material and not to misrepresent. We also provide guidance on the importance of having internal and disclosure controls to support compliance and provide a basis for a due diligence defence.

One argument you will hear is that the certificate requires the CEO and CFO to say that the financial disclosure presents fairly (not just in accordance with GAAP) the financial position and results of the issuer, and this raises the standard of disclosure. Our response to this is that there is already a requirement that the disclosure not be misleading. We think that this certainly covers any “unfair” presentation.

If the intention were really to impose a higher disclosure standard, we think it should be imposed as a positive obligation of the issuer rather than through a certificate requirement imposed only on the CEO and CFO. Otherwise, the issuer itself and the rest of the board can say there is no obligation on them to ensure that the disclosure meets the higher standard.

2. Audit Committee Rule
The Commission does not agree with the approach in the proposed Audit Committee Rule of prescribing the composition and duties of an audit committee. The BC draft legislation requires every public issuer to have an audit committee. It also imposes duties on directors and officers to act in the best interests of the issuer. We think that is enough.

There is a wealth of information available to boards about current and evolving best practices. We do not believe it is necessary, desirable or even possible to codify them into a one-size-fits-all requirement. Instead, the BC draft legislation requires good, plain language disclosure about the qualifications of directors and the composition and mandate of each board committee. This will allow investors to make their own judgments about whether they think the audit committee has the right members and responsibilities.

An issuer that encounters a financial reporting problem (having to restate earnings, for example) will be subject to regulatory, civil, and, in extreme cases, criminal liability. In raising any due diligence defence, the issuer and its directors will have to explain its governance processes, including committee composition, duties, and actual activities, as they apply to financial reporting and disclosure generally. We think that, combined with market pressures, this is sufficient incentive for issuers to properly constitute and empower audit committees in a way that fits with their particular circumstances. The results are likely to be better than those from a checklist approach using definitions of independence, financial literacy and financial expertise that are difficult to interpret and apply.

Canada is starting from a base of solid requirements that build significant accountabilities into our system. That is why in the BC draft legislation we limited ourselves to the few areas where we felt improvement to our Canadian system was necessary, rather than proposing the adoption of a watered-down version of rules made in the United States.

3. Auditor Oversight Rule
The Commission agrees with requiring auditors of reporting issuers to be under the Canadian Public Accountability Board (CPAB), and included that in our draft legislation. However, we believe that the proposed Auditor Oversight Rule contains more detail than is necessary, particularly in the requirements imposed on auditors and the definition of “good standing.” We would simply make it a condition of being a public company’s auditor that the firm be subject to oversight by the CPAB.

The Commission expects to formally publish the Auditor Oversight Rule under our rule-making process later this summer. We will consider comments we receive on both the Auditor Oversight Rule and the BC draft legislation before we make a decision about whether to participate in the rule with the appropriate carve-outs, or to opt out of the rule and implement our own, simpler auditor oversight requirement.

Request for Comments
The Commission requests that you consider our reasons for not adopting the Certification Rule and Audit Committee Rule, and for preferring a simpler Auditor Oversight Rule, when you provide comments to our CSA colleagues on those rules. The following questions may serve as a guide in preparing your comments on those specific rules:

  • Do you believe the U.S. approach, and in particular SOX-type legislation, is the best way for regulators in Canada to proceed?
  • Do you agree that a certification requirement adds nothing meaningful to the existing legal duties of an issuer’s executive officers?
  • Do you agree that requiring only two officers to certify creates a risk of diluting the entire board’s responsibility for the accuracy of financial disclosure?
  • Do you agree that the approach in the BC draft legislation of requiring issuers to disclose everything that is material, and not to misrepresent, is preferable to getting a certificate by two officers relating only to financial disclosure?
  • Do you agree with the approach in the BC draft legislation of requiring an audit committee and requiring good, plain language disclosure about the qualifications, composition and mandate of such committee?
  • Do you agree that the simpler approach in the BC draft legislation requiring auditors of public companies to be subject to oversight by the CPAB is preferable to the more complex and detailed requirements of the Auditor Oversight Rule?

We ask that you provide a copy of your comments on the Certification Rule, Audit Committee Rule and Auditor Oversight Rule, as they relate to the British Columbia position, in writing before September 25, 2003 to:

Susan Toews
Senior Legal Counsel
Legal and Market Initiatives
British Columbia Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, BC V7Y 1L2
Fax: (604) 899-6814

June 27, 2003

Douglas M. Hyndman


MI 52-108 Auditor Oversight
Companion Policy - 52-108CP
MI 52-109 Certification of Disclosure in Companies’ Annual and Interim Filings
Form 52-109F1 - Certification of Annual Filings
Form 52-109F2 - Certification of Interim Filings
Companion Policy - 52-109CP
MI 52-110 Audit Committees
Form 52-110F1 Information in an AIF
Form 52-110F2 Disclosure by Venture Issuers
Companion Policy - 52-110CP

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at in the Commission Documents database. We have links on our website for securities commissions across Canada, which will give you access to copies of the “investor confidence” rules, and the corresponding notices of our CSA colleagues.

You can also view the BC draft legislation and related documents at, and order hard copies from, our website at