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Securities Law

NIN 97/31 - Proposed National Instrument 52-101 and Companion Policy 52-101CP and Proposed Rescission of National Policy Statement No. 48 [NIN - Rescinded]

Published Date: 1997-07-18
Effective Date: 1997-07-16

Future-Oriented Financial Information

The Commission, together with other members of the Canadian Securities Administrators ("CSA"), is publishing for comment the text of proposed National Instrument 52-101 and Companion Policy 52-101CP, which will replace National Policy Statement No. 48 ("NP48") dealing with future-oriented financial information ("FOFI"). The National Instrument and Companion Policy contain footnotes that are not part of the proposed National Instrument or Companion Policy, as applicable, but which have been included to provide background and explanation. The Commission is also publishing at this time a CSA discussion paper and a draft consequential amendment to the Securities Rules.

The CSA proposes to rescind NPS 48 concurrently with the adoption of the proposed National Instrument and Companion Policy.

Substance and Purpose of Proposed National Instrument and Companion Policy

The proposed National Instrument specifies the manner in which FOFI is to be prepared, disseminated, subsequently compared with actual results and updated where applicable. FOFI is information about prospective results of operations, financial position and/or changes in financial position, based on assumptions about future economic conditions and courses of action. FOFI may be presented as either a forecast or a projection.

The proposed National Instrument and Companion Policy are based on NP48. Certain provisions of NP48 that provide guidance concerning the use of FOFI have been retained in the proposed Companion Policy rather than in the proposed National Instrument. A table of concordance comparing NP48 to the proposed National Instrument and Companion Policy is set out as Appendix A to this Notice.

The proposed National Instrument and Companion Policy are initiatives of the CSA. The National Instrument is expected to be adopted as a rule in each of British Columbia, Alberta, Ontario and Nova Scotia, as a Commission regulation in Saskatchewan and as a policy in each of the other jurisdictions represented by the CSA. The proposed Companion Policy is expected to be adopted as a policy by each jurisdiction represented by the CSA.

Terms used in the proposed Companion Policy that are defined or interpreted in the proposed National Instrument or a definition instrument in force in the jurisdiction should be defined and interpreted in accordance with the proposed National Instrument or definition instrument, unless the context otherwise requires.

Summary of Proposed National Instrument and Companion Policy

The proposed National Instrument applies to all FOFI that is included or incorporated by reference in specified offering or continuous disclosure documents (defined in the Instrument as "general purpose documents"), subject to certain exceptions. The proposed National Instrument requires that

(i) FOFI be prepared in accordance with Canadian generally accepted accounting principles and be accompanied by a report of the issuer’s auditor;

(ii) FOFI be prepared in the form of a forecast, except for FOFI pertaining to start-up issuers (defined as issuers whose current business has been conducted for 24 months or less), which may take the form of either a forecast or a projection, but not both;

(iii) the period covered by FOFI must not exceed 24 months; and

(iv) the effective date of the assumptions underlying FOFI must not precede by more than 120 days the date of the general purpose document of which the FOFI forms part.

The proposed National Instrument also contains specific requirements applicable to the use of projections. In particular, the proposed National Instrument requires that any material part of a projection must be based to a greater extent on reasonable and supportable assumptions rather than on hypotheses. This requirement represents a change from the provisions of NP48 but is consistent with the current practice of the CSA.

The proposed National Instrument requires that issuers periodically publish comparisons of previously published FOFI with actual financial results. The proposed National Instrument also requires that issuers update FOFI in certain circumstances.

The proposed National Instrument prescribes certain requirements in connection with the preparation of an auditor’s report on FOFI, the performance of an audit of FOFI and the preparation of comfort and consent letters relating to FOFI that is included in a prospectus.

The proposed National Instrument does not permit the dissemination of FOFI except to the extent that it is in the same form as that contained in a general purpose document. This represents a change from the provisions of NP48, which permits the dissemination of extracts of FOFI. The change is based on the CSA’s determination that dissemination of FOFI extracts is an infrequent occurrence and carries the potential to mislead investors.

The provisions of the proposed Companion Policy are based primarily upon provisions contained in NP48 that were not appropriate for reformulation as mandatory requirements but were considered by the CSA to continue to be useful to those preparing FOFI in accordance with the proposed National Instrument.

Alternatives Considered

Staff of the various securities regulatory authorities considered recommending retention of NP48 as a policy, with the amendments included in the proposed National Instrument and Companion Policy, and placing greater reliance on issuers’ compliance with Canadian generally accepted accounting principles. However, given the desirability of ensuring that certain of the provisions of NP48 be mandatory, staff recommended that these provisions be reformulated as a rule.

