While a narrower group of "insiders" will be required to report, the rules also include specific reporting obligations in respect of management companies, income trust issuers and those holding convertible securities.
Effective April 30, 2010, the Canadian Securities Administrators (CSA) will be implementing a new regime for insider reporting under National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104 or the Instrument). NI 55-104 will principally harmonize all requirements relating to insider reporting and most insider reporting exemptions across all provinces and territories. Generally, NI 55-104 will reduce the scope of persons required to file insider reports and expand the nature of interests that must be reported. As discussed in detail below, some of the key features of NI 55-104 include:
- introducing a new concept of a "reporting insider", which is a subset of those persons defined to be insiders. Generally, only reporting insiders will be required to file insider reports;
- expanding the insider reporting obligation to apply to persons who are not insiders as defined under securities legislation, but that are designated as insiders for the purposes of the Instrument;
- applying the insider reporting requirement beyond beneficial ownership or control or direction over securities to also include interests in, or rights or obligations associated with, related financial instruments and to agreements, arrangements or understandings that alter a reporting insider's economic exposure to the reporting issuer; and
- accelerating filing deadlines for subsequent insider reports, from 10 calendar days down to five, starting October 31, 2010 (initial reports will still be subject to a 10 day filing deadline).
Reporting issuers and insiders should review the new definitions and requirements carefully to determine how their reporting obligations are affected. Insiders who are not "reporting insiders" will be relieved from most of their reporting obligations, while those that fit within the definition will be required to report a broader range of interests. The new rules will also impact management companies by requiring reports by their directors, officers and shareholders and will replace the insider reporting-related undertakings that were required in respect of income trust issuers and their subsidiaries. Those who hold convertible or similar securities but are not otherwise insiders may be determined to be insiders for the purposes of the Instrument and subject to insider reporting obligations. Issuers may need to review their insider trading policies and procedures for any required modifications and determine whether they will file issuer grant reports to enable their insiders to rely on certain reporting exemptions in respect of compensation arrangements.
Determining who is a "reporting insider"
Generally, the scope of persons required to file insider reports will be reduced by requiring only insiders who are "reporting insiders" to be subject to a reporting requirement. A "reporting insider" includes:
- a 10% voting shareholder; being a significant shareholder of the reporting issuer or a significant shareholder based on post-conversion beneficial ownership of the reporting issuer's securities (based on ownership or control or direction over securities carrying more than 10% of the voting rights);
- a member of senior management or the board; being the Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO) and every director of a reporting issuer, a significant shareholder, a significant shareholder based on post-conversion beneficial ownership or a major subsidiary (based on the threshold of 30% or more of the consolidated assets);
- key personnel; being a person or company responsible for a principal business unit, division or function of a reporting issuer;
- external managers: being a person or company established or contracted to provide significant management or administrative services to an issuer or a subsidiary of the issuer (a "management company") and that provides significant management or administrative services to a reporting issuer or a major subsidiary of the reporting issuer, and every CEO, CFO, COO, director and significant shareholder of the management company;
- those performing similar functions; being an individual performing functions similar to the functions performed by any of the positions described above; or
- individuals with information and influence; being any other insider that (i) in the ordinary course receives or has access to undisclosed material information; and (ii) directly or indirectly, exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of a reporting issuer (referred to as the "basket criteria").
New obligations relating to management companies, income trust issuers and those holding convertible securities
While the Instrument generally reduces the breadth of persons who are subject to the insider reporting requirement, it will result in imposing insider reporting upon certain persons who may not have previously been required to report. These include significant shareholders based on post-conversion beneficial ownership and management companies that provide significant management or administration services to the issuer or a subsidiary of the issuer. With respect to management companies, their directors, officers and significant shareholders are also considered to be "insiders" for the purposes of the Instrument.
Similarly, for issuers that are income trusts, every trustee, director, officer and significant shareholder of the principal operating entity of the income trust issuer is also considered to be an insider for the purposes of the Instrument. With respect to all of these individuals or entities that are considered insiders, those that are "reporting insiders" as set out above will now be required to file insider reports.
For the purposes of the Instrument, a person or company is a significant shareholder based on post-conversion beneficial ownership if it has direct or indirect beneficial ownership, control or direction over securities carrying more than 10% of the voting rights attached to all the issuer's outstanding voting securities, based on the conversion of any convertible or similar securities. As is the case for determining beneficial ownership with respect to take-over bids (and filing of early warning reports), a person is considered to have, as of a given date, post-conversion beneficial ownership of a security if the person or company is the beneficial owner of a security convertible into the security within 60 days following that date or has a right or obligation permitting or requiring the person or company, whether or not on conditions, to acquire beneficial ownership of the security within 60 days, by a single transaction or a series of linked transactions.
