On January 22, 2010, the Canadian Securities Administrators (“CSA”) published the National Instrument 55-104 - Insider Reporting Requirements and Exemptions (“NI 55 104”) which includes significant amendments to insider reporting requirements and exemptions that will be effective on April 30, 2010.

These amendments give effect, save for certain exceptions, to the proposals of the CSA of December, 2008. Please see our bulletin “The Canadian Securities Administrators Propose Major Amendments to Insider Reporting Requirements and Exemptions”.

The CSA, with the exception of the Ontario Securities Commission, will adopt NI 55-104, along with its companion policy, as part of an initiative to modernize, harmonize and streamline insider reporting in Canada. In Ontario, however, the main insider reporting requirements will remain set out in Part XXI of the Securities Act (Ontario) (“OSA”). The CSA specifies that, despite this difference, the substance of the requirements for insider reporting provided in NI 55-104 and in the OSA have been harmonized.

NI 55-104 consolidates into a single document the principal insider reporting requirements and most of the reporting exemptions that are currently set forth in the securities legislation of each jurisdiction. That being said, the NI 55- 104 does not amend either the procedural SEDI electronic filing requirements or the framework surrounding the use of undisclosed information and the various prohibitions imposed on insiders.

Summary of the Main Amendments

  • New definition of “insider reporting” reducing the number of persons required to file an insider report
  • Filing deadline reduced from 10 to 5 days for all but initial reports
  • Greater number of transactions to declare in insider reports, including those associated with related financial instruments
  • Simplification of the reporting requirements for stock-based compensation arrangements

Description of Proposals

The following text gives a brief description of the most significant changes made to the current regime.

New definition of “reporting insider”

The CSA is introducing a new definition of “reporting insider” in order to refocus filing requirements on a limited group of insiders. Consequently, only “reporting insiders” will be required to file an insider report. According to the CSA, the number of insiders subject to the reporting requirement will be significantly reduced.

This new definition of “reporting insider” which is composed of (i) a generic list of persons that includes, among others, all the directors and certain officers of the issuer, of any significant shareholder and of any major subsidiary and (ii) a basket provision that explicitly targets any other insider who (A) has received or has access to material undisclosed information and (B) has or can have significant power or influence over the issuer. The application of this general provision in determining if an insider is a reporting insider will necessarily require additional efforts in identifying insiders that could be subject to the reporting requirement.

The CSA have also modified the thresholds set out in the definition of “major subsidiary”, a fundamental element of the definition of “reporting insider”, by increasing them from 20% to 30% of the consolidated assets or revenues, therefore aiming to reduce the number of reporting insiders from subsidiaries of an issuer.

NI 55-104 takes up the concept of “significant shareholder” (another aspect of the concept of “insider” as it is currently defined in securities legislation), contemplating any person who has beneficial ownership of or control or direction over, whether direct or indirect, or a combination of beneficial ownership of and control or direction over, whether direct or indirect, securities of an issuer carrying more than 10% of the voting rights attached to all of the issuer’s outstanding voting securities. This definition, which is similar to the one used for the early warning system (National Instrument 62-104 – Take-over Bids and Issuer Bids), makes no distinction between the different classes of voting securities that may have different voting entitlements (ex.: multiple voting rights).

Concept of “post-conversion beneficial ownership”

In NI 55-104, the CSA also introduce the concept of “significant shareholder based on post-conversion beneficial ownership”. A person would therefore have “post-conversion beneficial ownership” of securities, including securities not yet issued, if such person is the beneficial owner of securities convertible into such securities within 60 days. Consequently, a person is a significant shareholder based on post-conversion beneficial ownership if such person is not a significant shareholder but has beneficial ownership of, post-conversion beneficial ownership of, control or direction over, or any combination of beneficial ownership of, postconversion beneficial ownership of, or control or direction over, whether direct or indirect, securities of an issuer carrying more than 10 percent of the voting rights attached to all the issuer’s outstanding voting securities. Consequently, a person who is a “significant shareholder based on post-conversion beneficial ownership” will be a “reporting insider”.

For example, a person who owns 9.9% of voting securities together with special warrants convertible into an additional 10% of the voting securities will have the same reporting requirements as a person holding 19.9% of the voting securities, (i) considering that voting securities could potentially be issued following the conversion of such warrants and (ii) in light of the total number of voting securities outstanding after such a conversion.

This concept is intended to ensure that a person cannot avoid a disclosure threshold by holding a convertible security rather than the underlying security directly.

Reportable transactions

NI 55-104 broadens the insider reporting requirement so as to include transactions involving related financial instruments. This requirement now provides that a reporting insider’s report must contain information not only on the beneficial ownership of, or control or direction over, securities of the reporting issuer, but also information on the interest in, or right or obligation associated with, any related financial instrument involving securities of that issuer.

This way, any transaction involving an instrument the value or obligations of which are derived from the value or obligations of a security, as well as any other transaction involving an agreement that affects a person’s economic interest in a security, will be subject to a reporting requirement.

NI 55-104 also includes a supplemental insider reporting requirement relating to certain agreements, arrangements or understandings that corresponds to the derivative transaction reporting requirements of Multilateral Instrument 55-103 - Insider Reporting for Certain Derivative Transactions (Equity Monetization) (which is presently in force in all jurisdictions, except for British Columbia), which it will replace.

Deadline for filing reduced to 5 days

Although the CSA have kept the current ten (10) day deadline for filing initial reports, they have accelerate to five (5) days the deadline for filing subsequent reports indicating any change in the beneficial ownership of an issuer’s securities (or the control it exercises thereon), or any change affecting its interest in, or rights or obligations associated with, any related financial instrument involving securities of that issuer. It is worth noting that a transition provision has been included as to provide insiders with a transition period of six (6) months to become familiar with this new reporting requirements. Consequently, the accelerated filing deadline for subsequent insider reports will become effective on October 31, 2010.

Simplification of stock-based compensation arrangements

The NI 55-104 now allows issuers the possibility of filing an “issuer grant report” on SEDI when granting options or similar securities under compensation arrangements. The directors and officers of a reporting issuer, who has filed an issuer grant report, can be exempted, upon certain conditions, from the requirement of filing an insider report for the acquisition of such securities. Reporting insiders who intend to rely on this exemption must first check that the issuer has already disclosed the material terms and conditions of the compensation arrangement and confirm that the issuer grant report contains all requisite information to that effect. However, reporting insiders will be required to report any subsequent transactions on such securities.

Report by certain designated insiders for certain historical transactions

In the interests of harmonization, provisions based on the “deemed insider look-back provisions” in the securities legislation of some jurisdictions are set forth in NI 55-104. Under these provisions, the CEO, CFO, COO and each director of an issuer may, in certain circumstances, be designated or determined to be insiders of a second issuer. These individuals are required to file, within ten (10) days of such designation or determination, insider reports for transactions involving securities of the second issuer for a period of up to six (6) months prior to such designation. The purpose of these provisions is to prevent directors and officers of a company from acquiring a significant interest in another company by “frontrunning” the acquisition through personal purchases of shares of the second company. These individuals will now be required to file insider reports in respect of these historical transactions on SEDI.

Existing Exemptions Maintained

As it will be replacing National Instrument 55-101 - Insider Reporting Exemptions, NI 55-104 also contains the reporting exemptions for automatic securities purchase plans, normal course issuer bids, publicly disclosed transactions and certain issuer events.