The Migration of Sarbanes-Oxley

Article by Jonathan Lampe and Mark Spiro

Originally published in July 2003

On June 27, 2003, the Ontario Securities Commission (OSC) released for comment three rules that it believes are necessary to restore investor confidence in Canada's capital markets. Following the pattern set by the Sarbanes-Oxley Act of 2002 in the United States, the rules contemplate:

certification of annual and interim disclosures by an issuer's chief executive officer and chief financial officer,

increased independence, competence and responsibility for audit committees, and

support for the Canadian Public Accountability Board in its oversight of external auditors.

With the exception of British Columbia (which has expressed some reservations about the need for these rules), the provincial and territorial securities regulators across Canada have joined the Commission in these initiatives. In describing the new rules, David Brown, the Chairman of the Commission, stated that:

"The rules are as robust as parallel rules required by the U.S. Sarbanes-Oxley legislation, but address unique Canadian concerns. They are made in Canada and right for the Canadian market. They include accommodations for smaller issuers, closely-held companies and issuers listed on an American exchange. "

The proposed rules are, in large measure, similar to those adopted south of the border. Issuers that are already subject to the U.S. regulatory regime will be largely unaffected by the proposed rules. The measures will, however, require other reporting issuers in Canada to begin to address the procedural and substantive requirements that have occupied significant amounts of time and resources over the past year for issuers subject to Sarbanes-Oxley.

The currently scheduled implementation date for a majority of the initiatives is January 1, 2004. The comment period for the new rules expires September 25, 2003.

CEO and CFO Certification

The first of these rules (which is patterned on section 302 of Sarbanes-Oxley) will require CEOs and CFOs of all reporting issuers in Canada to certify, based on their knowledge, that their company's annual filings (i.e., annual information form, annual financial statements and MD&A) and interim filings (i.e., interim financial statements and interim MD&A) do not contain a misrepresentation and that the company's financial condition is fairly presented. The annual certificate will have to be filed at the same time the issuer files the last of its annual information form and its annual financial statements and MD&A.

The Commission has advised that it believes that fair presentation includes, but is not necessarily limited to:

the selection and proper application of appropriate accounting policies;

disclosure of financial information that is informative and reasonably reflects the underlying transactions; and

the inclusion of additional disclosure necessary to provide investors with a materially accurate and complete picture of the financial condition, results of operations and cash...