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CSA Consultation Paper 52-404, Approach to Director and Audit Committee Member Independence [ED]

Comment period ends on January 25, 2018

Proposed effective date:

Not specified

Last updated:

October 2017

Overview

The Canadian Securities Administrators (CSA) published for comment Consultation Paper 52-404 "Approach to Director and Audit Committee Member Independence", which is intended to facilitate a broad discussion on the appropriateness of the CSA’s approach to determining director and audit committee member independence.

The Consultation Paper outlines key historical developments related to the CSA’s corporate governance regime, sets out the CSA’s approach to determining director and audit committee member independence, and describes the approaches to determining independence in other jurisdictions. The Consultation Paper also examines the benefits and limitations of the CSA’s approach.

The CSA’s current approach to determining whether a director or audit committee member is independent was introduced in 2004. This approach is largely subjective, but contains prescriptive elements (bright-line tests) that, when applicable, do not permit the board to determine whether a director could reasonably be expected to exercise independent judgement. It is predominantly derived from the concepts of independence adopted by the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) following several U.S. financial reporting scandals, as modified by the requirements set out in the Sarbanes-Oxley Act of 2002.

Some stakeholders have expressed concern about the appropriateness of the CSA’s current approach to determining independence. They believe that the CSA’s current approach has precluded individuals with the requisite expertise and sound judgement from being considered independent members of the board or being able to serve as audit committee members. In other instances, it has been argued that the application of the CSA’s current approach has limited the pool of individuals who could be considered independent to the detriment of certain issuers. Some of those stakeholders who have expressed these concerns point to the merits of approaches to independence adopted in other jurisdictions such as the U.K., Australia and Sweden. Other stakeholders, however, have pointed out that the market has adapted to the CSA’s current approach and are concerned with potential costs associated with making changes to the approach or transitioning to a new approach.

 

Recent activities

October 2017

On October 26, 2017, the Canadian Securities Administrators (CSA) published for comment CSA Consultation Paper 52-404 "Approach to Director and Audit Committee Member Independence". Comments are requested by January 25, 2018.

 

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