The proposed National Instrument and Companion Policy substantially maintain the status quo established by NP48. Certain issues relating to FOFI have recently been considered by the CSA and have been summarized and discussed in the paper entitled "Future-Oriented Financial Information - Issues for Discussion", a copy of which is attached as Appendix B to this Notice.

Anticipated Costs and Benefits

The CSA recognize the value of FOFI in many circumstances, but also recognize the serious possibility that such information may mislead investors unless it is presented carefully and with full disclosure of the assumptions and the inherent risks associated with such information.

The proposed National Instrument provides for the standardization and balanced disclosure of FOFI, including disclosure of the result of comparison of FOFI against actual results and disclosure of updates to FOFI.

The costs of compliance with the proposed National Instrument relate primarily to the involvement of management in the preparation, review and, where required, updating of FOFI and to the performance of an audit of FOFI. As the proposed National Instrument and Companion Policy substantially maintain the status quo, they do not impose any significant incremental costs.

Based on its experience to date under NP48 and the local policies which preceded it, the CSA are of the view that the benefits of the proposed National Instrument and Companion Policy justify the costs of compliance, and that those costs are necessary to achieve the benefits described above.

Consequential Amendment to the Securities Rules

In order to ensure consistency and avoid redundancy between the proposed National Instrument and the Securities Rules, section 115 of the Securities Rules, which currently deals with FOFI in prospectuses, will be repealed upon implementation of the proposed National Instrument. A draft of the proposed consequential amendment to the Securities Rules is attached as Appendix C to this Notice.


Interested parties are invited to make written submissions with respect to the proposed National Instrument and Companion Policy. As well, the CSA specifically invite comments on the issues discussed in the paper entitled "Future-Oriented Financial Information - Issues for Discussion", referred to above. Submissions received by November 17, 1997 will be considered.

Submissions, in duplicate, should be addressed to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Securities Registry, Government of the Northwest Territories
Registrar of Securities, Government of the Yukon Territory

c/o Daniel P. Iggers, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows

Jacques Labelle, General Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
Montréal, Québec H4Z 1G3

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions received cannot be maintained.

Questions may be referred to any of the following:

Derek E. Patterson
British Columbia Securities Commission
(604) 775-0457

Chris Courtland
Alberta Securities Commission
(403) 297-4223

Ram Ramachandran
Ontario Securities Commission
(416) 593-8253

Diane Joly
Commission des valeurs mobilières du Quebéc
(514) 873-5009 Ext. 220

DATED at Vancouver, British Columbia, on July 16, 1997.

Douglas M. Hyndman



National Policy Statement No. 48 and
Proposed National Instrument 52-101 - Future-Oriented Financial Information
and Companion Policy 52-101CP

Section Reference in Section Reference in Proposed National
National Policy Statement No. 48Instrument and Companion Policy

1 first paragraph deleted and replaced by 2.1; most of second paragraph included at section 1.1 of Companion Policy

2 1.1

3.1(1) 2.2(2)

3.1(2) 2.3(a) and (b)

3.1(3) 2.3(c)

3.2(1) 3.1

3.2(2) deleted

3.2(3) 1.5 of Companion Policy

3.3 1.2; also 1.2 of Companion Policy

4.1(1) 3.2(1)

4.1(2) part in 3.2(2); part in 1.3 of Companion Policy

4.1(3) 3.2(2)

4.2 part in 3.3; part in 1.4 of Companion Policy

4.3(1) 4.4

4.3(2) 3.5

4.3(3) 3.6

4.4(1) 2.2(1); second sentence deleted

4.4(2) 3.4 and 6.1(3)

5.1(1) deleted

5.1(2) 4.1

5.2(1) 4.2(1) and (2) and 4.3; also 2.1 of Companion Policy

5.2(2) 4.2(3) and (4)

6.1(1) 5.1(1) and (2)

6.1(2) 5.2(1) and (2); also 3.1 of Companion Policy

6.2 5.2(3)

7.1(1) 6.2

7.1(2) deleted

7.2 6.1(1); second sentence deleted and replaced by 6.1(2)

7.3(1) 6.3(1)

7.3(2) 6.3(2)

8.1 deleted

8.2 deleted

9.1 7.1(1) and (2)

9.2 7.2

9.3(1) 7.3(1)

9.3(2) 7.3(2); second sentence deleted

10 deleted

11 deleted

Appendix A Appendix A




National Policy Statement No. 48 ("NP 48") regulates future-oriented financial information ("FOFI") in prospectuses and other documents disseminated to the public. In recent years, staff of each of the securities regulatory authorities comprising the Canadian Securities Administrators ("Staff") have become concerned about the effectiveness and relevance of NP 48. Staff have reformulated NP 48 as a proposed National Instrument without substantive change in order to maintain the status quo while views are canvassed and changes considered. The nature and extent of possible changes to FOFI regulation will depend largely on the comments received on this paper and on National Instrument 52-101 published concurrently with this paper. Reaction to other proposals such as those of the Ontario Securities Commission’s Task Force on Small Business Financing and the Final Report of The Toronto Stock Exchange’s Committee on Corporate Disclosure and events in other jurisdictions, particularly the United States, will also be considered.

