Canada's securities regulators have adopted a new regime for insider reporting. New National Instrument 55-104 and its companion policy are expected to come into effect on April 30, 2010. In Ontario, the new rules will work in conjunction with existing insider reporting provisions in Ontario's Securities Act. The new regime replaces National Instrument 55-101, Insider Reporting Exemptions; Multilateral Instrument 55-103, Insider Reporting of Certain Derivative Transactions; and their respective companion policies.
Like the current rules, the new rules will require reporting by insiders in respect of securities as well as related financial instruments. A related financial instrument is an agreement, arrangement or understanding that has the effect of altering, directly or indirectly, the insider's economic interest in or exposure to the reporting issuer.
Highlights of the new insider reporting rules are as follows:
- For many issuers, the group of officers and directors who will
have to file insider reports will be smaller than under the current
rules, because many insiders will now only have to file reports if
they have significant power or influence over the issuer (even if
they have access to material undisclosed information).
- A major subsidiary will be one that accounts for 30% or more of
the reporting issuer's consolidated assets or revenues, based
on its most recent financial statements. The threshold was formerly
- Insider reports will have to be filed by significant
shareholders, as determined by their post-conversion beneficial
ownership of the issuer's securities. The concept of
post-conversion beneficial ownership is similar to that applied
under Canadian takeover bid rules, and is discussed below.
- The deadline for insiders to report changes in their interests
is being shortened to 5 calendar days from 10, after a six-month
- The exemption from the insider reporting requirements for
securities received under compensation arrangements will depend,
among other things, on the issuer's having filed an issuer
grant report. Reporting insiders will have to report acquisitions
of securities under compensation arrangements at least
The rules will bring Canada's insider reporting regime closer to that of the United States, where the deadline for filing insider reports is generally two business days after a change in beneficial ownership and the officers who must file insider reports are limited to the reporting issuer's president, principal financial and accounting officers, vice-presidents in charge of a principal business unit, division or function, and others who perform policy-making functions for the issuer.
Filings by Reporting Insiders
Directors and Management of the Reporting Issuer and Its Subsidiaries
A reporting issuer's directors and its chief executive officer (CEO), chief financial officer (CFO) and chief operating officer (COO) will have the same insider reporting obligations as under current rules. The directors of major subsidiaries will also continue to have insider reporting obligations, but a major subsidiary will be one that accounts for 30% or more, rather than 20% or more, of the reporting issuer's consolidated assets or revenues, based on its most recent financial statements.
Under the current rules, the reporting obligations of other officers of the reporting issuer and the officers and directors of its subsidiaries depend on whether the insider has access to material undisclosed information or is in charge of a principal business unit, division or function of the reporting issuer or a major subsidiary. The new rules modify these requirements as follows:
- CEOs, CFOs and COOs of major subsidiaries (using the 30% test)
will have to file insider reports.
- The reporting issuer's other officers and its
subsidiaries' other officers and directors will only have to
file insider reports if they have the ability to exercise, directly
or indirectly, significant power or influence over the business,
operations, capital or development of the reporting issuer
and they receive or have access, in the
ordinary course, to material undisclosed information about the
- Reports will also have to be filed by any other insider who is
responsible for a principal business unit, division or function of
the reporting issuer, such as sales, finance or production.
The new rules confirm that insider reporting requirements apply to directors and officers who are insiders of a principal operating entity of an income trust. A principal operating entity is one that qualifies as a major subsidiary on the basis of the 30% test. This requirement is consistent with securities regulators' interpretation of the current insider reporting requirements as set forth in National Policy 41-201, Income Trusts.
A person or company with beneficial ownership of, or control or direction over, directly or indirectly, more than 10% of the voting rights attached to an issuer's outstanding securities will still be required to file insider reports under the new rules.
In addition, insider reports will be required to be filed by shareholders who cross the 10% threshold taking into account securities that they may acquire within the next 60 days. Specifically, the new rules specify that a shareholder has "post-conversion beneficial ownership" of voting securities of an issuer if the shareholder (i) has beneficial ownership of a convertible security that the shareholder may convert into voting securities of the issuer within the next 60 days; or (ii) has a right or obligation permitting or requiring the shareholder (whether or not on conditions) to acquire beneficial ownership of voting securities of the issuer within the next 60 days, by a single transaction or a series of linked transactions.
The new rules make clear that the calculation of a person's percentage ownership of securities will include any securities that the person is deemed to beneficially own or control in the denominator as part of the issuer's total outstanding voting securities.
Directors and Officers of Significant Shareholders and Their Affiliates
Directors and officers of significant shareholders, as well as of their affiliates, will continue to be exempt from the insider reporting requirements provided that they do not, in the ordinary course, receive or have access to material undisclosed information about the reporting issuer. (The exemption also depends on the person not holding any other position that would trigger insider reporting obligations, such as being responsible for a principal division, unit or function of the reporting issuer.)
Under the new rules, companies that provide significant management or administrative services to a reporting issuer or a major subsidiary will have to file insider reports. Reporting obligations will also apply to the CEO, CFO, COO, directors and significant shareholders of the management company.
Retroactive Filings When One Issuer Becomes an Insider of Another
Under the new rules, when an issuer becomes an insider of another issuer, the directors and the CEO, CFO and COO of each of those issuers will be deemed to have been insiders of the other for the past six months and will have to file insider reports retroactively. However, insider reports are required only in respect of securities of reporting issuers.
