PRESENTATION TO THE AUDITORS GROUP

1
PRESENTATION TO THE AUDITORS GROUP

• Trinidad and Tobago Securities
• and Exchange Commission
• Thursday 24th November, 2006

2
The Agenda

• Regulatory Background
• IAS Issues
• Filing Requirements
• Board of Directors
• Professional Matters
• Market Related Matters

3
Regulatory Background

• Market presently subject to the Securities
  Industry Act of 1995
• Significant growth and development in the
  industry since that time new and more
  sophisticated products, including mutual funds,
  and a challenging stock exchange
• Proposed Securities Act, based on the Stikeman
  Elliot Final Report

4
International Accounting Standards
Main Challenges Facing Registrants in the
Implementation of IFRS
5
IAS 1- Presentation of Financial Statements

• Many instances of registrants failing to
  properly disclose information relating to their
  share capital. In particular shares reserved
  for issue under options and contracts for the
  sale of shares, including the terms and amounts
• This information is critical since there may be
  cases where Directors who have little or no
  beneficial shareholding are entitled to a
  significant of shareholding if shares granted
  through Stock Options are taken into account.

6
IAS 24 Related Party Disclosures

• In most cases disclosures are very broad and do
  not adequately disclose the person/persons who
  may be in positions to exert significant
  influence over the operations of the entity.
• Directors compensation and beneficial loans or
  advances made to Management or Directors should
  be appropriately disclosed as it is in
  investors/ shareholders interest to know this
  information.

7
IAS 28 Investments in Associates

• Significant influence - owning 20 or more of
  the voting power of the investee is the only
  interpretation considered in determining whether
  or not an investee should be accounted for as an
  associate.
• Significant influence by an investor is usually
  evidenced in 1 or more of the following ways
• Representation on the board of directors or
  equivalent governing body of the investee
• Participation in policy-making processes,
  including participation in decisions about
  dividends and other distributions
• Material transactions between the investor and
  the investee
• Interchange of managerial personnel or
• Provision of essential technical information.

8
IAS 28 Investments in Associates

• In our small economic environment, there can be a
  presumption that from time to time, directors of
  large, influential companies may overlap.
• Need to be mindful of SOX provisions and good
  corporate governance. If there are instances
  where intellectual/experienced resources are
  limited, registrants must be prepared to account
  for these overlaps appropriately and give users
  of its financial statements the information
  required to make sound investment decisions.

9
IAS 39 Financial Instruments

• This standard has been the source of most of the
  problems encountered by our registrants.
• Its adoption has directly impacted on the
  profitability and hence the EPS of the
  registrants.
• Our concern consistency of interpretation

10
Filing Requirements
11
Part V - Securities Act 2006 Disclosure
Obligations of Reporting Issuers

• Annual Reports
• (1)A reporting issuer shall, within 120 days of
  the end of its financial year -
• (a) file with the Commission, a copy of its
  annual report containing the prescribed
  information and
• (b)send the annual report to each holder of its
  securities, other than debt securities, addressed
  to the latest address as shown on the securities
  register of the reporting issuer
• Proposed Section 67, GBL 58

12
Part V - Securities Act 2006 (contd)

• Annual Financial Statements
• (1)Every reporting issuer shall within the
  prescribed time period (i.e. 120 days) prepare
  and file with the Commission annually comparative
  financial statements relating separately to
• (a) the period that commenced on the date of
  incorporation or organization and ended as of the
  close of the first financial year or, if the
  reporting issuer has completed a financial year,
  the last financial year, as the case may be and
• (b) the period covered by the financial year next
  preceding the last financial year, if
  any
• made up and certified as prescribed and prepared
  in accordance with financial reporting standards
  Proposed Section 69 GBL 60

13
Part V - Securities Act 2006 (contd)

• Section 69 Annual Financial Statements (contd)
• (2)Every financial statement referred to in
  subsection (1) shall be accompanied by a report
  of the auditor of the reporting issuer, without
  reservation of opinion, prepared as prescribed.
• (3)Auditor of a reporting issuer
• No person shall act as the auditor of a
  reporting issuer unless such person is a member
  in good standing of the Institute of Chartered
  Accountants of Trinidad and Tobago or such other
  professional accounting body as may be prescribed
  

