eSECURITIES NOTES

Update: Proposed Investor Confidence Rules:

Auditor Overview and Audit Committees
Securities & Corporate Finance Group
August 19, 2003
Audit Committees (Proposed Multilateral Instrument 52-110)

This proposed investor confidence rule was designed to encourage reporting issuers to
establish and maintain strong, effective and independent audit committees. It is based
on the audit committee requirements currently being implemented in the United States.
MI 52-110 applies to all reporting issuers other than investment funds, issuers of asset
backed-securities; designated foreign issuers and reporting issuers that are subsidiaries
of entities if the subsidiary does not have equity securities displayed for trading on a
marketplace and the parent of the subsidiary is subject to the requirements of the MI 52-
110.

Audit Committee Responsibilities

MI 52-110 requires every reporting issuer to have an audit committee to which the
external auditors must directly report. The committee must have a written charter that
sets out its mandate and responsibilities. The audit committee must be responsible for,
among other things:

• overseeing the work of the external auditors engaged for the purpose of
preparing or issuing an audit report or other audit, review or attest services work;

• pre-approving all non-audit services to be provided to the issuer or its subsidiary

entities by its external auditors or the external auditors of its subsidiary entities;

• reviewing the issuer's financial statements, MD&A and earnings press releases
before public disclosure; and

• establishing procedures for receipt, retention and treatment of complaints

received by the issuer regarding internal accounting controls, or auditing matters
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and confidential, anonymous submission by employees of the issuer of concerns

regarding questionable accounting or auditing matters.
The audit committee will be required to recommend to the board of directors the
external auditors to be nominated for the purpose of preparing or issuing an audit report
(or any related work), as well as the compensation to be paid to such auditors. Every
reporting issuer will be required to disclose in its AIF if the board of directors has not
adopted a nomination or compensation recommendation of the audit committee.
An exemption is provided from the requirement that an audit committee pre-approve
non-audit services provided by the external auditors, so long as the non-audit services
in question are de minimis. The audit committee is permitted to delegate its pre-
approval responsibilities to one or more of its independent members.

Composition of the Audit Committee

MI 52-110 requires every audit committee to have a minimum of three members, and
each member must be independent and financially literate. It does not, however,
require an issuer to appoint an audit committee financial expert to its audit committee.
An audit committee member is independent if the member has no direct or indirect
material relationship with the issuer. A “material relationship” is defined as a relationship
that could, in the view of the issuer's board of directors, reasonably interfere with the
exercise of a member's independent judgement. Persons that are considered to have a
material relationship with the issuer include:

• a person who is, or whose immediate family member is, or at any time during the
prescribed period (the shorter of the period commencing on [January 1, 2004]
and ending immediately prior to the determination or the three year period
ending immediately prior to the determination) has been, an officer or employee
of the issuer, its parent, or of any of its subsidiary entities or affiliated entities;
• a person who is, or has been, an affiliated entity of, a partner of, or employed by,
a current or former internal or external auditor of the issuer, unless the prescribed
period has elapsed since the person's relationship with the internal or external
auditor, or the auditing relationship, has ended;
• a person whose immediate family member is, or has been, an affiliated entity of,
a partner of, or employed in a professional capacity by, a current or former
internal or external auditor of the issuer, unless the prescribed period has
elapsed since the person's relationship with the internal or external auditor, or the
auditing relationship, has ended;
• a person who is, or has been, or whose immediate family member is or has
been, employed as an executive officer of an entity if any of the issuer's current
executives serve on the entity's compensation committee, unless the prescribed
period has elapsed since the end of the service or employment;
• a person who accepts, or has accepted at any time during the prescribed period,
directly or indirectly, any consulting, advisory or other compensatory fee from the
issuer or any subsidiary entity of the issuer, other than as remuneration for acting
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in his or her capacity as a member of the audit committee, the board of directors,
or any other board committee; and
• a person who is an affiliated entity of the issuer or any of its subsidiary entities.

For these purposes:

• “partner” does not include a limited partner whose interest in the internal or
external auditor is limited to the receipt of fixed amounts of compensation
(including deferred compensation) for prior service with an internal or external
auditor if the compensation is not contingent in any way on continued service;

• “compensatory fees” do not include the receipt of fixed amounts of compensation

under a retirement plan (including deferred compensation) for prior service with
the issuer if the compensation is not contingent in any way on continued service;

• the indirect acceptance by a person of any consulting, advisory or other

compensatory fee includes acceptance of a fee by:

(a) an immediate family member, or

(b) a partner, member or executive officer of, or a person who occupies a similar
position with, an entity that provides accounting, consulting, legal, investment
banking or financial advisory services to the issuer or any subsidiary entity of
the issuer, other than limited partners, non-managing members and those
occupying similar positions who, in each case, have no active role in
providing services to the entity; and

• “financial literacy” is the ability to read and understand a set of financial

statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of the issues that
can reasonably be expected to be raised by the issuer's financial statements. An
individual's financial literacy is determined in relation to the issuer in question.

There are exemptions from the requirement that each audit committee member must be
independent. These are:
• Initial Public Offerings -- exemptions for a period of up to one year following an
issuer's initial public offering;

• Controlled Companies -- an exemption for audit committee members who sit on

the board of directors of affiliated entities of the issuer;

• Events Outside Member's Control – an exemption where an audit committee

member ceases to be independent for reasons outside that member's reasonable
control in that, the member may continue to sit on the audit committee until the
later of (i) the next annual meeting and (ii) the date six months from the day the
member ceased to be independent; and
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• Filling a Vacancy – an exemption where the death, disability or resignation of an

audit committee member has resulted in a vacancy that the board of directors is
required to fill, the member appointed to fill the vacancy, from the independence
and financial literacy requirements until the later of (i) the next annual meeting
and (ii) the date six months from the day the vacancy was created.