Why the CSA Regulates FOFI

Securities law exists to ensure that full, true and plain information about enterprises in the capital markets is available to all investors. FOFI is one category of information. Canadian Institute of Chartered Accountants ("CICA") Handbook section 4250 defines FOFI as "information about prospective results of operations, financial position and/or changes in financial position based on assumptions about future economic conditions and courses of action".

FOFI is different from historical financial information. It is sometimes more relevant than historical information in helping readers predict an issuer’s future net income or cash flows. However, because of its forward-looking nature, it is more difficult to ensure that FOFI is reliable and free from bias. The CSA regulate FOFI because they believe regulation can reduce the risk of bias and error in FOFI.

The CSA also regulate FOFI to ensure that FOFI is disseminated to all potential investors, whether retail or institutional. In practice, management-prepared FOFI in various forms is often disseminated to professional analysts and investors. Over-regulation of FOFI may prevent retail investors from getting information that others may get.

History of FOFI Regulation

Before 1982, FOFI was proscribed from public offering documents. In 1982, the Ontario Securities Commission (the "OSC") introduced a policy permitting the inclusion of FOFI in public offering documents provided that the FOFI was accompanied by a review report prepared in accordance with CICA guidelines.

OSC 1989 Survey

In 1989, OSC staff did an extensive survey comparing FOFI and actual results (the "1989 Survey").

1 (1990), 13 OSCB 707

The 1989 Survey revealed consistent and material variances, usually negative, between FOFI and actual results for the same period. Based on the 1989 Survey, OSC and Commission des valeurs mobilières du Québec ("QSC") staff adopted policies containing additional requirements in the hope that they would prevent perceived abusive practices and enhance the reliability of FOFI included in public offering documents.

The result of this work ultimately became NP 48. NP 48’s new features included restrictions on the use of projections in offering documents, the requirement to prepare FOFI in accordance with the then newly released CICA Handbook section 4250 and the requirement to have an unqualified auditor’s report attached to the FOFI. Staff believed that the changes would increase the overall reliability of FOFI and reduce the use of FOFI in those industries in which forecasting is difficult and differences between FOFI and actual results are substantial.

OSC 1994 Survey

In 1994, OSC staff conducted a follow-up to the 1989 Survey (the "1994 Survey")2

2 (1994), 17 OSCB 6.

in order to assess NP 48’s effect on the usefulness of FOFI. The 1994 Survey’s findings were very similar to those of the 1989 Survey. One inference from these findings is that FOFI is inherently unreliable.

1994 Survey Follow-up

OSC staff further analyzed the 1994 Survey results by focusing on the cases with large negative variances between FOFI results and actual results. OSC staff examined the assumptions, hypotheses and supporting schedules included in the original FOFI, together with subsequent interim reports, annual reports, Management Discussion and Analysis ("MD&A"), press releases and material change reports issued in connection with such FOFI. OSC staff also met with some issuers and their advisors. Some general observations from this exercise were:

1. many of the assumptions and hypotheses underlying the FOFI surveyed were likely overly optimistic when the FOFI was prepared;

2. management generally did not communicate material adverse variances between the FOFI and actual results to the markets in a timely fashion;

3. non-disclosure of interim shortfalls were often rationalized by optimistic beliefs that the interim shortfalls would likely be recovered before the end of the FOFI term;

4. many of the issuers faced extreme technological change or evolution, pressures for rapid changes in product development and marketing, significant price volatility and significant competitive pressures; and

5. minor changes to certain of the FOFI assumptions and hypotheses had very material effects on forecasted and projected revenues and earnings.

Consideration of Current Requirements and Practice

The findings of the above surveys, together with other Staff observations noted below, suggest that the requirements of NP 48 and Handbook section 4250 should perhaps be reconsidered

1. FOFI is usually presented as only one set of predicted results despite the possibility that more than one set of predicted results may be equally plausible and informative to investors.

2. NP 48 requires that FOFI be audited. Staff understand that the attest procedures performed to provide the basis for an audit report on FOFI are largely unchanged from the review engagement procedures applicable prior to the release of Handbook section 4250.

