Recent reforms to Canada’s insider reporting regime which come into effect April 30, 2010 will accelerate certain insider reporting deadlines and narrow the number of insiders required to report trades. In addition, all stock-based compensation arrangements, including restricted share units, deferred share units, performance share units, phantom stock, stock appreciation rights and phantom options will become subject to insider reporting obligations. Directors and other reporting insiders should take steps now to report all outstanding stock-based compensation which was previously not subject to insider reporting.

New National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) and its related companion policy (CP 55-104CP) largely consolidates and harmonizes insider reporting requirements across Canada. Ontario, however, will retain insider reporting obligations in the Securities Act (Ontario). Since the Ontario statutory reporting obligations apply to a broader range of persons than is required under NI 55-104, NI 55-104 includes exemptions from statutory insider reporting for persons who are not “reporting insiders” as defined in NI 55-104.

Key changes to Canada’s insider reporting regime include:

  • Introducing a new definition of “reporting insiders” aimed at reducing the number of individuals required to file insider reports.
  • Accelerating the filing deadline from 10 to five calendar days for reporting changes in interests.
  • Requiring reporting insiders to report security-based compensation arrangements, such as restricted share units (RSUs), deferred share units (DSUs), performance share units (PSUs), phantom stock, stock appreciation rights and phantom options.
  • Increasing the percentage needed to be considered a “major subsidiary” from 20% of the assets or revenue of a reporting issuer to 30%.

Reporting Insiders

The new “reporting insider” concept will narrow the range of executives of a reporting issuer and executives and directors of subsidiaries of the reporting issuer who are required to file insider trade reports. In general, the following individuals will be subject to insider reporting:

  • The CEO, CFO, COO and the directors of (i) the reporting issuer, (ii) a significant shareholder of the reporting issuer and (iii) a major subsidiary of the reporting issuer;
  • A person or company that is responsible for a principal business unit or function of the reporting issuer;
  • A significant shareholder;
  • Individuals who perform functions similar to those described above; and

Any other insider who both (a) has access to undisclosed material information and (b) can exercise “significant power or influence” over the business, operations, capital or development of the reporting issuer (the “basket provision”). The Canadian Securities Administrators (CSA) have also increased the percentage threshold in the definition of “major subsidiary” from 20% to 30% of the consolidated assets or revenue of the issuer. The CSA also acknowledged that the corporate structure of a reporting issuer may include intermediate holding companies with consolidated assets or revenues which exceed the threshold but whose directors and officers as a practical matter have no control over the business units, divisions or functions of the reporting issuer and stated that it is willing to consider applications for relief from insider reporting obligations for such directors and officers.

In the companion policy, the CSA states that the determination as to whether an insider is subject to insider reporting under the basket provision requires the exercise of reasonable judgement as to whether the insider exercises, or has the ability to exercise, influence over the reporting issuer which is comparable to the influence exercised by the other categories included within the definition of “reporting insider”.

Beneficial Ownership and Control or Direction

Except in Quebec, Canadian securities legislation does not define the terms “beneficial ownership” or “control or direction”. The companion policy states that beneficial ownership must be determined in accordance with the ordinary principles of property and trust law of the relevant jurisdiction and that for purposes of NI 55-104 a person will generally have “control or direction” over securities of an issuer if the person directly, or indirectly, through any contract, arrangement, understanding or relationship has or shares power to vote or direct the voting of such securities or the power to acquire or dispose of such securities. Under Quebec securities law, “beneficial ownership” is defined in section 1.4 of Regulation 14-501Q and the concept of “control” is defined in section 90 of the Securities Act (Quebec) which states that “[t]he person who is the owner of securities or has direction over them is the person who exercises control over them”. Additionally, section 91 of the Securities Act (Quebec) states that any person who may exercise as he sees fit voting rights attached to securities he does not own is deemed to exercise control over those securities. As a practical matter, the application of these definitions in Quebec generally leads to the same conclusion as would be reached in other Canadian jurisdictions.

