On January 21, 2010, the Canadian Securities Administrators (CSA) announced the adoption of National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55 - 104), and the related companion policy, along with the repeal of, or amendments to, a number of related instruments and policies. Consequently, along with equivalent proposed amendments to Ontario securities legislation, insider reporting requirements and exemptions will be harmonized across all Canadian jurisdictions.
The consolidation of the main insider reporting requirements and exemptions in a single national instrument ought to make it easier for issuers and insiders to understand their obligations and should help to promote timely and effective compliance.
NI 55– 104 is expected to benefit investors by:
- focusing the insider reporting requirement on a core group of insiders with the greatest access to material undisclosed information and the greatest influence over the reporting issuer;
- making more consistent the reporting requirements for stock-based compensation arrangements; and
- after a six month transition period, accelerating the filing deadline from 10 calendar days to five calendar days, which will make this important information available to the market sooner.
NI 55 - 104 reduces the range of insiders required to file insider reports by introducing the concept of “reporting insider.” The definition represents a principles-based approach to determining which insiders should file insider reports.
In addition to enumerating a list of insiders (including the CEO, CFO or COO of the reporting issuer), the definition also includes a “basket” provision that includes the following two criteria:
i.the insider in the ordinary course receives or has access to information as to material facts or material changes concerning the reporting issuer before the material facts or material changes are generally disclosed; and
ii.the insider directly or indirectly, exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer.
The basket provision articulates the fundamental principle that an insider who satisfies the criteria of routine access to material undisclosed information concerning a reporting issuer and significant influence over the reporting issuer should file insider reports.
The definition of “reporting insider” includes a shareholder whose 10% beneficial ownership, control or direction is calculated based on post-conversion beneficial ownership of a security. A person has “post-conversion beneficial ownership” of a security, including an unissued security, if the person is the beneficial owner of a security convertible into the security within 60 days.
When an issuer becomes an insider of another issuer, the directors, the CEO, CFO and COO of each of those issuers will be deemed to have been insiders of the other issuer for the past six months and will have to file insider reports retroactively. These reports are only required in respect of securities of reporting issuers.
Reporting of Securities and Related Financial Instruments
A reporting insider must report (i) its beneficial ownership of, or control or direction over, whether direct or indirect, securities of a reporting issuer, and (ii) its interest in, or right or obligation associated with, a related financial instrument involving a security of a reporting issuer. NI 55 - 104 also specifies reporting requirements associated with convertible or exchangeable securities such as options and warrants as well as agreements, arrangements or understandings that have the effect of altering one’s economic exposure to a reporting issuer or involving a security, or a related financial instrument involving a security, of a reporting issuer.
Reporting Requirements For Stock-Based Compensation Arrangements
Reporting insiders will generally be required to file insiders reports about grants of options and similar instruments within five days of the grant. NI 55 - 104 contains an exemption from the insider reporting requirement for a grant of options or similar instruments under a compensation arrangement, provided the issuer has disclosed the existence and material terms of the arrangement in a public filing and filed an issuer grant report. The CSA encourage issuers to assist their insiders in complying with their insider reporting requirements by, for example, making use of the new exemption in NI 55 - 104 for issuer grant reports.
Cash-settled equity derivatives that have a similar economic effect as stock options are to be reported in a similar manner as stock options. This reflects the CSA’s view that timely disclosure of grants of stock options and similar instruments is important since it allows investors, among other things, to monitor whether issuers and insiders may be engaging in improper or unauthorized dating practices.
Accelerated Filing Requirements
A reporting insider must file an insider report in respect of a reporting issuer, within 10 calendar days of becoming a reporting insider. NI 55 - 104 accelerates the filing requirement for subsequent insider reports from 10 calendar days to five (but provides a six-month transition period until October 31, 2010 for compliance with this accelerated filing deadline). This transition period is expected to provide insiders and issuers time to become familiar with the new reporting requirements and to make necessary arrangements with third-party service providers.
Coming Into Force
NI 55 – 104 is expected to come into force in all jurisdictions on April 30, 2010, once Ministerial approval is received. However, in Ontario, the new requirements are expected to come into force on the later of April 30, 2010 and the date the requisite provisions of the Budget Measures Act, 2006 (No. 2) are proclaimed into force.