The new rules will maintain the current 10-day deadline for insiders' initial reports. This includes retroactive reports as discussed above and reports to disclose the material terms of any related financial instrument, which is an agreement, arrangement or understanding that alters, directly or indirectly, the insider's economic interest in a security of the reporting issuer or economic exposure to the reporting issuer.
Filings to report changes in insiders' interests will be due within 5 calendar days (which include weekends and holidays) instead of 10. Exercises of options, warrants or other convertible or exchangeable securities will require reports in respect of those securities and the underlying securities. The regulators have provided a six-month transition period before the shortened deadline takes effect, so it will apply to transactions as of October 31, 2010, assuming the new rules come into force on April 30, 2010.
The new companion policy states the regulators' view that beneficial ownership passes when an offer to buy or an offer to sell is accepted by the other party. In other words, the five-day deadline begins on the day of the trade, not the day of settlement.
The regulators decided not to require proxy circular disclosure of late filings of insider reports by an issuer's insiders. However, they indicated that they may revisit this proposal at a later date.
Exemption for Directors and Officers Who Participate in Automatic Securities Purchase Plans
As under the current rules, insiders will be exempt from reporting acquisitions and specified dispositions of securities and related financial instruments under automatic securities purchase plans (ASPPs) (other than lump-sum cash contributions). The availability of the exemption is contingent on the insider complying with the alternative annual reporting regime. Specified dispositions are those that (i) are incidental to the operation of the plan and do not involve a discrete investment decision or (ii) are made to satisfy a tax withholding obligation if certain other conditions are met.
For acquired securities that have not been disposed of or transferred before the end of the calendar year, the current 90-day reporting deadline (March 31 of the following calendar year) will continue to apply. For securities that are disposed of or transferred before year-end, the current 10-day reporting deadline will be shortened to 5 days. The same six-month transition period noted above applies to this shortened deadline.
The exemption for insider reporting in respect of ASPPs is meant to apply only where an insider is not making discrete investment decisions. The regulators state in the companion policy that if an issuer intends that insiders be able to rely on the exemption for a particular ASPP, the issuer should design and administer the plan in a manner that is consistent with that limitation. The plan must set out criteria or a formula for establishing the timing of the acquisitions, the number of securities that the insider can acquire and the price payable. For the exemption to be available, an insider should not be able to exercise discretion in these matters, either in the capacity of a recipient of the securities or through participation in the issuer's decision to make the grant.
The exemption is not available for automatic securities disposition plans, also known as "pre-arranged structured sales plans," established between a reporting insider and a broker. However, the companion policy states that exemptive relief may be granted by securities regulators to permit alternative reporting of dispositions on an annual basis if a reporting insider can demonstrate that the plan is genuinely an automatic one under which the insider cannot make discrete investment decisions.
Under the new rules, grants of options and similar securities will not necessarily qualify for reporting under the alternative annual reporting regime. Instead, insiders may be able to rely on the exemption discussed below for compensation arrangements if the other criteria for that exemption are satisfied.
Exemption for Acquisitions of Securities Under Compensation Arrangements
Under the current rules, for an insider to qualify for the exemption from insider reporting in respect of securities or related financial instruments acquired under a compensation arrangement, the arrangement must be publicly disclosed or the acquisition must occur automatically and without a discrete investment decision. The criteria under the new rules are as follows:
- The reporting issuer must have previously disclosed the
existence and material terms of the compensation arrangement in a
- The reporting issuer must have previously filed an issuer grant
report disclosing the date any options or similar securities were
granted, the number granted, the grant price and exercise price,
the number and type of securities issuable on exercise and any
other material terms that have not been previously disclosed.
- The insider must file an insider report complying with the
alternative reporting requirements discussed above in relation to
The new rules make it clear that the insider reporting regime (including the above exemption) for securities and related financial instruments will cover most equity-based compensation arrangements, including phantom stock units, deferred share units, restricted share awards, performance share units, stock appreciation rights and similar instruments. This is the case even if the instrument is exclusively cash-settled.
The new rules confirm that reporting issuers must file insider reports when they acquire their own securities. If the securities are acquired under a normal course issuer bid, the report must be filed within 10 days of the end of the month in which the acquisition occurred. A full reporting exemption is available for other transactions if the existence and material terms of the transaction have been publicly disclosed on SEDAR.
The new rules confirm that stock dividends, splits, consolidations, amalgamations and reorganizations that affect all outstanding securities of a class on an equivalent basis (referred to as "issuer events") do not trigger an insider reporting requirement. Instead, the issuer will file an issuer event report, and reporting insiders will reflect the change in their next insider report filing.
No Effect on Existing Exemptions for Insiders of Non-Canadian Issuers
The new insider reporting regime does not affect the exemptions from insider reporting that are currently available to insiders of non-Canadian issuers under National Instrument 71-102 or to insiders of U.S. MJDS issuers under National Instrument 71-101.
What Issuers Should Do to Prepare
In anticipation of the new rules coming into force, we would recommend that reporting issuers take the following steps:
- Review their current list of insiders who are subject to
reporting requirements and modify it to reflect the new group of
- Alert their insiders to the new rule and its requirements
(including in respect of related financial instruments,
compensation arrangements and accelerated filing deadlines), and
notify those insiders who can cease reporting after April 30,
- Decide whether to routinely file issuer grant reports in
respect of securities granted under compensation
- Ensure that ASPPs are designed so that insiders may qualify for
the alternative reporting regime if the issuer so intended.
- Encourage reporting insiders to begin complying with the
shortened five-day deadline in anticipation of the new rules coming
into force on October 31, 2010 or implement a reporting program to
assist them in doing so.
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.