With respect to the "information and influence basket criteria," the CSA advise that, to determine whether an insider satisfies the significant influence criterion, "the insider should consider whether the insider exercises, or has the ability to exercise, significant influence over the business, operations, capital or development of the issuer that is reasonably comparable to that exercised by one or more of the enumerated positions in the definition."
Reports by certain designated insiders for certain historical transactions
If an issuer becomes an insider of reporting issuer, the CEO, CFO, COO and every director of the first issuer is designated or determined to be an insider of the reporting issuer and is required to file insider reports for transactions that occurred in the previous six months or relevant shorter period. Similar reporting obligations also apply where a reporting issuer becomes an insider of another issuer, as the CEO, CFO, COO and directors of the other issuer are determined or designated to be insiders of the reporting issuer for the purposes of the Instrument.
Nature of interests giving rise to a reporting obligation
Pursuant to the Instrument, reporting insiders will be required to file insider reports disclosing the reporting insider's direct or indirect beneficial ownership, control or direction over securities of the reporting issuer, and interest in or right or obligation associated with a related financial instrument involving a security of the reporting issuer.
According to the CSA, the concept of an "economic interest" in a security is a core component of the definition of "related financial instrument" and is intended to have broad application that refers to economic attributes ordinarily associated in common law with beneficial ownership of a security. The CSA have also attempted to address any uncertainty related to derivatives by including derivative instruments in the definition of "related financial instrument" and have identified a broad range of instruments that they consider to be related financial instruments even if they do not, as a matter of law, constitute securities. These include: (i) forwards, futures, stock purchase or similar contracts involving securities of the reporting issuer; (ii) options issued by an issuer other than the insider's reporting issuer; and (iii) stock-based compensation instruments, including phantom stock units, deferred share units (DSUs), restricted share awards (RSAs), performance share units (PSUs), stock appreciation rights (SARs) and similar instruments.
The Instrument also contains a supplemental insider reporting requirement intended to capture the reporting obligations currently covered by Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions (Equity Monetization) relating to certain agreements, arrangements or understandings that have the effect of altering the reporting insider's economic exposure to the reporting issuer, involve, directly or indirectly, a security of the reporting issuer or a related financial instrument involving a security of the reporting issuer and do not otherwise trigger the obligation to file an insider report. Upon becoming a reporting insider, the reporting insider must file an insider report to disclose any such agreement or arrangement that was entered into prior to the date the person became a reporting insider and that is still in effect. According to the CSA, the term "economic exposure" generally refers to the link between a person's economic or financial interests and the economic or financial interests of the reporting issuer of which the person is an insider.
Acceleration of Filing Deadlines
NI 55-104 accelerates the filing deadline for filing insider reports in respect of changes in a disclosable interest from 10 calendar days to five calendar days. However, initial insider reports, required to be filed upon becoming a reporting insider, are still subject to a 10 calendar day filing deadline. Under the transition provisions of the Instrument, the accelerated five day deadline comes into force after October 31, 2010.
Filing Exemptions for ASPPs, Compensation Arrangements and NCIBs
The Instrument carries forward certain existing exemptions that allow insider reports to be filed on an annual basis. These include acquisitions of securities and specified dispositions under automatic securities purchase plans (ASPPs) and under compensation arrangements established by the reporting issuer or by a subsidiary of the reporting issuer. For these types of transactions reports may be filed by March 31 of each year. To rely on the reporting exemption in respect of compensation arrangements, the reporting issuer is required to have previously disclosed the existence and material terms of the compensation arrangement in an information circular or other public document filed on SEDAR. For acquisitions of securities under a compensation arrangement, the issuer is required to have previously filed an issuer grant report on SEDI in respect of the acquisition. An issuer grant report must disclose: (i) the date the option or other security was issued or granted; (ii) the number of options or other securities issued or granted to each director or officer; (iii) the price at which the option or other security was issued or granted and the exercise price; (iv) the number and type of securities issuable on the exercise of the option or other security; and (v) any other material terms that have not been previously disclosed or filed in a public filing on SEDAR. With respect to automatic securities disposition plans (ASDPs), the CSA note they may raise different considerations than ASPPs in that ASPPs are typically established and administered by the issuer while ASDPs are often private arrangements between the reporting insider and their broker. While not providing a reporting exemption in the Instrument in respect of ASDPs, the CSA state they will consider applications for exemptive relief on a case-by-case basis.
The Instrument also continues filing exemptions relating to normal course issuer bids (NCIBs) by permitting an issuer which acquires securities of its own issue under an NCIB to file a report within 10 days of the end of the month in which the acquisition occurred. Also provided is a new general exemption for an issuer from having to report in connection with a transaction, other than an NCIB, involving a security of its own issue if the existence and material terms of the transaction have been generally disclosed in a public filing on SEDAR.