Canadian Securities Administrators Announce New Insider Reporting Regime
On January 22, 2010, the Canadian Securities Administrators (CSA) published an advanced notice of the adoption of a new insider reporting regime that aims to harmonize, simplify and streamline how insiders report their operations to the public. The CSA has elected to consolidate the main reporting requirements into one single regulation, National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104). The new regulation will establish consistent insider reporting requirements applicable in all CSA jurisdictions, except in Ontario, where the principal insider reporting requirements will remain under the Ontario Securities Act.
The comment period for the proposed materials submitted by the CSA expired on March 19, 2009, and entry into force of NI 55-104 is scheduled to take place on April 30, 2010. This article highlights several of the upcoming changes.
Introduction of the Term of "Reporting Insider" and Reduction of the Numbers of Insiders Required to File Insiders' Reports
The CSA adopted in NI 55-104 a principled approach to insider reporting by significantly narrowing the class of insiders required to file reports, and by introducing the novel term of "reporting insider." The Instrument enumerates a list of insiders who typically receive or have access to information as to material facts or material changes concerning the reporting issuer before these facts or changes are disclosed, and insiders who exercise significant power or influence over the business, operations, capital or development or the reporting issuers. Such insiders include CEOs, CFOs and COOs (of the issuer and of any major subsidiary), directors and significant shareholders of the reporting issuer (actual or based on post-conversion beneficial ownership), among others. The novelty of the Instrument rests in the addition of a "basket" provision, which seeks to include all insiders who may not be enumerated (and may not in some cases be "insiders" under securities legislation), but who satisfy the two criteria of access to material information and influence over the reporting issuer. Finally, insiders who are enumerated but who do not satisfy the two criteria may avail themselves of an exemption pursuant to the Instrument.
The CSA also modified the definition of "major subsidiary," increasing the percentage threshold for a company to qualify as a subsidiary of an issuer from 20 per cent of assets and revenues to 30 per cent of assets and revenues of such issuer. This increase narrows significantly the class of insiders required to file reports.
Concept of Post-Conversion Beneficial Ownership
The CSA has adopted 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 such as options or warrants, rather than the underlying securities directly.
Hence, a person or a company will qualify as the beneficial owner of securities at a given date if such person or company holds a security convertible in the underlying security within 60 days of that given date. Consequently, the new concept of "significant shareholder," which leads to qualification as a reporting insider, will include any holder of securities held but not yet converted, and which would amount to 10 per cent of the voting rights attached to all of the issuer’s outstanding voting securities after conversion.
Reporting Deadline Reduced from 10 Days to Five
Although the 10-day delay for filing initial insider reports is maintained, NI 55-104 provides for a shortened filing period of five days for subsequent reports disclosing a change in the beneficial ownership of securities of the reporting issuer, as well as a change in the reporting insider’s interest in a related financial instrument involving a security of the reporting issuer. The CSA supplemented its December 2008 proposal with a six-month transition period following the entry into force of the Instrument, in order to provide insiders and issuers adequate time to familiarize themselves with the new accelerated reporting requirements.
Impact of NI 55-104 on Derivatives Transactions
In its Companion Policy to NI 55-104, the CSA explains that the Instrument purports to put an end to the uncertainty as to whether certain derivative instruments constitute securities, and consequently whether such instruments should be the object of insider reporting requirements. This was done by subsuming the notion of derivative instruments under the notion of "related financial instrument," targeted by the Instrument’s primary and supplemental insider reporting requirements. Consequently, reporting requirements previously contained in the Multilateral Instrument 55-103 Insider Reporting for Certain Derivatives Transactions (Equity Monetization) have been integrated into the Instrument.
Clarification of Stock-Based Reporting Requirements, Related Exemption and Introduction of the Issuer Grant Report
The CSA also simplified and created more consistency among the insider reporting requirements relating to certain stock-based compensation arrangements. The new definition of "compensation arrangements" in NI 55-104 includes "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 of these stock-based compensation arrangements in a single definition, the reporting requirements will apply consistently to all stock-based compensation arrangements.
The CSA hence establishes an exemption from direct reporting by certain insiders (directors and officers of the reporting issuer and of the important subsidiary of the reporting issuer) for securities received under compensation arrangements, provided that the issuer has previously disclosed the existence and material terms of such compensation agreement on SEDAR and, in the case of acquisition of securities, provided that the reporting issuer has previously filed an issuer grant report on SEDI.
In addition, to benefit from the exemption, the director or officer must have complied with the provisions regarding alternative reporting by filing an insider report disclosing each acquisition and disposition of securities under a compensation arrangements not previously disclosed. As a result, the insider would be relieved from the obligation to file an insider report in respect of the grant by the regular deadline, and instead be allowed to file an alternative activity or status report on an annual basis.