On January 22, 2010, the Canadian Securities Administrators (CSA) published advance notice that they will adopt a new reporting regime for insiders of public issuers in Canada (the New Insider Reporting Rules). The new streamlined regime will be reflected in National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104), its Companion Policy and related amendments and is anticipated to take effect on April 30, 2010. The key changes introduced in the new regime include:
- the deadline for filing insider trading reports (other than initial reports) will be reduced from 10 calendar days to 5 calendar days. This change will take effect following a 6-month transition period
- the number of insiders required to file insider reports will be reduced to those persons that have access to material undisclosed information regarding the reporting issuer and significant influence over the reporting issuer
- the stock-based compensation reporting requirements will be simplified and will give issuers the option to file reports on behalf of insiders
REDUCTION OF PERSONS REQUIRED TO REPORT INSIDER TRADING
The New Insider Reporting Rules will reduce the number of persons required to file insider reports by focusing the reporting requirement on those insiders who have access to material undisclosed information regarding the issuer and who exercise significant influence over the issuer.
Concept of Reporting Insider: The New Insider Reporting Rules will reduce the number of insiders required to file insider reports by imposing the reporting requirements only on those persons who are “reporting insiders”. An insider of a reporting issuer will be a reporting insider if the insider is:
- the CEO, CFO or COO or a director of the reporting issuer, a significant shareholder of the issuer or a major subsidiary of the issuer;
- a person or company responsible for a principal business unit, division or function of the issuer;
- a significant shareholder of the issuer (including a significant shareholder of the issuer based on post-conversion beneficial ownership of securities and the CEO, CFO, COO and any director of that significant shareholder);
- a management or services company providing significant services to the issuer or a major subsidiary of the issuer and the management company’s directors, CEO, CFO, COO and significant shareholders;
- an individual who performs similar functions to the functions described in (a) to (d);
- the reporting issuer who holds its own securities by reason of a repurchase, redemption or other acquisition; or
- any other insider who in the ordinary course receives or has access to material undisclosed information regarding the issuer and who directly or indirectly exercises significant power or influence over the business, operations, capital or development of the reporting issuer.
The new concept of reporting insider will significantly simplify insider reporting for those issuers with large numbers of officers by imposing the reporting obligations only on those officers who are CEOs, CFOs and COOs or who receive or have access to material undisclosed information regarding the reporting issuer and have significant power or influence over the business of the reporting issuer.
Significant Shareholder: For the purposes of the definition of a reporting insider, a shareholder will be a significant shareholder where that shareholder has beneficial ownership of, or control or direction over, directly or indirectly, securities of an issuer carrying more than 10% of the voting rights attached to all securities of the issuer or management company. A reporting insider also includes a significant shareholder based on a calculation of post-conversion beneficial ownership of securities. A person or company will be considered to have post-conversion beneficial ownership of a security on a particular date if they beneficially own securities which are convertible into that security within 60 days following that date or have a conditional or unconditional right or obligation to acquire the issuer’s security within the same time period. If the significant shareholder threshold of 10% of voting rights is met by virtue of the rights attached to the underlying securities then the shareholder will be considered to be a significant shareholder subject to the reporting requirements. In making the calculation as to whether the 10% threshold has been met, a shareholder is entitled to rely on the most recent information provided by the issuer in its most recent MD&A or material change report filed on SEDAR.
Major Subsidiary: A subsidiary of an issuer will be considered a major subsidiary of a reporting issuer if the assets or revenues of the subsidiary represent 30% or more of the consolidated assets or revenues of the reporting issuer. The current rules have a 20% threshold.
Look Back for Historical Transactions: Where an issuer (a first issuer) becomes an insider of a reporting issuer (the second issuer), the CEO, CFO, COO and every director of the first issuer are deemed to be insiders of the second issuer and must file insider reports in respect of securities transactions of the second issuer that occurred within the prior six-month period (or such shorter period during which they acted as an officer or director). The CEO, CFO, COO and directors of the second issuer will also be required to file insider reports for the same period in respect of securities transactions in the first issuer’s securities.
REPORTING STOCK-BASED COMPENSATION ARRANGEMENTS
The New Insider Reporting Rules introduce a new exemption which will simplify the reporting requirements for certain issuer grants made under stock-based compensation arrangements such as options, SARs, DSUs and RSUs. The exemption recognizes that certain transactions in these sorts of arrangements are within the control of the issuer and do not involve an investment decision of the reporting insider. Directors and officers are exempt from filing individual insider reports in respect of acquisitions or specified dispositions of securities or related financial instruments under such arrangements provided the reporting issuer has filed an “issuer grant report” on SEDI within 5 calendar days of such transaction and has disclosed the existence of the material terms of the arrangement in a public filing on SEDAR. Specified dispositions are those which are incidental to the compensation arrangement and do not involve a discreet investment decision of the reporting insider or which are made to satisfy a tax withholding obligation. A director or officer, although exempt from the individual reporting requirement, will be required to file an alternative report with respect to such transactions on an annual basis. Alternative reports are due by March 31, in each year with respect to prior calendar year transactions.
REPORTING IN DERIVATIVE TRANSACTIONS
Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions will be repealed on April 30, 2010 and the obligations contained therein will be included in the New Insider Reporting Rules. The new rules will therefore require reporting not only of any change of beneficial ownership of or control or direction over securities of a reporting issuer but also any change in a reporting insider’s interest in, or right or obligation associated with a related financial instrument involving a security of the reporting issuer. A related financial instrument includes instruments such as derivatives (any instrument, agreement or 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) and any other instruments, agreements or understandings that affect, directly or indirectly, a person’s economic interest in a security or exchange contract. In addition to this primary filing obligation, the new rules provide for a supplemental reporting requirement pursuant to which a reporting insider must report the entering into, material amendment or termination of any agreement or understanding if it alters, directly or indirectly, the reporting insider’s economic exposure to the issuer and involves a security of the issuer or a related financial instrument of the reporting issuer if the reporting insider is not otherwise required to file an insider report. Therefore the rule catches certain derivative based transactions that previously may have fallen outside the reporting regime.
EXEMPTION FOR ELIGIBLE INSTITUTIONAL INVESTORS
Eligible institutional investors will be exempt from the New Insider Reporting Rules if they have made similar disclosure in early warning reports as set out in National Instrument 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.
TIME PERIOD FOR FILING REPORTS
The New Insider Reporting Rules will continue to require that an initial insider report showing a reporting insider’s beneficial interest in an issuer’s securities or a related financial instrument involving a security of the reporting issuer be filed within 10 calendar days of the reporting insider becoming a reporting insider of the issuer. The period for filing a subsequent insider report in respect of any change in such ownership or interest in the issuer’s securities will be reduced from 10 days to 5 calendar days. The new accelerated filing deadline will not take effect until 6 months after the New Insider Reporting Rules take effect (i.e., after October 31, 2010). The new regime clarifies the CSA’s view that the relevant changes to beneficial ownership occur at the time an offer to buy or sell is accepted and not when the trade is settled.
It is anticipated that the New Insider Reporting Rules will take effect on April 30, 2010. As amendments to the Securities Act (Ontario) are required to introduce the new regime in Ontario, the New Insider Reporting Rules will come into force in Ontario on the later of April 30, 2010 or the date the necessary amendments to the Securities Act (Ontario) are proclaimed in force.