OSC Staff Notice 55-701 sheds light on the circumstances in which the purchase or disposition of securities under pre-arranged structured sales or acquisition plans by an insider do not constitute illegal insider trading.
On June 2, 2006 the Ontario Securities Commission (the "OSC") released OSC Staff Notice 55-701 - Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (the "Staff Notice"), addressing frequently asked questions concerning the exemption from insider trading and insider reporting for acquisitions and dispositions of securities under certain types of automatic disposition or purchase plans in Ontario.
The types of plans dealt with in the Staff Notice are those involving the sale or purchase of securities from the holdings of an insider by a broker, based on a pre-arranged set of instructions (‘disposition plans" and "purchase plans", respectively). These plans typically contemplate that trading is to continue under the plan regardless of "blackout periods" or of the insider being in possession of material undisclosed information at the relevant time.
The regulations under the Securities Act (Ontario) (the "Act") contain an exemption from the insider trading prohibition and insider trading liability under the Act where a person purchases or sells a security 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 a material fact or material change that has not been generally disclosed (the "automatic plan exemption"). Similar exemptions are also available under the Canada Business Corporations Act and the securities legislation of most other Canadian jurisdictions that impose liability for purchasing or selling securities with knowledge of an undisclosed material fact or material change, with the only notable exception being New Brunswick, and a distinction in Quebec where it appears the exemption is only available if the plan is established by the issuer.
Does the automatic plan exemption apply to dispositions of securities under a disposition plan?
The Staff Notice states that the automatic plan exemption will generally apply to disposition plans, provided the plan is "automatic". A disposition plan will be considered automatic if:
- the insider can demonstrate that it does not have decision making ability over the trading of securities governed by the disposition plan and cannot make "discrete investment decisions" through the plan;
- at the time the insider enters into the plan, the insider does not possess any material undisclosed information about the issuer (and if the plan has not been established by the issuer, the issuer must provide a certificate to the broker confirming that it is aware of the plan and that the insider has no such knowledge);
- the plan is in the form of a written plan document setting out trading parameters and other instructions;
- the plan contains "meaningful restrictions" on the ability of the insider to vary, suspend or terminate the plan (e.g. by including a requirement that any change in instructions be disclosed through a filing on SEDI, along with a representation that the insider is not aware of any material undisclosed information);
- the plan prohibits the broker from consulting with the insider regarding any sales or purchases under the plan, and the insider from disclosing information to the broker concerning the issuer that might influence the execution of the plan; and
- the plan is entered into in good faith.
Does the automatic plan exemption apply to plans established by the issuer only?
The Staff Notice states that while the automatic plan exemption typically refers to plans that are established by the issuer, this is not necessarily a required element under Ontario securities laws and that the term "other similar automatic plan" can include, subject to satisfaction of the automatic plan exemption and the "automatic" elements discussed above, a plan established by an insider. However, this is the opinion of OSC staff only and may not conform with the securities laws of, or interpretations made by securities regulatory authorities in, other jurisdictions. While the provisions of securities laws or regulations in most other Canadian jurisdictions contain an exemption similar to the automatic plan exemption, it is not clear whether the exemption could be extended to plans established by the insider. In most of these jurisdictions, the equivalent of the automatic plan exemption refers to "other similar automatic plan" without qualifying that it be a plan established by the issuer. The only exception is Quebec, where s. 187(2) of the Securities Act (Quebec) refers to "…any other automatic plan established by a reporting issuer…".
It is important to note however that, even in Ontario, if the plan is not established by the issuer, the broker must be provided with a certificate from the issuer confirming it is aware of the plan and certifying that the insider has no knowledge of material undisclosed information if the plan is to fall within the exemption.
Is there an obligation to disclose the establishment of the plan?
According to the Staff Notice, whether disclosure is mandated depends upon particular circumstances. Although no firm view is expressed, the Staff Notice indicates that disclosure/treatment might be warranted if, for example, establishment of the plan constitutes a material change (in which case a news release and material change report is triggered), a material fact (in which case the insider with knowledge is restricted from trading until the material fact is generally disclosed), a change in direct or indirect control or direction over the insider’s securities (in which case an insider report is required), or a change in the insider’s economic interest in/or the economic exposure to a security of the reporting issuer (again, requiring an insider report).
Whether or not there is a clear requirement to disclose, the Staff Notice does suggest that issuers and insiders may want to voluntarily disclose the existence of a plan to eliminate questions about any apparent trading activity by insiders during blackout periods and periods when insiders may have access to material undisclosed information.
Does an insider have to file an insider report for each disposition of securities under a disposition plan?
The Staff Notice states that, generally, the insider (or its broker) will be required to file an insider report (which, it is suggested, should refer to the plan) for each disposition. It also clarifies that the exemption in NI 55-101 allowing for reporting on an annual basis for certain acquisitions and dispositions of securities under or in connection with purchase plans will not generally be available for disposition plans. That notwithstanding, if an insider seeks exemptive relief in connection with disposition plans and can demonstrate that the plan is genuinely an automatic plan and that the insider cannot make discreet investment decisions through it, staff may be prepared to recommend exemptive relief and allow the insider to file insider reports annually.
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.