The new insider reporting regime for Canada, which was brought in on April 30, 2010 in the form of National Instrument 55-104 - Insider Reporting Requirements and Exemptions (NI 55-104) and the related companion policy, which were adopted by the Canadian Securities Administrators (the CSA), is now fully effective.
Key Changes in the New Regime
The changes to insider reporting in Canada contained in NI 55-104 cover various aspects of the regime and include:
- the previous six-month transition period to October 31, 2010 has now ended, so the filing deadline for insiders to report changes in their holdings is now five calendar days instead of the previous filing deadline of ten calendar days;
- the number of individuals who are required to file insider reports is reduced to a smaller group of insiders who have significant power or influence over the issuer;
- making the reporting requirements more uniform for securities issued under share-based compensation arrangements and facilitating an alternative process for insider reporting of share-based compensation arrangements by allowing issuers to file an “issuer grant report” which allows affected insiders to report on a deferred basis; and
- insider reports are required to be filed by significant shareholders based on that shareholder’s beneficial ownership of the issuer’s securities after deemed conversion of certain securities held by the shareholder.
The New Definition of “Reporting Insider”
NI 55-104 contains the new concept of “reporting insider”, which is a smaller group of insiders that continue to be required to file insider reports. Accordingly, the number of insiders of a reporting issuer that is required to file insider reports is reduced.
The definition of “reporting insider” includes the following insiders:
- those who have ordinary course access to material undisclosed information concerning the reporting issuer and who also directly or indirectly exercise, or have the ability to exercise, significant power or influence over the issuer;
- a director of the reporting issuer, of a significant shareholder of the reporting issuer or of a “major subsidiary” of the reporting issuer (a subsidiary that accounts for 30% or more of the reporting issuer’s consolidated assets or revenues, based on its most recent financial statements);
- the CEO, CFO and COO of a reporting issuer, of a significant shareholder of the reporting issuer or of a “major subsidiary” of the reporting issuer. The reporting issuer’s remaining officers and its subsidiaries’ other officers and directors only have to file insider reports if they have significant power or influence over the reporting issuer; and
- any other insider who is responsible for a principal business unit, division or function of the reporting issuer (for example, sales, finance or production). This makes the filing of insider reports easier for larger issuers or issuers with multiple subsidiaries, as the requirements for who is required to file the reports has been streamlined.
The threshold for insider reporting by a significant shareholder remains at the same percentage level under NI 55-104. Therefore, a person or company with beneficial ownership of, or control or direction over, directly or indirectly, more than 10% of the voting rights attached to a reporting issuer’s outstanding securities, continues to be required to file insider reports.
The additional concept introduced by NI 55- 104 now includes a significant shareholder who can acquire through “post-conversion beneficial ownership” additional voting securities within the next 60 days that would bring their holdings above the 10% threshold. This new concept makes the insider reporting requirements similar to Canada’s take-over bid regime, so that a shareholder has to include in the calculation of its holdings any securities that it can acquire within the next 60 days through, for example, converting securities or exercising warrants or options.
Exemption for Acquisitions of Securities Under Compensation Arrangements
NI 55-104 includes a new process for reporting transactions involving share-based compensation arrangements, so that a reporting issuer can file insider reports on a deferred basis. This new process is available provided that the reporting issuer has already included disclosure of the existence and material terms of the compensation arrangement in a management information circular or other public document filed on SEDAR, the reporting issuer has already filed an “issuer grant report” on SEDI within five calendar days of the grant, containing the required disclosure of the material terms of that grant and the relevant insider complies with the applicable deferred reporting procedure. An issuer is under no obligation to file an “issuer grant report” for a grant of stock options or similar instruments, but may choose to do so to assist its reporting insiders with their reporting obligations. The deferred reporting requirement for compensation arrangements requires annual disclosure on a transaction-by-transaction basis, for securities acquired under a compensation arrangement during the calendar year that have not been disposed of or transferred (other than by a specified disposition), by March 31 of the next calendar year. For securities that are disposed of or transferred before year-end the reporting deadline is five calendar days.
Accelerated Filing Deadline
Under NI 55-104 there is no change to the current ten calendar day deadline for filing an insider's initial report. However, changes in a reporting insider's direct or beneficial ownership of securities must now be reported within five, not ten calendar days.
Suggestions for How to Prepare for the New Regime
Reporting issuers should review the new requirements in detail and take the following steps as the new regime is now effective:
- review its current list of insiders who are subject to the insider reporting requirements and amend (and likely reduce) the list based on the new group of reporting insiders;
- provide guidance to the revised list of the issuer’s reporting insiders regarding the new requirements, in particular the accelerated five-day reporting period that is now effective; and
- review the issuer’s share compensation arrangements and determine whether to commence filing issuer grant reports