14
Part V - Securities Act 2006 (contd)

• Officer Certification of Accuracy
• At the time a reporting issuer files comparative
  financial statements, it shall concurrently file
  a certificate in the prescribed form and signed
  by its CEO and its CFO, or any other 2 senior
  officers if the reporting issuer does not have a
  CEO or CFO, certifying the accuracy of the
  comparative financial statements.
• If no CEO and CFO, or any 2 other senior
  officers, any 2 directors of the reporting issuer
  shall certify the accuracy.
  Proposed s. 69(4)

15
Part V - Securities Act 2006 (contd)

• Audit Committee
• The Board of Directors of a reporting issuer is
  to have an audit committee composed of not less
  than 3 directors of the reporting issuer
• The majority of this committee shall not be
  senior officers or employees of the reporting
  issuer or its affiliates Proposed s. 69(5)
• The Audit Committee is required to review the
  comparative annual financial statements before
  their approval by the reporting issuers
  directors Proposed s. 69(6)

16

Part V - Securities Act 2006 (contd)

• Meetings of the Audit Committee
• Auditors entitled to
• Receive notice of every meeting of the audit
  committee
• Attend and be heard at these meetings at the
  reporting issuers expense
• Attend every meeting of the committee held during
  their term of office if so requested by any
  member of the audit committee
• Proposed s. 69 (7)

17
Part V - Securities Act 2006 (contd)

• Management Discussion Analysis (MDA)
• (1)A reporting issuer shall prepare and file
  annually within 120 days of the end of its
  financial year, an MDA for each financial year
  ending on or after (date dependent on passage of
  new Act).
• Proposed s. 72, proposed GBL 63
• (2) An MDA of a reporting issuer shall contain
  and discuss such matters as may be prescribed.

18
Part V - Securities Act 2006 (contd)

• MDA contd
• (3) MDA to be sent by reporting issuer to each
  holder of its securities, other than debt
  securities, to the latest address as shown on the
  securities register concurrently with the sending
  to those security holders of its annual
  comparative financial statements.

19
Part V - Proposed General By-Laws

• MDA contd
• By-Law 63 (2) - Management Discussion Analysis
• The MDA of a reporting issuer shall include a
  discussion of the following items for the
  financial year of the reporting issuer for which
  the MDA is being prepared, and a comparative
  discussion for the financial year immediately
  preceding such financial year -

20
Part V - Proposed General By-Laws (contd)

• By-Law 63 (2) contd - MDA
• (a) the overall performance of the reporting
  issuer
• (b) the results of operations for the reporting
  issuer
• (c) the liquidity position of the reporting
  issuer
• (d) the capital resources of the reporting issuer
• (e) material related party transactions involving
  the reporting issuer
• (f) accounting policies of the reporting issuer

21
Part V - Proposed General By-Laws (contd)

• By-Law 63 (3), (4) - MDA
• 3) An MDA of a reporting issuer may discuss
  such other matters which the reporting issuer
  reasonably believes are necessary for a full,
  true and complete understanding of the financial
  results, financial position and future prospects
  of the reporting issuer
• However, a reporting issuer is not required to
  make disclosure of any matter in an MDA which is
  not material to the reporting issuer, or which is
  inapplicable given the business and operations of
  the reporting issuer.

22
Mutual Funds/CISs

• Proposed Collective Investment Scheme By-Laws
  (now CIS Guidelines)
• Part 3 Initial Investment
• Clause 6 (1)
• A new CIS shall file a prospectus for
  distribution together with documentary evidence
  demonstrating that an investment of at least 5
  million dollars in the securities of the CIS has
  been made and that those securities are
  beneficially owned before the time of filing

23
Mutual Funds/CISs contd

• CIS Guidelines
• Initial Capital
• Clause 6 (2), 25
• The sponsor or manager of a CIS shall set aside
  minimum initial capital of 2 million dollars
  from which the fees and expenses of the formation
  or initial organization of the CIS must be
  deducted.

24
Mutual Funds/CISs contd

• CIS Guidelines
• Part 5 Name
• Clause 8 (1)
• No CIS shall have a name that is misleading or
  conflicts with the type of CIS by which it is
  best characterized.

