Under Ontario law, insiders are prohibited from purchasing or selling securities of an issuer with knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed ("material undisclosed information"). However, the purchase or sale by insiders of securities of issuers with material undisclosed information may be exempt from this prohibition where the purchase or sale is effected pursuant to "automatic securities dispositions plans" or "automatic securities purchase plans" (referred to in this article collectively as "automatic securities trading plans" or "ASTPs"). Ontario Securities Commission ("OSC") Staff Notice 55-701 – Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (the "Staff Notice") sets out the view of the staff of the OSC in this regard.
An ASTP is generally an arrangement whereby an insider will instruct his or her broker to purchase or sell securities on the insider's behalf in accordance with a pre-determined set
of instructions. The ASTP will usually contemplate that the broker will continue to purchase or sell securities on behalf of the insider regardless whether a "blackout" period established by the issuer is in effect or whether the insider is in possession of material undisclosed information at the time of the purchase or sale.
Ontario law provides that an insider will be exempt from the prohibition against purchasing or selling with knowledge of material undisclosed information where the purchase or sale is made by the insider through an "automatic dividend reinvestment plan, share purchase plan or other similar automatic plan" which the insider entered into before he or she acquired the material undisclosed information.
When is the Exemption Available?
The Staff Notice provides that an ASTP will be considered "automatic" when the insider no longer has the ability to make decisions relating to the trading of the securities held under the ASTP, and when the following conditions are met:
- At the time of entry into the plan, the insider is not in possession of any material undisclosed information in relation to the issuer.
- At the time of entry into the plan, in the case of plans that have not been established by the issuer, the insider provides the broker with a certificate from the issuer confirming that the issuer is aware of the plan and certifying that, to the best of its knowledge, the insider is not in possession of material undisclosed information about the issuer.
- The trading parameters and other instructions are set out in a written plan document at the time of the establishment of the plan. The plan contains meaningful restrictions on the ability of the insider to vary, suspend or terminate the plan that have the effect of ensuring that the insider cannot profit from material undisclosed information through a decision to vary, suspend or terminate the plan. [emphasis added]
- The plan provides that the broker is not permitted to consult with the insider regarding any sales under the plan and that the insider cannot disclose to the broker any information concerning the issuer that might influence the execution of the plan. The plan to purchase or sell securities was given or entered into in good faith and not as part of a plan or scheme to evade the insider trading prohibitions.
- The Staff Notice states that meaningful restrictions on the insider's ability to vary, suspend or terminate the ASTP could include, for example, a requirement that the insider notify the issuer and the public (via a filing of an insider report) of a change in instruction, which filing would include a representation that the insider is not in possession of any material undisclosed information.
Other restrictions might include: (a) implementing a mandatory wait period after an ASTP is established before purchases or sales can be made under the ASTP; (b) implementing mandatory delay periods (such as 30 or 45 days) in the implementation of instructions to vary, suspend or terminate the ASTP; and (c) limiting the number of amendments which may be made to the ASTP to, say, one amendment during the life of the ASTP.
Insiders (and issuers who establish an ASTP for their insiders) should ensure that the ASTP contains clear trading instructions to avoid potential misinterpretations by the broker or other plan administrator. Another factor to be considered is the timing of trades – an ASTP which results in trades being made at regular intervals over a period of time may be easier to defend in regulatory review than one which results in large sales over short periods of time, as advantageous trades will be analyzed in hindsight.
Moreover, issuers whose insiders wish to initiate such ASTPs should consider implementing a policy setting out the rules and parameters with which insiders must comply.
What Disclosure is Required?
According to the Staff Notice, whether the insider's entry into an ASTP will trigger a disclosure obligation will depend on the circumstances of the ASTP. In making this determination, the following questions should be considered:
- Where the plan is established by the issuer, the issuer should consider whether establishing the plan constitutes a "material change" thereby triggering the requirement for a news release and a material change report.
- The issuer and insider should consider whether the establishment of the plan is a "material fact," with the result that no person with knowledge of such a material fact, which has not been generally disclosed, can trade until general disclosure is made.
- The insider should consider whether entering into the arrangement involves a change in "direct or indirect… control or direction" over the insider's securities. If yes, then an insider report is required at the time the arrangement is entered into.
- The insider should consider whether entering into an arrangement involves a change in the insider's "economic interest" in a security of the issuer, or the insider's "economic exposure" to the issuer. If yes, then entering into the arrangement will trigger a disclosure requirement under MI 55-103 – Insider Reporting for Certain Derivative Transactions (Equity Monetization), unless an exemption to that instrument is available.
The Staff Notice provides further that, even if the issuer and insider conclude that there is no legal requirement to disclose the existence of the ASTP at the time the ASTP is established, it may nevertheless be advisable to disclose the existence of the ASTP on a voluntary basis in order to eliminate questions about apparent trading activity by insiders during blackout periods and periods when the insiders may have access to material undisclosed information.
The insider will generally be required to file insider reports each time there is a purchase or sale under an ASTP. However, as a result of amendments to NI 55-101 – Insider Reporting Exemptions, certain purchases and sales under an ASTP may be reported on an annual basis. NI 55-101 should be consulted to determine what the applicable reporting requirements are with respect to particular purchases and sales made pursuant to an ASTP.
ASTPs can help limit the exposure of insiders to allegations or charges of purchasing or selling an issuer's securities with knowledge of material undisclosed information. However, a number of factors should be considered by issuers and insiders when implementing, varying, suspending or terminating an ASTP, or by issuers when establishing policies relating to ASTPs.