3. An auditor’s report may be an inappropriate communication of assurance on FOFI since it implies that the FOFI is objectively verifiable. An audit report on FOFI may therefore mislead its readers.

4. The number of issuers including FOFI in prospectuses has dropped significantly. This suggests an increased gap in the information available to institutional investors versus retail investors.

5. Issuers are presenting more aggressive pro-forma financial information more often in an attempt to incorporate future-oriented information. OSC Staff Accounting Communique No. 9 and QSC Staff Accounting Communique No. 2 now discourage some of these practices.

6. There may be a conflict between the approaches of NP 48 and the MD&A provisions relating to forward-looking information as contained in the existing requirements of certain jurisdictions.3

3 (i) See OSC Policy Statement No. 5.10 entitled "Annual Information Form and Management's Discussion and Analysis of Financial Condition and Results of Operations".

(ii) See National Policy Statement No. 47 - "Prompt Offering Qualification System". The MD&A provisions are set out in Schedule 2 to Appendix A to that policy statement.

(iii) See Schedule VII of the regulations under the Securities Act (Quebec)

No form of assurance is required on FOFI included in MD&A. The OSC’s Office of the Chief Accountant has repeatedly commented on the failure by issuers to provide a comprehensive discussion of known trends, commitments, events or other uncertainties that are likely to have a material effect on the issuer’s future operations and liquidity. Some issuers have argued that the restrictive provisions of NP 48 prevent them from providing comprehensive forward-looking MD&A disclosure either in their prospectuses or in their continuous disclosure documents.

Views of Other Bodie

-- The United States Securities and Exchange Commission ("SEC") Rule 11-03 does not impose additional requirements on issuers publishing FOFI, relying on the guidelines established by the American Institute of Certified Public Accountants ("AICPA"). SEC Rule 11-03 does not include a requirement for an audit of FOFI, leaving this decision to issuers.

-- The United States has enacted laws extending safe harbour provisions concerning forward-looking statements, thus encouraging the provision of more forward-looking statements.

-- The AICPA’s Special Committee on Financial Reporting (the Jenkins Committee) recommends more emphasis on forward-looking perspective, including disclosure of information related to management plans, business opportunities, risks and measurement uncertainties. If adopted, this would significantly extend the scope of the current MD&A and other requirements concerning forward-looking information in the United States.

-- The Interim Report of The Toronto Stock Exchange’s Committee on Corporate Disclosure states the Committee’s belief that it is important for investors to be advised of management’s assessment of a company’s prospects and that liability for forward-looking information may result in this information not being disclosed. To address this issue, the Committee recommends the adoption of safe harbour provisions in Canada concerning forward-looking information provided that there is a reasonable basis for the forward-looking information. The Committee’s Interim Report further indicates that the audit requirement for forecasts may give them undue credibility and prevent them from being provided in some circumstances where they would be useful to investors. The Committee’s Final Report confirms the Committee’s recommendation that the nature of the auditor’s participation in forward-looking information should be re-examined by securities regulatory authorities in collaboration with the CICA.

-- The OSC Small Business Task Force report recommends alternatives which reduce the regulatory burden on small or medium sized issuers. The Task Force specifically recommends that consideration be given to developing approaches to FOFI that would not require it to be audited given the importance of FOFI to investors and the need to facilitate access to it.


Interested parties are invited to make written submissions on the issues raised in this paper. The CSA invites specific comments on the following questions

(1) Does the cost to audit FOFI exceed the benefits of increased reliability provided by the audit?

(2) Should the present auditor’s report on FOFI be replaced by a review engagement report or some other form of report?

(3) Would there be any benefit from introducing safe harbour provisions similar to those in the United States for companies issuing forward-looking statements?

(4) Should projections be permitted more often?

(5) Should issuers be encouraged to present FOFI in a range format or to provide sensitivity analyses to highlight the FOFI’s uncertainty?

(6) Would expanded and more meaningful cautionary language for FOFI be useful?

(7) What can be done to ensure more timely disclosure of material variances from FOFI?

(8) Should FOFI be accompanied by MD&A-like disclosure to, among other things, provide users better information regarding the possibility that actual results may vary materially from FOFI?

(9) Should FOFI contained in an offering memorandum, regardless of whether there is a minimum acquisition cost for the securities offered, be subject to FOFI regulation?

(10) Should pre-clearance of FOFI with Staff be required to avoid the inclusion of inappropriate FOFI in an offering document which is used to market securities?

Submissions received by November 17, 1997 will be considered. Submissions and questions should be submitted as indicated in the Notice of National Instrument 52-101 and Companion Policy 52-101CP.



1. Section 115 of the Securities Rules, R.B.C. Reg 194/97, is repealed.