CSA to Maintain Current Approach to Director and Audit Committee Member Independence

August 17, 2018

CSA find general industry support for continuing with the current approach to director and audit committee independence, in place since 2004.

  • The Canadian Securities Administrators (CSA) recently published an update to the consultation process undertaken last year regarding director and audit committee member independence.
  • Having found that most respondents support the current approach, the CSA has decided that it should continue unchanged.

The CSA Review

The CSA launched their review of independence rules in October 2017 with the publication of CSA Consultation Paper 52-404, which was intended to “facilitate a broad discussion” on how director and audit committee member independence is determined in Canada. The Consultation Paper also sought to compare Canada’s approach with that of other jurisdictions.

Existing approach

Since 2004, National Instrument 52-110 Audit Committees has defined “independence” primarily in terms of the existence of a “material relationship” as determined by the board. However, a number of specific situations are also enumerated that the Instrument categorically deems to be “independent” or “not independent”, leaving the board with no discretion in those cases (the “bright-line test”).

Request for comments

The Consultation Paper cited the consistency and predictability of the current approach but also acknowledged concerns about its inflexibility in cases where the bright-line test has been triggered. The CSA accordingly asked for comments on its existing approach to independence and whether any changes should be considered.

Comments received

In response to industry feedback, the CSA published CSA Staff Notice 52-330 on July 26, 2018, which provided an update on the consultation process. In considering the 27 comment letters received in response, the CSA noted that most respondents supported the current approach, which generally aligns with that of the United States. While some respondents suggested that the current approach was inflexible or overly restrictive, the CSA found little consensus in that group with respect to specific potential changes.

Conclusion: No Changes Necessary

The CSA therefore concluded that it is appropriate to continue the current approach to determining independence for directors and audit committee members. According to the Staff Notice, while the current approach may have limitations, it provides an appropriate balance between board discretion and prescriptiveness in appropriate circumstances.

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