Canada: Expanded Relief From Insider Reporting Requirements

Originally published in Blakes Bulletin on Securities Law, January 2007

Proposed amendments to National Instrument 55-101 – Insider Reporting Exemptions (NI 55-101) expand relief from insider reporting requirements.

The Canadian Securities Administrators (the CSA) have published for comment proposed amendments to National Instrument 55-101 – Insider Reporting Exemptions (NI 55-101) and Companion Policy 55-101CP (55- 101CP). NI 55-101 provides exemptions from insider reporting obligations under Canadian securities legislation.

The CSA propose to make changes to NI 55-101 to broaden the definition of "major subsidiary", which would broaden the group of insiders who would have relief from insider reporting requirements. The proposed changes also would eliminate the requirement to maintain lists of insiders relying on certain exemptions from insider reporting requirements as a condition of the use of the exemptions. As well, the changes confirm the possible use of the automatic securities purchase plan (ASPP) exemption from insider reporting requirements for option plans while imposing conditions on such use.

Pursuant to Parts 2 and 3 of NI 55-101, insiders may qualify for exemption from insider reporting requirements provided that they satisfy certain conditions, including, among others, that they are not "ineligible insiders" of the reporting issuer. Ineligible insiders include, among others, any director of a "major subsidiary" of the reporting issuer or any senior officer of a principal business unit, division or function of a major subsidiary of the reporting issuer. At present, a subsidiary is a "major subsidiary" of a reporting issuer if either the assets or the revenues of the subsidiary (on a consolidated basis with its subsidiaries) are 10 per cent or more of the consolidated assets or revenues, respectively, of the reporting issuer, as included in the most recent annual audited financial statements of the reporting issuer.

It is proposed that the relevant percentages in the definition of major subsidiary be increased from 10 per cent to 20 per cent. This proposed change makes the insider reporting exemptions in Parts 2 and 3 of NI 55-101 available to directors or senior officers of subsidiaries which are major subsidiaries as presently defined, but which will not be major subsidiaries if the relevant percentages are increased from 10 per cent to 20 per cent.

Currently Part 4 of NI 55-101 requires, as a condition of the use of certain exemptions from insider reporting requirements in NI 55-101, that (a) an insider notify the reporting issuer that the insider intends to rely on an exemption in Part 2 or 3 of NI 55-101, (b) the reporting issuer maintain a list of insiders who are relying on exemptions from insider reporting requirements and a list of insiders who are not relying on the exemptions (or file an undertaking with the securities regulatory authorities that it will make those lists available to the regulatory authorities on request), and (c) the reporting issuer advise its insiders that the reporting issuer has established policies and procedures relating to insider trading and that, as part of those policies and procedures, the issuer is required to maintain the lists of insiders referred to above.

The proposed amendments would repeal these requirements. For eligible insiders who use the exemption in Part 2 or 3 of NI 55-101, it is no longer necessary for the reporting issuer maintain a list of insiders who are relying on such exemptions and a list of insiders who are not relying on such exemptions. However, it is proposed that such record-keeping be included in the related Companion Policy 55-101CP as an example of a best practice.

Currently section 5.1 of NI 55-101 provides that, subject to certain conditions, the requirement of an insider to file an insider report within 10 days of the acquisition of certain securities does not apply to certain acquisitions of securities under an ASPP. ASPPs are plans for the acquisition of securities of the reporting issuer pursuant to which the timing of acquisitions of securities, the number of securities which may be acquired under the plan by a director or senior officer of the reporting issuer (or certain subsidiaries of the reporting issuer) and the price payable for securities are established by written formula or criteria set out in plan documents. While this provision provides relief from the insider reporting requirements, section 5.3 of NI 55-101 provides that, subject to certain exceptions, any insider which has relied on the ASPP exemption must file an annual report disclosing, on a transaction-by-transaction basis or in acceptable summary form, each acquisition under the ASPP that has not been previously disclosed. Therefore the ASPP exemption is an insider reporting deferral, not a true exemption.

The proposed amendments provide for a new subsection 5.2(3) of NI 55-101 which explicitly provides that certain insiders can rely on the ASPP exemption for the grant of stock options and similar securities under an ASPP, but only if the reporting issuer has publicly disclosed in a news release filed on SEDAR the existence and material terms of the grant, including (a) the date the options or other securities were issued or granted, (b) the number of options or other securities issued or granted to each insider who is an executive officer (as defined in National Instrument 51-102 – Continuous Disclosure Obligations) or a director of the reporting issuer or a major subsidiary of the reporting issuer, (c) the price at which the options or other securities were issued or granted and the exercise price, and (d) the number and type of securities issuable on the exercise of the options or other securities.

This new provision does not provide a new exemption from insider reporting requirements for option grants, as the plan must still qualify as an ASPP. As few stock option plans qualify as an ASPP, it is not expected that this new provision will be widely used, particularly as it imposes additional reporting requirements which largely duplicate the information which would be contained in an insider report.

The CSA indicated that these proposed amendments to NI 55-101 and 55-101CP are an interim step, and that they will continue to review the appropriateness of current insider reporting requirements (including whether the insider reporting system would be more effective if it focused on a smaller group of insiders) and consider accelerating the time-frames for filing insider reports, as part of their plan to ultimately adopt harmonized insider reporting requirements across Canada.

Recent amendments to the Securities Act (Ontario) as part of Bill 151, Budget Measures Act, 2006 (No. 2) make certain changes to the provisions relating to insiders. Among other things, the amendments provide that the insider reporting rules will be changed to harmonize the definitions of "insider", "director", and "officer" with those of other Canadian jurisdictions (and consequently to repeal the definition of "senior officer"). In particular, this means that every individual who is designated as an officer of a reporting issuer under a by-law will be an insider, in addition to the specified officers in the current definition.

The amendments also extend the reporting requirements for insiders of a reporting issuer to include interests in "related financial instruments". The extension of reporting requirements to include interests in "related financial instruments" has an effect similar to the existing insider reporting rules presently contained in Multilateral Instrument 55-103 – Insider Reporting for Certain Derivative Transactions (Equity Monetizations). The definition of "related financial instrument" is an agreement, arrangement or understanding to which an insider of a reporting issuer is a party, the effect of which is to alter, directly or indirectly, the insider’s economic interest in a security of the reporting issuer or economic exposure to the reporting issuer. The term "economic interest in a security" is defined as a right to receive or the opportunity to participate in a reward, benefit or return from a security, or an exposure to a loss or a risk of loss in respect of a security and the term "economic exposure" in relation to a reporting issuer is defined as the extent to which the economic or financial interests of a person or company are aligned with the trading price of securities of the reporting issuer or the economic or financial interests of the reporting issuer.

In addition, the Ontario Securities Commission receives authority to make certain rules with respect to insider reporting requirements. Consequently, the definition of "insider" will include any person or company so designated by an Ontario Securities Commission order under subsection 1(11) of the Securities Act (Ontario) and exclude any person or company designated not to be an insider by an Ontario Securities Commission order under subsection 1(10) of the Securities Act (Ontario).

The amendments have not yet been proclaimed in force.

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