David Brown says the internal control reporting rule proposed by provincial securities regulators is the toughest issue he’s had to grapple with during his tenure as OSC chairman.

Speaking at McMaster University in Hamilton, Ont. today Brown noted that the internal control reporting requirement of the U.S. Sarbanes-Oxley Act, known as SOX 404, has arguably been its most controversial. “Canadian securities regulators are proposing a similar rule here, and I would have to say it has been the most difficult issue I’ve seen in my time as chair,” he said.

Canadian securities regulators are proposing a rule that largely mimics SOX 404, and would apply to all companies listed on the Toronto Stock Exchange.

It will require company management to evaluate and report annually on the effectiveness of their firm’s internal control over financial reporting. The firm would then have to disclose any material weaknesses it uncovers, and these controls will have to be audited.

“Most companies take their financial reporting very seriously, and many devote significant attention and resources to it. But generally they have never undergone the kind of systematic evaluation exercise we are proposing,” Brown said.

The controversy over the proposed rule has arisen over the expected cost of compliance. Brown said that regulators sought alternatives, but couldn’t find a satisfactory substitute for SOX 404-type requirements.

“There is no question the costs will be substantial, though perhaps not as high as some SOX 404 opponents would have people believe,” Brown said. He noted that Charles River Associates estimated the incremental cost of implementing a Canadian rule will amount to 2¢ to 3¢ cents per share over a 10 year period for every non-interlisted share on the TSX.

Brown pointed out that provincial regulators have attempted to minimize the costs to Canadian companies by proposing a delayed implementation schedule. The largest TSX issuers, with a market capitalization exceeding $500 million, will not need to comply until financial years ending on or after June 30, 2006. The schedule is staggered through to 2009, so that issuers with a market capitalization under $75 million will have the most time to prepare. Issuers not listed on the TSX will be exempt from the rule.

Brown suggested that this long implementation schedule will allow Canadian companies to benefit from the U.S. experience. “By the time our own rule takes effect, much of the thinking about implementation strategies will have been done. The pressure on scarce resources should have abated and issuers and auditors alike should be dealing with a more stable environment.”

“No one is suggesting implementation will be easy. But I believe very strongly that it is an essential step for us to take, and I certainly plan to do all I can in my remaining months in this job to see that it happens,” he concluded.

Meanwhile, regulators in British Columbia are not proposing to adopt the rule there.