Canada: Automatic Securities Disposition Plans

This article was originally published in Blakes Bulletin on Securities Law - June 2006

Staff of the Ontario Securities Commission (the OSC) have provided guidance on automatic securities disposition plans (ASDPs). On June 2, 2006, OSC staff published Staff Notice 55-701 (the Notice) responding to questions and issues with respect to ASDPs pending the development by the Canadian Securities Administrators of a CSA Staff Notice.

ASDPs typically involve an insider instructing a broker to sell securities from the insider’s holdings in accordance with a pre-arranged set of instructions, independent of restrictions that may otherwise be placed on insiders’ selling activities, such as issuer imposed blackout periods.

Section 175(2)(b) of the regulations to the Securities Act (Ontario) provides for an exemption from the general prohibition on insiders of an issuer trading securities with knowledge of an undisclosed material fact or material change with respect to the issuer. The exemption is in respect of purchases or sales made pursuant to an automatic dividend reinvestment plan, share purchase plan or "other similar automatic plan" that was entered into by the person or company prior to the acquisition of knowledge of the material fact or material change.

The Notice provides that, in Ontario, an "other similar automatic plan" can include an ASDP. An "automatic" plan is one in which insider cannot make "discrete investment decisions" - that is, where the insider does not have the discretion or ability to directly or indirectly make decision relating to trading in the securities in the plan. For ASDPs, trades must be made pursuant to a pre-determined mechanical formula that does not involve an investment decision other than the decision to enter into the plan in question.

The Notice states that an ASDP should include a written document setting out the trading parameters and other instructions, the insider should not have any discretion in any specific transactions within the plan, there should be meaningful restrictions on the ability of the insider to vary, suspend or terminate the plan itself, consultation between the broker and the insider regarding transactions within the plan should be prohibited, and more generally, the plan must be entered into in good faith and not as part of scheme to evade the insider trading prohibitions. To qualify for the exemption from the insider trading prohibition, an insider must establish that he or she is not able to use the ASDP to selectively profit from material undisclosed information.

Issuers and insiders should consider whether the establishment of an ASDP constitutes a "material change"; a "material fact"; a "direct or indirect change of control or direction" over an insider’s securities; or a change in the "economic interest" in a security of the reporting issuer, or the insider’s "economic exposure to the reporting issuer" and consider the attendant disclosure or filing obligation under securities law.

Issuers and insiders should also consider voluntarily disclosing the existence of an ASDP, to address questions about apparent trading activity by insiders during blackout periods and periods when the insiders may have access to material undisclosed information.

Insiders are required to file insider reports each time there is a disposition under an ASDP. The insider report should include a statement in the general remarks section that the sale is pursuant to an ASDP.

The Notice indicates that OSC Staff may be prepared to recommend exemptive relief to allow insiders to file reports on an annual basis (similar to the provision in National Instrument 55-101 – Insider Reporting Requirements providing relief for purchases made pursuant to automatic share purchase plans), provided that the insider is able to demonstrate that the plan is genuinely an "automatic" plan and that the insider cannot make "discrete investing decisions" pursuant to the ASDP.

The Notice addresses Ontario requirements only. Pending the issuance of a CSA Staff Notice, where applicable, the requirements of the securities legislation of other provinces will have to be considered in establishing an ASDP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.