On February 18, 2016, the Ontario Securities Commission (the "OSC") published OSC Staff Notice 51-726 Report on Staff's Review of Insider Reporting and User Guides for Insiders and Issuers (the "Staff Notice"). The Staff Notice sets out the results of the OSC's review of the continuous disclosure records and reporting insider filings of 100 reporting issuers whose principal regulator is Ontario.
The term "reporting insider" is defined in National Instrument 55-104 Insider Reporting Requirements and Exemptions ("NI 55-104"), and generally includes persons who have access to material undisclosed information concerning a reporting issuer and/or significant influence over the reporting issuer (e.g. CEO, CFO, COO, significant shareholder, etc.). Reporting insiders are generally required to file an initial insider report within ten calendar days of becoming a reporting insider. Any subsequent insider reports reflecting changes in their holdings must be filed within five calendar days of such change.
The purpose of the review was to assess compliance and assist reporting insiders with meeting insider reporting requirements. The Staff Notice states that insider reporting requirements aim, among other things, to deter insider trading based on material undisclosed information and increase market efficiency by providing investors with information concerning the trading activities of insiders. When insiders fail to comply with insider reporting requirements, this affects the integrity, reliability and effectiveness of the insider reporting regime, which in turn has a negative impact on market efficiency.
OSC staff examined the filings of approximately 1,500 reporting insiders on the System for Electronic Disclosure by Insiders ("SEDI") to assess compliance with NI 55-104 and related securities legislation. The review found that reporting insiders of issuers of all sizes need to improve the quality of their insider reporting for accuracy, completeness and timeliness. There were material insider reporting deficiencies in approximately 70% of the issuers reviewed, with approximately 200 reporting insiders filing new insider reports to address material deficiencies and 150 reporting insiders filing correctional reports. The reporting insiders required to file new insider reports were generally charged late filing fees.
OSC staff found that some of the common reasons for insider reporting deficiencies leading to remedial filings were as follows: unfamiliarity with the definition of "reporting insider"; unfamiliarity with the definition of "significant shareholder" in NI 55-104; failure to file reports for acquisitions under a normal course issuer bid; failure to report expiration of securities; late reporting due to issuer delays; and reliance on third parties. The Staff Notice recommends that as responsibility to file insider reports remains with the reporting insider regardless of whether they use a third party agent, reporting insiders should periodically review SEDI to make sure their reports are being filed correctly.
Some of the non-material deficiencies resulting in correctional filings were as follows: inaccurate transaction codes; inaccurate transaction dates; inaccurate reporting with respect to type of ownership (direct, indirect or control or direction); not reporting the name of the registered holder; and use of incorrect security designations by issuers, precluding their insiders from correctly reporting their transactions.
OSC staff also found that reporting insiders were unfamiliar with the requirement to update their insider profiles and issuer profile supplements on SEDI, reporting issuers used incorrect security designations in their issuer profile supplements (e.g. common shares, stock options, rights), few reporting issuers made use of grant reports (a report that may be voluntarily filed by a reporting issuer on SEDI which discloses the details of a grant of stock options or similar instruments to its insiders under a compensation arrangement), and reporting issuers lacked internal processes to reconcile insider reports on SEDI with their continuous disclosure records.
Overall, the Staff Notice notes that many reporting insiders need to improve the quality of their insider reporting for accuracy, completeness and timeliness. OSC staff strongly recommend that issuers and reporting insiders take note of the recommendations made in the Staff Notice and consider other processes that can be put in place to increase the rate of compliance with insider reporting obligations.
To assist issuers and reporting insiders in meeting their reporting obligations, the Staff Notice includes checklists (Appendix B and C) which highlight key points that reporting insiders and issuers should consider in complying with insider reporting requirements.
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