Summary

The new insider reporting regime coming into effect on April 30, 2010 will:

  • reduce the number of persons required to file insider reports;
  • after October 31, 2010, accelerate the filing requirement from 10 calendar days to five calendar days;
  • simplify and make more consistent the reporting requirements for stock-based compensation arrangements; and
  • facilitate insider reporting of stock-based compensation arrangements by allowing issuers to file an “issuer grant report” in a similar manner to the current “issuer event report”.

The New Materials

The Canadian Securities Administrators (“CSA”) are adopting a new National Instrument 55-104 Insider Reporting Requirements and Exemptions (the “New Instrument”) and Companion Policy 55-104CP Insider Reporting Requirements and Exemptions (the “New Policy”) (together, the “New Materials”). The New Instrument sets out the main insider reporting requirements and exemptions from those requirements for insiders of reporting issuers, except in Ontario. In Ontario, the main insider reporting requirements will remain in the Securities Act (Ontario). Despite this difference, the substance of the requirements for insider reporting will be the same across the CSA jurisdictions. The New Policy provides guidance as to how the CSA would interpret or apply certain provisions of the New Instrument. Except in Ontario, the New Materials will come into force on April 30, 2010. In Ontario, the New Materials will come into force on the later of the following: (a) April 30, 2010; and (b) the date certain amendments to the Securities Act (Ontario) are proclaimed into force.

Concept of “Reporting Insider”

The insider reporting requirements and exemptions in the New Instrument apply to insiders that are “reporting insiders” as defined in the New Instrument. The CSA developed the term “reporting insider”1 specifically for the purposes of the New Instrument. The insider reporting requirements are focused on a core group of persons and companies who, in some cases, are not “insiders” as defined in securities legislation. The term “reporting insider” contains a list of persons and companies, as well as a “basket” provision at the end. The list includes, among others, the CEO, CFO or COO of the reporting issuer, of a significant shareholder of the reporting issuer or of a major subsidiary of the reporting issuer; a director of same; a person or company responsible for a principal business unit, division or function of the reporting issuer; and a significant shareholder of the reporting issuer. In addition to the enumerated positions, a person or company, regardless of title or position, that:

  1. 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
  2. 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,

will also fall within the definition of a “reporting insider” and will now be required to file insider reports.

Reporting Requirements and Deadlines

The primary insider reporting requirement is set out in Part 3 of the New Instrument. It covers securities of the reporting issuer as well as “related financial instruments”, such as options, warrants and other convertible or exchangeable securities (discussed under “Stock-Based Compensation Arrangements” below). The New Instrument retains the ten day deadline for filing initial reports to accommodate new filers and the time associated with creating new insider profiles on the System for Electronic Disclosure by Insiders (“SEDI”). A reporting insider must file an initial report disclosing the reporting insider’s:

  1. beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer, and
  2. interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer.

If there is a change to any of the above, a reporting insider must file a subsequent report within five days of such change disclosing the change. However, the New Instrument provides for a six-month transition period for the filing deadline, whereby a reporting insider may file a subsequent report within 10 days of a change if the change relates to a transaction that occurred on or before October 31, 2010.

Part 4 of the New Instrument contains the supplemental insider reporting requirement. Because Part 3 of the New Instrument requires reporting insiders to file insider reports about transactions involving “related financial instruments”, most derivative transactions that were previously subject to a reporting requirement under former Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions (Equity Monetization) will now be subject to the primary insider reporting requirement under Part 3 of the New Instrument. If a reporting insider enters into, materially amends, or terminates an equity monetization transaction or other derivative-based transaction that falls outside of the primary insider reporting requirement in Part 3 of the New Instrument, the reporting insider must report the transaction under Part 4 within five days of the event. There is a six-month transition period for this filing deadline as well.

Stock-Based Compensation Arrangements

The CSA simplified and made more consistent the insider reporting requirements relating to different types of stock-based compensation arrangements, such as stock options, phantom stock units, stock appreciation rights, restricted share awards, deferred share units, and similar instruments. Historically, there has been some uncertainty as to whether, as a matter of law, certain derivative instruments involving securities are themselves securities. The New Instrument resolves this uncertainty by including derivative instruments in the definition of “related financial instrument”2. Under the New Instrument, it is not necessary to determine whether a particular derivative instrument is a security or a related financial instrument since the insider reporting requirement in Part 3 of the New Instrument applies to both securities and related financial instruments.

Issuer Grant Reports

Part 6 of the New Instrument contains an exemption from the insider reporting requirement for directors and officers of a reporting issuer or a major subsidiary of a reporting issuer who are reporting insiders of the reporting issuer for certain grants of securities and related financial instruments under a “compensation arrangement”3 established by the reporting issuer or by a subsidiary of the reporting issuer. The CSA introduced the exemption to reduce the regulatory burden on insiders that is associated with insider reporting of stock options and similar instruments. The exemption allows an issuer to file a single issuer grant report on SEDI.

A director or officer can use the exemption in Part 6 if (a) the reporting issuer has previously disclosed the existence and material terms of the compensation arrangement in an information circular or other public document filed on SEDAR; (b) in the case of an acquisition of securities, the reporting issuer has previously filed in respect of the acquisition an issuer grant report on SEDI; and (c) the director or officer complies with the alternative reporting requirement in Part 6.

There is no required format for an issuer grant report but it must include the information required by Part 6. An issuer is not required to file an issuer grant report. If the issuer has not made the required disclosure within the required time, the reporting insider must report the grant within the required time and in accordance with the normal reporting requirements under Part 3 of the New Instrument. If the issuer chooses to file an issuer grant report, a director or officer must file an insider report, in the case of any security acquired under the compensation arrangement during a calendar year that has not been disposed of or transferred and any security that has been disposed of or transferred as part of a specified disposition of a security (as defined in Part 6), on or before March 31 of the next calendar year.

This article highlights some of the aspects of the new insider reporting regime and does not constitute an exhaustive analysis of the new rules.