Significant Shareholder and Significant Shareholder Based on Post Conversion Beneficial Ownership

For purposes of NI 55-104, a significant shareholder is a person whose beneficial ownership and control or direction, direct or indirect, over securities of the reporting issuer exceeds 10% of the voting rights attached to the reporting issuer’s outstanding securities. For purposes of such determination, the person is entitled to rely on information on the number of outstanding voting securities disclosed in the reporting issuer’s most recent MD&A or material change report.

In order to better align insider reporting with early warning reporting requirements under National Instrument 62-103 - Early Warning System and Related Take-Over Bid and Insider Reporting Issues, a significant shareholder based on “post conversion beneficial ownership” will now be subject to insider reporting. A person has “post conversion beneficial ownership” of a particular security if the person beneficially owns a convertible security that the person can convert into the particular security within 60 days or if the person has a right or obligation, whether or not on conditions, to acquire beneficial ownership of the particular security within 60 days. A person will be subject to insider reporting based on the aggregate of their direct or indirect actual beneficial ownership, control or direction of securities of the reporting issuer plus their post conversion beneficial ownership of securities of the reporting issuer. If such holdings would collectively carry more than 10% of the voting rights attached to all of the voting securities of the reporting issuer which would be outstanding assuming the securities underlying the person’s post conversion beneficial ownership were outstanding, the person is required to file insider reports.

The alternative reporting regime for eligible institutional investors under NI 62-103 will continue to apply provided that the early warning report filed by the eligible institutional investor also discloses the eligible institutional investor’s interest in a related financial instrument and the material terms thereof. The eligible institutional investor must also treat a significant change in the related financial instrument as triggering a new report under the early warning requirements.

Accelerated Filing Deadline

Under NI 55-104, changes in a reporting insider’s beneficial ownership of securities must be reported within five, not 10 calendar days. If a change occurs shortly before a holiday or weekend, a reporting insider may effectively have only two business days in which to complete the filing. To provide reporting insiders with some time to adjust their insider reporting practices, the five-day filing deadline will not come into effect until October 31, 2010. There is no change to the current 10-day filing period for initial reports.

What Needs to be Reported

Reporting insiders must continue to report direct or indirect beneficial ownership of and control or direction over securities of the reporting issuer and interests in, or rights or obligations associated with, a related financial instrument involving a security of the reporting issuer. The definition of “related financial instrument” remains quite broad and is generally defined as (i) an instrument, agreement, security or exchange contract the value, market price or payment obligations of which are derived from, referenced to or based on the value, market price or payment obligations of a security or (ii) any other instrument, agreement or understanding that affects, directly or indirectly a person’s economic interest in a security or exchange contract.

The reporting insider must also file a report if the reporting insider enters into, materially amends, or terminates an agreement, arrangement or understanding involving, directly or indirectly, a security of the reporting issuer or a related financial instrument if it has the effect of altering, directly or indirectly, the reporting insider’s economic exposure to the reporting issuer. But no such report is required if the reporting insider did not know, and in the exercise of reasonable diligence could not have known, of the alteration to the reporting insider’s economic exposure to the reporting issuer.

Although derivatives and other agreements or understandings that have the effect of altering, directly or indirectly, a reporting insider’s economic exposure to the reporting issuer must be reported, derivatives and such other agreements or understandings are not considered in determining whether a person is a reporting insider. As a result, a person may have a significant economic interest in a reporting issuer resulting from a derivative arrangement yet not be required to disclose that interest.

New Reporting Requirements for Compensation Arrangements

Effective April 30, 2010, all security-based compensation arrangements, including cash-settled RSUs, DSUs, PSUs, phantom shares and stock appreciation rights will be subject to insider reporting under NI 55-104. This involves a substantial change to prior practice as, for example, directors generally have not been required to file insider reports detailing the receipt of DSUs.

NI 55-104 contemplates an alternate reporting regime for all compensation arrangements, including security-settled awards such as restricted shares and stock options, but also cash-settled awards. Under NI 55-104, an insider does not have to file an insider report within five (or in some cases 10) days of the acquisition or a “specified disposition” of a security-based award under a compensation arrangement where the following conditions are met:

  • The reporting issuer has previously disclosed the material terms and conditions of the compensation arrangement in a document filed on SEDAR;
  • In the case of an acquisition of a security-based award, the issuer filed an issuer grant report on SEDI providing details about the awards made to directors and officers of the issuer and its subsidiaries who were reporting insiders at the time of the report; and
  • The reporting insider files an insider report on SEDI by March 31 of the following year (or in the event of a disposition or transfer of the award which is not a specified disposition, within five days of such disposition or transfer) providing details of such awards on either a transaction-by-transaction basis or in a summary form.