Under proposed MI 52-110 every audit committee must be provided with the authority to
engage and compensate independent counsel and other advisers which the committee
determines are necessary to carry out its duties. Every audit committee must also have
the authority to communicate directly with the internal and external auditors.

AIF Disclosure

An issuer will be required to include in its AIF the information required by Form 52-
110F1 including:
• the text of the audit committee charter;
• the composition of its audit committee;

• whether an audit committee financial expert is serving on its audit committee;

• if it is relying on certain exemptions contained in MI 52-110;

• if an audit committee recommendation regarding the nomination or compensation

of the external auditors has not been adopted by the board of directors;

• if the audit committee has adopted specific policies and procedures for the
engagement of non-audit services, describe those polices and procedures; and
• the service fees that the issuer has paid its external auditors.

If management of an issuer solicits proxies from the security holders of the issuer for the
purpose of electing directors to the issuer's board of directors, the management
information circular must also include a cross-reference to those sections in the issuer's
AIF which contain the required audit committee disclosure.

Exemption for Venture Issuers

Proposed MI 52 -110 contains an exemption for venture issuers acknowledging that it

may be difficult or impossible for many small issuers to comply with the independence
and financial literacy requirements. A venture issuer is an issuer that does not have any
of its securities listed or quoted on any of the Toronto Stock Exchange, the New York
Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the
Nasdaq SmallCap Market, the Pacific Exchange or a marketplace outside of Canada or
the United States.
 -5 -

The members of a venture issuer's audit committee are not required to be either
independent or financially literate. Venture issuers relying on this exemption are also
exempt from Part 5 (Disclosure Obligations); however, ve nture issuers must provide, on
an annual basis, the alternative disclosure required by Form 52-110F2. Among other
matters, Form 52-110F2 requires a venture issuer to disclose:
• the text of the audit committee’s charter;

• the composition of its audit committee and whether each member is (i)
independent, and (ii) financially literate;

• if an audit committee recommendation regarding the nomination or compensation

of the external auditors has not been adopted by the board of directors;
• the service fees that the venture issuer has paid its external auditors; and

• that the venture issuer is relying upon the exemption.

This disclosure must be provided in the venture issuer's management information

circular or in its AIF or MD & A.

Exemption for US Listed Issuers

Issuers whose securities are listed on a national securities exchange or listed in a

automated inter-dealer quotation system of a national securities association registered
pursuant to the 1934 Act are exempt from the requirements of the proposed instrument.
The exemption is conditional upon compliance with U.S. audit committee requirements
and, where applicable, the disclosure requirement in paragraph 5 of Form 52-110F1.
Notwithstanding this exemption, Canadian investors should have access to disclosure
regarding audit committees as a result of proposed National Instrument 51-102
Continuous Disclosure Obligations, which will require issuers registered with the SEC to
make reciprocal filings with the appropriate Canadian securities regulatory authorities or
regulators.

Companion Policy to MI 52-110

The Companion Policy to MI- 52-110 provides additional guidance on what the CSA
view as the role of the audit committee, and the meaning of “independence”, and
“financial expert” and sets out the CSA view that the designation of an audit committee
financial expert does not impose on such person any duties, obligations or liabilities that
are greater than the duties, obligations and liabilities imposed on such person as a
member of the audit committee and conversely does not affect the duties, obligations or
liability of any other member of the audit committee or board.

Effective Date
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Proposed MI 52-110 will only apply to issuers commencing on the earlier of (i) the first
annual meeting of the issuer after January 1, 2004, and (ii) June 30, 2004.

Auditor Oversite and the Canadian Public Accountability Board (CPAB)

(Proposed Multilateral Instrument 52-108)

This proposed investor confidence rule is designed to contribute to public confidence in

the integrity of financial reporting of reporting issuers by promoting high quality,
independent auditing. It requires reporting issuers to engage auditors who are
participants in good standing with the CPAB at the time it issues an auditor’s report to
the financial statements. An auditor which has sanctions or restrictions imposed on it by
the CPBA will be required to provide notice to securities regulators and in some cases
to the audit clients as well.

Members of the Miller Thomson LLP Securities & Corporate Finance Group regularly
advise issuers with their corporate governance, disclosure and compliance matters. We
would be pleased to assist you with any needs you may have in this regard.

Barbara R.C Doherty

bdoherty@millerthomson.ca
Tel: 416.595.8621
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For further information, please contact any one of the lawyers in our Securities & Corporate Finance Group:

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Barbara R.C. Doherty 416.595.8621 Dwight D. Dee 604.643.1239

bdoherty@millerthomson.ca ddee@millerthomson.ca
Eli I. Laius 416.597.4370 Corrine M. Fiesel 604.643.1251
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S. Brian Levett 416.595.8167 S. Campbell Fitch 604.643.1206
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Robert M. Stewart 416.595.2963 Gregory C. Smith 604.643.1258
rstewart@millerthomson.ca gsmith@millerthomson.ca
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Clarke D. Barnes 403.298.2402 Eric N. Schneider 519.579.3661 Ext. 300

cbarnes@millerthomson.ca eschneider@millerthomson.ca
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dpoon@millerthomson.ca iwismer@millerthomson.ca
Chris D. Prokop 403.298.2427
cprokop@millerthomson.ca
Greg P. Shannon 403.298.2482
gshannon@millerthomson.ca

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of
the law nor does it constitute an opinion of Miller Thomson LLP or any member of the Firm on the points of law discussed.

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