Introduction
On December 5, 2024, the Canadian Securities Administrators (CSA) released Staff Notice and Consultation 11-348 (the “Notice”), titled “Applicability of Canadian Securities Laws and the Use of Artificial Intelligence Systems in Capital Markets.” While the Notice clarifies how securities legislation applies to the deployment of Artificial Intelligence (AI) systems by various market participants, it specifically dedicates an entire section to non-investment fund public issuers (“Non-IF Issuers”)[1] and how they should approach disclosure issues related to their use of “AI systems”.[2]
Focus on Continuous Disclosure Obligations
The Notice emphasizes the importance for Non-IF Issuers to adequately and accurately disclose use of AI systems in their continuous disclosure documents. In particular, the Notice focused on how AI related issues should be addressed in a Non-IF Issuer’s Management Discussion and Analysis (MD&A) and Annual Information Form (AIF). It also noted that Canadian Securities Administrators (CSA) will monitor Non-IF Issuers’ continuous disclosure filings (as part of its Continuous Disclosure Review program) specific to AI related issues.
Assessing and Disclosing Use of AI Systems
To begin, Non-IF Issuers must evaluate and disclose how AI systems affect their operations specifically as they begin to and increasingly adopt such onto their platforms. The extent and nature of AI use should be factored into continuous disclosure documents, particularly within the Management Discussion and Analysis (MD&A) and Annual Information Form (AIF).
Similarly, Non-IF Issuers must assess whether their AI-related activities are material—meaning considering whether omitting or misstating this information could reasonably alter an investor’s decision to buy, sell, or hold securities. If material, disclosure should be tailored to the issuer’s specific circumstances, avoiding generic, boilerplate language, a concept generally consistent with Canadian securities law principles across the board.
Disclosure Rules of Thumb
The following are key points for Non-IF Issuers to keep in mind when preparing Disclosure:
- Definition and Use: Explain how the issuer defines AI and detail its current or planned use within the business, clarifying whether the technology is developed internally or sourced from third parties.
- Risk Exposure: Identify material risks associated with AI systems, particularly in the Risk Factors section of an MD&A. These include operational risks (like system errors or data inaccuracies), third-party dependencies, ethical concerns, regulatory challenges, competitive impacts, and cybersecurity vulnerabilities.
- Impact on Business: Discuss the potential or observed impact of AI on the issuer’s business performance, financial condition, and competitive positioning.
- Forward-Looking Information: When presenting projections related to AI, issuers must clearly label these as forward-looking statements. Any statements about AI’s future impact must include a reasonable basis, outlining any assumptions relied upon, and be updated as new information emerges. Disclosure should also outline the key assumptions, risks, and factors that might cause actual outcomes to differ from these predictions.
- Promotional Statements: The Notice warns against overly promotional or vague statements regarding AI. Disclosures must be balanced—highlighting both benefits and risks—to avoid misleading investors.
Conclusion
In summary, Non-IF Issuers are required to provide detailed, specific, and timely disclosures about their use of AI systems as part of their overall continuous disclosure obligations, especially in their MD&A and AIF. This tailored approach ensures that investors are fully informed about the technological and financial risks as well as the potential benefits associated with AI, thereby fostering a more transparent and confident investment environment.
Should you or your team have any questions specific to AI-related disclosures, a member of our business law group would be happy to discuss.
[1] CSA Staff Notice and Consultation 11-348, Page 17
[2] CSA Staff Notice and Consultation 11-348, Page 1. AI Systems are defined in the Notice as machine-based systems that process inputs to generate outputs influencing environments.