25

Mutual Funds/CISs contd

• Money Market
• Clause 8 (2) - A CIS shall not include as part of
  its name the words money market or be otherwise
  referred to as a money market fund unless the
  CIS has at the date of inception, and intends to
  continue to have at all subsequent times, not
  less than 90 of its portfolio assets invested in
  any or all of the following
• cash and
• evidences of indebtedness that have a remaining
  term to maturity of not more than one year, that
  are issued, or fully and unconditionally
  guaranteed as to principal and interest, by a
  financial institution or a government entity

26
Mutual Funds/CISs contd

• Bond
• Clause 8 (3) - A CIS shall not include as part of
  its name the word bond or be otherwise referred
  to as a bond fund unless the CIS has at the
  date of inception, and intends to continue to
  have at all subsequent times, not less than 70
  of its portfolio assets invested in
• cash and
• bonds, debentures, notes or similar instruments
  representing indebtedness, whether secured or
  unsecured, that have an original tenor of more
  than one year (other than those issued by a
  foreign governments or any political division
  thereof that issues bonds, debentures, or other
  evidences of indebtedness).

27
Mutual Funds/CISs contd

• Bond
• Clause 8 (4) -Apart from Money Market and
  Bond Funds, where a CIS includes as part of its
  name, words that suggest the pursuit of a
  particular investment strategy, not less than 80
  of the schemes assets shall be invested in
  pursuit of that strategy.
• Clause 8 (5) -Where a CIS selects as part of its
  name the words guaranteed or secured or words
  of similar meaning, the sponsor or investment
  manager of the scheme shall provide evidence to
  the satisfaction of the Commission that
  sufficient assets have been set aside to give
  effect to the guarantee or to secure the
  investors assets.

28
Mutual Funds/CISs contd

• Clause 8 (6) - Within 60 days of the end of each
  6 month period of its operation, the manager
  shall confirm in writing to the Commission the
  amount of the assets set aside to give effect to
  the guarantee or to secure the investors assets.
  
• Part 7 Reporting Issuer
• Clause 10 - Registration of the Reporting Issuer
• The Sponsor of a CIS shall be registered with
  the Commission as a reporting issuer.

29
Mutual Funds/CISs contd

• Part 10 Borrowing Powers
• Clause 22 - Limitations
• A CIS shall not borrow cash or provide a security
  interest over any of its portfolio assets unless
  the transaction is temporary and is for the
  purpose of accommodating requests for the
  redemption of securities of the CIS while the CIS
  effects an orderly liquidation of portfolio
  assets, or to permit the CIS to settle portfolio
  transactions and, after giving effect to all
  transactions undertaken under this Part, the
  outstanding amount of all borrowings of the
  collective investment scheme does not exceed five
  percent of the portfolio assets of the CIS taken
  at market value at the time of the borrowing.

30
Mutual Funds/CISs contd

• Part 10 Borrowing Powers contd
• For purposes of this Part, a transaction shall be
  deemed to be temporary if the borrowing is repaid
  within six months from the date of borrowing.

31
Mutual Funds/CISs contd

• Part 16 Financial Statements and Management
  Discussion of Performance of CIS
• Clause 29 Annual Comparative Financial
  Statements
• A CIS shall file with the Commission and publish,
  within 120 days of its financial year end,
  audited annual comparative financial statements
  which shall include
• (a) an income statement prepared in accordance
  with IFRS
• (b) a balance sheet prepared in accordance with
  IFRS
• (c) a statement of investment portfolio prepared
  in accordance with these Guidelines
• (d) a statement of cash flows prepared in
  accordance with IFRS
• (e) a statement of changes in net assets prepared
  in accordance with these Guidelines
• (f) a statement of operations prepared in
  accordance with these Guidelines.

32
Mutual Funds/CISs contd

• Part 16 Financial Statements and Management
  Discussion of Performance of CIS contd
• The CIS Guidelines will also include a
  requirement that CISs file a monthly volume
  report with the Commission.

33
Mutual Funds/CIS contd

• Part 16 Financial Statements and Management
  Discussion of Performance of CIS contd
• Clause 30 Interim Financial Statements
• A CIS shall file with the Commission and publish
  within 60 days of the end of the second quarter
  of its financial year, interim financial
  statements which shall include -
• an income statement prepared in accordance with
  IFRS
• a balance sheet prepared in accordance with IFRS
• a statement of cash flows prepared in accordance
  with these Guidelines
• a statement of investment portfolio prepared in
  accordance with IFRS
• a statement of changes in net assets prepared in
  accordance with these Guidelines
• a statement of operations prepared in accordance
  with these Guidelines.