A “specified disposition” is a disposition or transfer that is incidental to the operation of the compensation arrangement and does not involve a discrete investment decision by the director or officer to acquire, hold or dispose of the award and includes a disposition or transfer made to satisfy tax withholding obligations if made automatically in accordance with the compensation arrangement or made at the election of the director or officer pursuant to an irrevocable election notice received at least 30 days prior to the disposition or transfer.

Transitional Reporting of Historic Compensation Awards

Effective April 30, 2010, reporting insiders will be required to report outstanding security-based compensation awards which were not previously subject to reporting requirements. However, NI 55-104 does not provide a transitional rule with respect to the filing of insider reports relating to outstanding compensation awards. In discussions with securities regulators, we understand that the preferred manner of reporting such awards is to file an “initial report” which details the outstanding balance held and to include a message in the “remarks” portion of the report explaining that the filing relates to compensation arrangements which are subject to insider reporting upon NI 55-104 coming into effect. Notwithstanding that the initial report will be dated the date the person first became subject to insider reporting, we understand that such a filing will not be subject to late filing fees.

Exemption for Automatic Securities Purchase Programs

NI 55-104 preserves the existing exemption for insider reporting in connection with automatic securities purchase programs (ASPPs). Under NI 55-104, an insider does not have to file an insider report within five (or in some cases 10) days of the acquisition or “specified disposition” of a security or related financial instrument if the reporting insider files an insider report on SEDI by March 31 of the following year (or in the event of a disposition or transfer of the award which is not a specified disposition, within five days of such disposition or transfer) providing details of such acquisitions and specified dispositions on either a transaction-by-transaction basis or in a summary form. A “specified disposition” is a disposition or transfer that is incidental to the operation of the ASPP and does not involve a discrete investment decision by the director or officer to acquire hold or dispose of the security or related financial instrument and includes a disposition or transfer made to satisfy tax withholding obligations if made automatically in accordance with the ASPP or made at the election of the director or officer pursuant to an irrevocable election notice received at least 30 days prior to the disposition or transfer.

The exemption for ASPPs specifically does not include securities acquired under a cash payment option of a dividend or interest reinvestment plan or a lump sum provision of a share purchase plan. It also does not apply to an acquisition of options or similar securities granted to a director or officer, although a similar exemption may be available to the reporting insider under the alternative regime for reporting compensation arrangements.

There is no blanket exemption for automatic securities disposition programs, although the CSA state that they will continue to consider applications for exemptions from insider reporting in connection with such programs.

CSA Notices and Initiatives

The CSA will be providing additional guidance on reporting requirements regarding compensation arrangements in CSA Staff Notice 55-308–Questions on Insider Reporting. It has also launched a separate initiative to respond to concerns about empty voting and securities lending by hedge funds and other entities. The CSA is also considering ways to harmonize late filing fees and other consequences of late insider filings.

What You Should Do Now

Reporting issuers should:

  • Determine who is subject to insider reporting requirements under NI 55-104.
  • Advise directors and officers of the reporting issuer who will no longer be subject to insider reporting to include a remark in their last filed SEDI report that they have ceased to be subject to the insider reporting requirements.
  • Determine whether to file issuer grant reports respecting awards made under security-based compensation arrangements.
  • Advise reporting insiders that they are reporting insiders, inform them of the new requirements and provide them with the information they need in order to report their outstanding security-based compensation awards on SEDI by April 30, 2010.
  • Revise their insider trading policy to reflect changes to insider reporting under NI 55-104.
  • Consider assisting directors and officers who are reporting insiders with some or all of their obligations arising from the implementation of NI 55-104 and consider providing ongoing assistance to reporting insiders.

Insiders should:

  • Create or update their SEDI profile as necessary to reflect the implementation of NI 55-104.
  • If a reporting insider, file an initial report detailing all outstanding unreported security-based compensation awards by April 30, 2010.