The Ontario Securities Commission has unveiled three proposed rules it says are the latest efforts to reassure investors in the wake of U.S. financial reporting scandals.

The new rules require:

  • the CEO and chief financial officer of publicly traded companies to personally certify four times a year that their issuers’ annual and interim filings do not contain a misrepresentation, and that they fairly present the issuers’ financial condition;
  • every reporting issuer to have an independent audit committee to which the external auditors must directly report. Every audit committee must have at least three members, each of whom is independent and financially literate, and;
  • public accounting firms that audit the financial statements of reporting issuers to participate in the public oversight program established by the Canadian Public Accountability Board and to remain in good standing with the CPAB. The rule will also require public accounting firms to provide notice to securities regulators in situations where restrictions or sanctions are imposed following an inspection by the CPAB.



David Brown, chair of the Ontario Securities Commission, said the draft proposals “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,” Brown said. “They include accommodations for smaller issuers, closely held companies and issuers that are listed on an American exchange.”

Brown underlined that the rules have “near-unanimous national backing,” with 12 of 13 provincial and territorial securities regulators in support.

Canada’s response to the U.S. Sarbanes-Oxley Act, enacted last July, has the support of every provincial and territorial regulator, except British Columbia. That has made for a situation in which Canada faces conflicting standards for the composition of audit committees and the certification of financial statements.

“Canada is not isolated from the effects of major regulatory changes in the U.S. market,” said Brown. “Since Sarbanes-Oxley became law in the U.S., we have consulted widely and are publishing draft rules that will boost investor confidence by addressing key concerns.”

The OSC said a cost-benefit analysis of the application of the new rules shows that even the high-end of the range of potential costs is significantly lower than the low-end of the range of potential benefits. Even taking into account just a partial list of benefits, the study shows that the benefits realized can be expected to be greater than the sum of the costs, the commission said.

The OSC has asked for comment by Sept. 25. Full text of the rules is available on the OSC’s Web site at www.osc.gov.on.ca.

The proposals received mixed reviews from one group. The Social Investment Organization, representing socially responsible investors in Canada, said the draft rules were welcome, but called for more disclosure to address “longer-term issues of corporate responsibility on social and environmental risk.”

“We applaud the new rules by OSC Chair David Brown,” said Eugene Ellmen, executive director of the Toronto-based group. “But the single-minded focus on management accounting and financial auditing is permitting companies to get away with a whole host of social and environmental risks that have huge impact on shareholder value.”

Ellmen said the rules ignore growing demand for disclosure on social and environmental issues. “Many studies have confirmed the link between social responsibility and investment returns,” Ellmen said. “As well, there is growing evidence of hidden social and environmental risks on balance sheets that threaten long term shareholder value.”

He pointed to greenhouse gas emissions as one example of hidden balance sheet risk due to social and environmental issues.