Canadian securities administrators emphasize disclosure issues arising from COVID-19

In light of the COVID-19 pandemic, capital markets regulators in Canada have been providing issuers and market participants with temporary relief from certain filing and regulatory requirements. Nevertheless, as we have discussed previously, it remains critical for issuers to ensure their disclosures remain current and accurate, including by addressing in regulatory filings specific pandemic-related risks and uncertainties applicable to their respective businesses.

On May 29, 2020, the International Organization of Securities Commissions ("IOSCO") – the global association of the world's securities regulators – released its Statement on Importance of Disclosure about COVID-19 (the "Statement"), which further emphasizes the importance of issuers providing timely, high-quality information about the impact of the COVID-19 pandemic on their performance and prospects. The Statement comes after IOSCO announced its intention to reprioritize its planned work program in order to focus on the impacts of the pandemic Also on May 29, 2020, the Canadian Securities Administrators (“CSA”) issued a statement reminding issuers of the importance of providing “high quality” information to investors, and approving of the Statement.

Timely, high quality disclosure critical during times of uncertainty

In the Statement, IOSCO acknowledges that the COVID-19 pandemic "may make disclosures outside the financial statements more challenging [making] high quality disclosures all the more important". The following are the points of emphasis set out in the Statement:

  • Impacts on amounts recognized in financial statements – The Statement reaffirms that issuers must account for risks related to COVID-19 when recognizing, measuring and presenting amounts in their financial statements. IOSCO acknowledges that, presently, issuers' estimates are subject to increased uncertainty. Nonetheless, issuers must use the best information available to arrive at supported judgments and estimates in their statements that take into account the impacts of the pandemic.
  • Transparent and complete disclosures – In the Statement, IOSCO emphasizes the importance of issuers providing entity-specific disclosures regarding the impacts of the COVID-19 pandemic. Issuers should disclose and explain material impacts on specific assets, liabilities and liquidity, as well as any significant uncertainties or assumptions underlying posted results, strategies and future prospects. Disclosures should go beyond boilerplate, abstract discussions; issuers must explain the impacts that the COVID-19 pandemic has had and will have on their financial performance, cash flows and strategies and should outline measures taken to mitigate the impacts of the pandemic on the issuers' businesses.
  • Non-GAAP financial measures – IOSCO cautions that issuers must avoid using non-GAAP financial measures to obscure rather than supplement financial information prepared in accordance with GAAP. While non-GAAP financial measures may be of assistance to investors during the COVID-19 pandemic, issuers must not use such measures to misleadingly attribute losses or impairments to the pandemic where such losses or impairments were attributable, in whole or in part, to other causes. IOSCO also warns against issuers characterizing conjectural hypothetical sales numbers (i.e., "but for" COVID-19 numbers) as non-GAAP measures.
  • Interim reports – The Statement emphasizes that, where an issuer's first report published since the commencement of the COVID-19 pandemic is its interim report, the issuer will be expected to produce a more detailed than usual interim report. In such cases, an issuer's interim disclosures should contain comprehensive information about the impacts of the pandemic on its business as well as information on mitigative steps taken by management to address these impacts. 
  • Annual audits – IOSCO reminds auditors that investors and other stakeholders may rely even more than usual on opinions of auditors during the COVID-19 pandemic. Auditors are required to report on "key audit matters" and to modify their reports where auditing standards require them to do so such as where material uncertainties about going concern status of an issuer have not been adequately addressed.
  • Filing deadline extensions – Where an issuer's local regulators have provided extensions to filing deadlines, the issuer should balance the needs of investors with the responsibility for providing timely and comprehensive financial information in determining whether to avail itself of such extensions. IOSCO states that issuers that rely on filing deadline extensions should consider disclosing the cause of their need for an extension, how such cause will be addressed and the date that the relevant document is expected to be published. We note that in Ontario, in order to rely on certain filing extensions, an issuer must issue a news release disclosing: (i) the requirements for which it is relying on an exemption; (ii) that insiders are subject to an insider trading black-out period; (iii) the estimated date by which disclosure is expected to be filed; and (iv) an update of any material business developments since the date of the last annual financial statements or interim financial reports that were filed.

Takeaways

IOSCO's Statement serves as a reminder that issuers' obligations to provide timely, transparent, thorough and well-reasoned disclosures persist even in times of unprecedented uncertainty and volatility. As IOSCO makes clear, the efficiency of capital markets around the world depends on the sustained diligence of these reporting issuers. Since the CSA has endorsed the Statement, Canadian issuers and auditors should carefully review it.

Given the many uncertainties created by the COVID-19 pandemic, and the unprecedented pace at which circumstances are changing, providing timely, high-quality information to investors may seem like an extraordinarily difficult task. However, the Statement and the CSA’s endorsement make it clear that issuers are not getting a “pass” on disclosure because of the pandemic. Securities regulators have placed the onus squarely on issuers to fully meet their continuous disclosure obligations regardless of the extraordinary circumstances. Issuers will also be aware that investors who have suffered losses will closely examine their disclosures, and that civil litigation may ensue where investors feel that disclosure was insufficient or inaccurate. Issuers should pay very careful attention to being clear, in particular, about what they know and what they do not know and, about how the pandemic has affected, and is going to affect, their businesses.

As regulators continue to navigate the  challenges in the capital markets landscape occasioned by the COVID-19 pandemic, it is critical that both issuers and other market participants remain up-to-date on regulatory pronouncements. To assist, we have developed a chart of financial and capital markets regulatory guidance, which can be found here.

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Editors

Lawrence E. Ritchie

Partner, Litigation

Alexander Cobb

Partner, Litigation

Shawn Irving

Partner, Litigation

Kevin O’Brien

Partner, Litigation

Lauren Tomasich

Partner, Litigation

Malcolm Aboud

Associate, Litigation