34
Mutual Funds/CIS contd

• Clause 31 Semi-Annual Reporting
• A CIS shall file within 60 days of the end of
  each 6 month period of its operation, reports in
  a form prescribed by the Commission which shall
  include, inter alia -
• (a) an income statement prepared in accordance
  with IFRS
• (b) a balance sheet prepared in accordance with
  IFRS
• (c) a statement of investment portfolio
  prepared in accordance with these Guidelines
• (d) a statement of portfolio transactions
  prepared in accordance with these Guidelines and
  
• (e) a statement of changes in net assets
  prepared in accordance with these Guidelines
• (f) a statement of operations prepared in
  accordance with these Guidelines
• (g) a volume report prepared in accordance with
  these Guidelines.
• (h) any other report prescribed by the
  Commission.

35
Board of Directors
36
Disclosure of Related Party Transactions

• A person connected with a reporting issuer (as an
  affiliate, holding company or as a result of
  controlling interests) must within 5 business
  days of becoming connected file a report with the
  Commission section 140(1)
• Filing is not required if the person does not
  beneficially own or exercise control or direction
  over the securities of the reporting issuer
  section 140(4)

37
Disclosure of Related Party Transactions

• A reporting issuer may require the holder of its
  securities to indicate the capacity in which he
  holds the securities, including whether any other
  person has an interest in the securities
  section 141(1), (2)
• A reporting issuer may request a holder of its
  securities to disclose whether any of its
  securities that are held by him are subject to an
  agreement or arrangement with another person
  section 141(4)

38
Disclosure of Related Party Transactions (CIS
Guidelines)

• Under the CIS Guidelines, the MDA must discuss
  any transaction involving a related party
  clause 39(1)(e)
• Where a related party engages in a transaction
  with a CIS, the CIS must report the transaction
  to the Commission within 7 days of the end of the
  month in which the transaction occurred - clause
  39(2)

39
Disclosure of Stock Options and Directors
Compensation

• Proposed Prospectus By-Laws Form 1
• The aggregate cash remuneration and other cash or
  non-cash benefits paid to the directors and
  senior officers of the issuer for services
  rendered in all capacities to the issuer to be
  stated. Clause 8
• A requirement for disclosure of full particulars
  of any contract or arrangement existing at the
  date of the prospectus. Clause 9
• NB The Commission is formulating draft
  guidelines to deal specifically with ESOPs/Stock
  Options

40
Professional Matters
41
Professional MattersInterim Statements Auditors

• Interim Financial Statements
• Need not include an auditors report, but if an
  auditor has been associated with that statement,
  his audit report or his comments on the unaudited
  financial information shall accompany the
  financial statement.
• Proposed s. 70(2)

42
Professional Matters Auditor Independence

• Under the general by-law making authority of
  proposed section 150(1), the Commission can
  prescribe
• Standards of independence and other
  qualifications for auditors Proposed s.
  150(1)(w)(iii)
• Requirements for a change in auditors by a
  reporting issuer or a market actor Proposed s.
  150(1)(w)(iv)
• In this regard, relevant provisions of the
  practice in other jurisdictions, such as under
  the Sarbanes-Oxley Act, 2002 (SOX), will be
  assessed.

43
Professional Matters Auditor Independence SOX

• Auditor Independence is heightened under SOX in
  the following ways
• Non-audit services are restricted
• Rotation of audit partner (but not entire firm)
  required at least every 5 years
• Auditor conflicts of interest limited by
  requiring 1 year cooling-off period before member
  of audit staff can be hired by client for high
  level executive position
• Improper influence by corporate personnel on the
  conduct of audit prohibited

44
Professional Matters Auditor Independence SOX
(contd)

• To prevent audit firms from appearing to be
  beholden to the public companies that employ them
  to conduct audits firms are prohibited from
  rendering the following services to a public
  company client contemporaneously with the audit
• Bookkeeping or other services related to the
  accounting records or financial statements of the
  audit client
• Financial information systems design and
  implementation
• Appraisal or valuation services, fairness
  opinions, or contribution-in-kind reports
• Actuarial services

45
Professional Matters Auditor Independence SOX
(contd)

• Internal audit outsourcing services
• Management functions or human resources
• Broker or dealer, investment adviser, or
  investment banking services
• Legal services and expert services unrelated to
  the audit and
• Any other services determined by regulation to be
  impermissible.

