On April 30, 2010, National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) and its Companion Policy NI 55-104CP came into force across Canada, launching a new insider reporting regime. With this new regime, the Canadian Securities Administrators (CSA) introduces several significant changes to insider reporting generally, including important changes to insider reporting of derivative transactions, as discussed below. (For a more detailed explanation of NI 55-104, see this post on our securities law blog.)
General Changes to Insider Reporting
Perhaps the most significant change affecting insider reporting generally (including derivative transactions) is the introduction of the “reporting insider” concept, which is narrower in scope than the concept of an “insider”. Persons who are reporting insiders and are thus obligated to file insider reports include a reporting issuer’s executives (specifically the CEO, CFO, COO, and members of the board of directors), shareholders with control or beneficial ownership of more than 10% of the voting rights of an issuer’s outstanding voting securities and external management companies. The definition also covers any other insider that (i) in the ordinary course has access to material undisclosed information and (ii) directly or indirectly exercises, or has the ability to exercise, significant power or influence over the issuer’s business, operations, capital or development. This change is intended to lessen the number of insiders subject to reporting, while, in some cases, increasing such persons’ reporting obligations.
NI 55-104 also integrates certain exemptions to insider reporting that were available under the previous regime. Other changes include 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 NI 55-104. The new regime also accelerates the filing deadline from 10 calendar days to five calendar days for subsequent insider reports. However, NI 55-104 provides a transition period so that the five-day limit affects only those dispositions or transfers occurring after October 31, 2010.
Changes to Insider Reporting Specific to Derivative Transactions
NI 55-104 has integrated the former insider reporting regime for derivative transactions, the now-repealed Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions, bringing the reporting of derivative transactions in line with the reporting of transactions involving conventional securities. (Equity Monetization)
NI 55-104 introduces the term “related financial instrument”, which effectively broadens the concept of derivative instruments for purposes of insider reporting. A related financial instrument includes an instrument, agreement, security or exchange contract, the market price or payment obligations of which is derived from, referenced or based on the value, market price or payment obligations of a security, or any other instrument, agreement or understanding that affects, directly or indirectly, a person or company’s economic interest in a security or an exchange contract. The companion policy notes that related financial instruments include several instruments that may 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 primary insider reporting requirements set out in Part 3 of NI 55-104 apply to both securities and related financial instruments – an attempt to negate prior uncertainty surrounding both the characterization of certain derivative instruments as securities and the consequential application of the insider reporting rules to such instruments.
This broader concept of derivatives is a crucial part of a new supplemental insider reporting requirement. Reporting insiders must report any agreement, arrangement or understanding that would directly or indirectly alter the insider’s “economic exposure” to the issuer and that directly or indirectly involves a security or related financial instrument of the issuer. Economic exposure refers to a link between the economic or financial interests of a person and the issuer, and since the CSA uses economic interest broadly in the sense of the potential for gain or loss, it is evident that the CSA wants reporting insiders to report all transactions affecting any of their interests in the issuer. The supplemental insider reporting obligations set out in Part 4 of NI 55-104 are intended to capture derivative transactions, including equity monetization transactions, that may not otherwise be captured by the primary insider reporting requirements set out in Part 3 of NI 55-104.