CSA Propose Changes to Insider Reporting Regime: Proposed NI 55-104
February 27, 2009
Robert D. Chapman
Edward P. Kerwin
In December 2008, the Canadian Securities Administrators (CSA) published for comment proposed National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) and a related companion policy. They are intended to modernize, harmonize, consolidate and streamline insider reporting in Canada.
The proposed new Instrument would establish consistent insider reporting requirements applicable in all CSA jurisdictions except Ontario, where the principal insider reporting requirements will remain in the Ontario Securities Act (although they will be substantially the same across all CSA jurisdictions).
Although the proposed changes do not directly affect the System for Electronic Disclosure by Insiders (SEDI), the CSA consider that several of the changes should help issuers and insiders comply with their filing obligations relating to SEDI.
The comment period ends on March 19, 2009. This article highlights several of the proposed changes.
Reduction of the Number of Insiders Having to File Insider Reports
The insider reporting regime under the proposed NI 55-104 would replace the current broad "catch and release" approach with a more principled approach that focuses the reporting requirement on a narrower, core group of insiders. The CSA proposals would reduce the number of insiders having to file reports by limiting the reporting requirements to persons who are defined as "reporting insiders." These "reporting insiders" are referred to as "a core group with the greatest access to material undisclosed information and the greatest influence over the reporting issuer." NI 55-104 provides a list of such persons or companies who are considered by the CSA to be "reporting insiders," on the bases that they receive or have access in the ordinary course to material undisclosed information concerning the issuer prior to general disclosure and that they exercise, or have the ability to exercise, significant power or influence over the reporting issuer. The CSA also propose amending the definition of "major subsidiary" (currently found in NI 55-101 Insider Reporting Exemptions) to increase the percentage threshold for a company to be considered a subsidiary of an issuer from 20 per cent of assets or revenues to 30 per cent. This proposal is seen by the CSA as a way to reduce the number of persons required to file insider reports, particularly for large issuers with many subsidiaries and affiliates.
Reporting Deadline Reduced from 10 Days to Five
It is also proposed to reduce the deadline for reporting by insiders of changes in ownership of, or control or direction over, securities of a reporting issuer from 10 days to five. However, the CSA wish to preserve the current 10-day period for filing initial reports when a person first becomes an insider of a reporting issuer.
Simplification of Stock-Based Reporting Requirements
The CSA also wish to simplify and make more consistent the insider reporting requirements relating to certain stock-based compensation arrangements. The proposed definition of "compensation arrangements" in NI 55-104 would include "options, stock appreciation rights, phantom shares, restricted shares or restricted share units, deferred share units, performance units or performance shares, stock, stock dividends, warrants, convertible securities, or similar instruments." By regrouping all these stock-based compensation arrangements in a single definition, the reporting requirements will apply consistently to all stock-based compensation arrangements, which is not the case under the current National Instrument 55-101 Insider Reporting Exemptions and other related instruments.
Concept of Post-Conversion Beneficial Ownership
The CSA propose to introduce the concept of "significant shareholder based on post-conversion beneficial ownership," which is intended to prevent persons from circumventing disclosure threshold by holding convertible securities rather than the underlying securities directly. The concept of "significant shareholder" will be introduced, which would include a person who has beneficial ownership of, or control or direction over, or a combination thereof, convertible and non-convertible securities of a particular issuer where these securities represent more than 10 per cent of the voting rights attached to all of the issuer’s outstanding voting securities.
Introduction of the Issuer Grant Report
The CSA propose to introduce an exemption from direct reporting by certain insiders, whereby an issuer would file on SEDAR an "issuer grant report" concerning transactions for the account of an insider originating from or initiated by the issuer, such as the grant of stock options. Such a filing by the issuer would exempt the related insider from the obligation to file an insider report in respect of the grant by the regular deadline, and instead allow the insider to file an alternative activity or status report on an annual basis.
Report by Certain Designated Insiders for Certain Historical Transactions
The CSA propose that directors and officers of an issuer might, in certain circumstances, be deemed to be insiders of an issuer other than the issuer for whom they file reports, and, consequently, be required to file "look-back" insider reports regarding historical transactions involving this other issuer that occurred in the previous period of up to six months. The purpose of this modification, the CSA maintains, is to address concerns over directors and officers of a company attempting to acquire a significant interest in another issuer by "front-running" the acquisition through personal purchases of shares of such other issuer.
Disclosure of Late Filings in Circulars
Finally, the CSA propose amending Form 51-102F5 Information Circular in order to require an issuer to disclose, in its information circular, whether any of its insiders have been late in filing their insider reports.
The CSA indicated in their publication of NI 55-104 that they are reviewing, and inviting comment on, issues relating to the potential use of derivatives, such as equity swaps, to avoid early warning requirements, insider reporting requirements, and similar securities law disclosure requirements that are based on the concepts of beneficial ownership and control or direction. The CSA also invited comment on the use of these derivatives to acquire voting rights with no accompanying economic stake in an issuer. The CSA noted that there have been recent proposals in other jurisdictions for disclosure-based reforms to deal with these problems.