46
Professional Matters Liability

• An auditor of a reporting issuer which knowingly
  makes or provides a false or misleading audit
  report in respect of the comparative financial
  statements of a reporting issuer is guilty of an
  offence and is liable on summary conviction to a
  fine of up to 1 million dollars.
• Proposed s. 75(4)

47
Professional Matters Liability contd

• Where an auditor is convicted of an offence
  under subsection (5), the Commission may order if
  it is in the public interest, and in addition to
  any other order that the Commission may make,
  that the auditor be prohibited from being the
  auditor of a reporting issuer for a period not
  exceeding 5 years.
• Proposed s. 75(4)

48
Market Related Matters
49
Market Related MattersTakeovers and IPOs

• The Takeover By-Laws that became effective in
  March 2005 in conjunction with certain provisions
  in the Companies Act govern takeovers in Trinidad
• IPOs no special provisions. Will be governed
  by the proposed Prospectus By-Laws (PBL) and
  accompanying prospectus form which will replace
  the current prospectus guidelines

50
Market Related MattersNew Disclosures

• Financial Statement Disclosure in a Prospectus
• Substantially similar to whats provided under
  current by-law 45, except that
• 3 year historical financial statements included
  (not the current 5 year requirement)
• Inclusion of interim financial statements for
  any quarterly period ending more than 60 days
  before the date of the prospectus
• Proposed PBL 18(1)

51
Market Related MattersNew Disclosures (contd)

• Proposed PBL 25
• (1) A financial statement that is included in a
  prospectus and which relates to any part of a
  financial year subsequent to the last completed
  financial year of the issuer need not be reported
  on by an auditor where -
• (a) that part of the financial year ended
• (i) not more than 90 days before the date on
  which a receipt was issued for the prospectus
  and
• (ii) not more than 12 months after the last
  audited financial year and
• (b) the audited balance sheet of the issuer as
  at the end of the latest financial year is
  included in the prospectus.

52
Market Related Matters New Disclosures (contd)

• (2) An auditor need not report on
• (a) the interim financial statements referred to
  in subsection 18(1) of this By-Law and
• (b) the income statement, the statement of
  surplus (i.e. cash flow) and the statement of
  changes in financial statements (changes in
  equity) and the pro forma balance sheet, for the
  same period for an acquired business referred to
  in subsections 19(1) or (2) or this By-Law.
• (3) Where, under this By-Law, a financial
  statement contained in a prospectus is not
  reported on by an auditor, there shall be filed
  with the Commission not later than the filing of
  the prospectus, the communication of the auditor
  that is suggested for these circumstances by the
  Institute of Chartered Accountants of Trinidad
  and Tobago.

53
Market Related MattersIllegal Insider Trading

• Two operative provisions (proposed sections 104
  (insider trading prohibition) and 105 (tipping
  prohibition) would operate to clearly prohibit
  certain uses of undisclosed price sensitive
  information by persons connected to a reporting
  issuer, including
• trading for their own account
• counselling others to trade and
• disclosing the information prior to its general
  dissemination, other than in the necessary course
  of business.

54
Market Related Matters Illegal Insider Trading
(contd)

• The determination of who is a connected person
  is simplified by deeming certain persons to be
  connected to a reporting issuer.
• Under current subsection 120(2), a subjective
  assessment is required which may make it
  difficult to determine whether any particular
  individual is in fact connected to a reporting
  issuer.

55
Market Related Matters Illegal Insider Trading
(contd)

• Proposed section 4(4)
• All officers and employees are considered to be
  insiders as well as directors and significant
  security holders (i.e. those holding more than
  10 of the outstanding voting securities of the
  reporting issuer).
• No subjective assessment is required. Based on
  their close relationship with the reporting
  issuer, these persons are considered to be
  connected to the reporting issuer and subject to
  the prohibitions on trading, and informing others
  of undisclosed price sensitive information

56
Market Related Matters Illegal Insider Trading
(contd)

• Certain other persons, who may be privy to such
  information, namely experts retained by the
  reporting issuer and persons engaging, or
  proposing to engage in, any business or
  professional activity with or on behalf of the
  reporting issuer (or with a bidder), or an
  employee of any such person, or of the reporting
  issuer or any affiliate, would also be considered
  to be connected to the reporting issuer.

57

• The End