On January 22, 2010, the Canadian Securities Administrators (the CSA) published the final version of National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104), together with a Companion Policy and related consequential amendments, which will come into effect on April 30, 2010.
The new rule, originally published for comment on December 18, 2008, updates the Canadian insider reporting regime and provides for a number of significant changes, including:
- accelerating the deadline for filing insider reports from 10 days to 5 days, effective after October 31, 2010;
- limiting the requirement for insider reports to a narrower class of “reporting insiders”;
- extending the concept of deemed beneficial ownership from the take-over bid regime to insider reporting;
- further integrating reporting of derivative transactions with securities transactions; and
- amending the insider reporting exemption for eligible institutional investors under National Instrument 62-103 The Early Warning System and Related Take- Over Bid and Insider Reporting Issues (NI 62-103).
The CSA has decided to withdraw the proposal to require issuers to include information circular disclosure on whether any of their insiders have been subject to late filing fees for insider reports. Given the lack of a uniform approach to late fees among the CSA jurisdictions, this is a welcome change to the rule. The CSA may revisit this proposal in connection with future efforts to harmonize the consequences of late insider reporting.
Acceleration of the Filing Deadline
The reporting deadline for trades by reporting insiders has been shortened from 10 calendar days to 5 calendar days. NI 55-104 provides for an additional 6-month transition period for the new deadline. Accordingly, the new deadline will be in effect for transactions that occur after October 31, 2010.
The “reporting insider” concept
One of the key changes in NI 55-104 is to require insider reports from a sub-set of insiders of a reporting issuer. The definition of “reporting insider” includes those insiders that are most likely to (i) have ordinary course access to material undisclosed information concerning a reporting issuer; and (ii) directly or indirectly exercise, or have the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer. For example, rather than including all officers of a reporting issuer, only the chief executive officer, chief operating officer and chief financial officer are explicitly listed. This change should simplify compliance for many large issuers, remove the impetus for a number of rule exceptions and routine exemptions and improve the relevance of insider reports generally.
The reporting insider definition also includes a policy-based basket clause that captures any insider that meets the two criteria of access and power or influence.
Deemed Beneficial Ownership
Significant shareholders are included in the definition of reporting insider. Beneficial ownership of, or control or direction over, securities with more than 10% of the voting rights attached to a reporting issuer’s securities are the defining attributes of a significant shareholder. NI 55-104 introduces the concept of a “significant shareholder based on post-conversion beneficial ownership.” Similar to the take-over bid regime, a shareholder is considered to beneficially own any securities that may be acquired within 60 days. Accordingly, a shareholder who holds less than 10% of the votes attaching to the outstanding securities of a reporting issuer may be a reporting insider as a result of holding convertible securities, such as warrants, or through other rights to acquire securities. As under the take-over bid regime, the existence of any conditions to the right to acquire securities, such as payment of an exercise price, are ignored and only those securities that may be acquired by the particular shareholder are deemed to be outstanding for the purposes of determining the percentage ownership. Accordingly, the level of post-conversion beneficial ownership calculated under the rule may be larger than the percentage ownership of a shareholder on a fully diluted basis.
The insider reporting requirement now applies to both (i) direct or indirect changes in beneficial ownership of, or control or direction over, securities of a reporting issuer, and (ii) interests or rights associated with related financial instruments involving a security of the reporting issuer.
The definition of a related financial instrument includes derivatives and other instruments that affect a reporting insider’s economic interest in securities of a reporting issuer or economic exposure to a reporting issuer. Accordingly, economic arrangements, such as total return swaps, that were formerly subject to disclosure under Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions (Equity Monetization) are now integrated in the primary insider reporting requirement. NI 55-104 also includes a supplementary insider reporting obligation that applies to any other agreement, arrangement or understanding that has the effect of altering a reporting insider’s economic exposure to a reporting issuer that involves a security of the reporting issuer or a related financial instrument.
The broad definition of the insider reporting requirements in NI 55-104 makes it clear that reporting insiders are expected to disclose all dealings that affect their interests in the reporting issuer. The Companion Policy and response to the comments published with NI 55-104 indicate that the CSA expects all transactions to be reported, including cash-settled and synthetic arrangements.
It is important to note, however, that economic interests acquired by entities that are not reporting insiders need not be disclosed, regardless of the magnitude of such interests. Accordingly, an investor may be able to hold a significant economic interest in a reporting issuer without triggering a disclosure requirement if it avoids acquiring control or direction, beneficial ownership or deemed beneficial ownership of securities with more than 10% of the voting rights attached to a reporting issuer’s securities.
The acquisition of voting rights without a corresponding economic interest would not be captured by the related financial instrument concept or the supplemental insider reporting requirement. However, the Companion Policy to NI 55-104 indicates that a person that has or shares voting power, including the power to direct the voting of securities, will generally have control or direction of the securities, which may trigger the primary insider reporting obligation.
The response to comments indicates that the CSA is continuing to review issues relating to empty voting and hidden ownership as part of a separate policy initiative.
Changes for Eligible Institutional Investors
The CSA originally proposed to exclude the supplemental insider reporting obligation under Part 4 of NI 55-104 from the scope of the insider reporting exemption provided for eligible institutional investors under NI 62-103. However, in response to comments, the final version of the consequential amendments to NI 62-103 continues to allow an eligible institutional investor to file exclusively under the early warning or alternative monthly reporting regimes, provided that it discloses its position under related financial instruments in its early warning or alternative monthly reports and treats a significant change to its position as a change in a material fact giving rise to an obligation to amend the report. Changes in interests in, or rights or obligations associated with, related financial instruments that have a similar economic effect as an increase or decrease of 2.5% of the investor’s securityholding percentage of voting or equity securities of the reporting issuer are considered to be significant. The corresponding requirement to treat actual changes in an eligible institutional investor’s securityholding percentage of voting or equity securities as a change in a material fact continues to apply only to decreases of 2% or more.
Eligible institutional investors must ensure that their early warning or alternatively monthly reports disclose their position under related financial instruments by April 30, 2010 in order to maintain their eligibility for the insider reporting exemption under NI 62-103.
The final version of NI 55-104 and the related materials are available here.