On October 24, 2019, the Canadian Securities Administrators (CSA) announced that it is undertaking a review of automatic securities disposition plans (ASDPs). ASDPs are plans that enable the pre-planned sales of securities through an arm's length third party in accordance with a pre-determined set of instructions.
According to the CSA, the review will:
- Examine whether these plans provide appropriate constraints on trading activities of insiders, which will include a review of relevant international developments in the area;
- Consider whether relief should continue to be granted from insider reporting for trades made under ASDPs and, if so, under what conditions; and
- Consider whether the regulatory framework should be enhanced and harmonized across Canada.
The CSA has stated that until it completes its review and updates the market on its conclusions, the CSA staff are unlikely to recommend new insider reporting relief for trades completed under ASDPs.
Insider trading and ASDPs
Securities laws generally prohibit people with knowledge of a material fact or change with respect to an issuer that has not been generally disclosed (Inside Information) from trading in securities of that issuer. Certain individuals (insiders), including directors and officers of an issuer, are frequently in possession of Inside Information about their issuer. This prohibition under securities laws substantially limits the ability of insiders to trade in the securities of such issuer, which they may wish to do for legitimate personal, financial or other reasons. In addition, insider trading policies of most issuers impose mandatory "black-out periods" where no trading is permitted ahead of financial reporting deadlines or other major announcements, further limiting the ability of insiders to trade securities. As a result, it is frequently challenging for insiders to effectively diversify or sell their holdings of their issuer without an ASDP, despite the fact that insiders are often encouraged or required to hold positions in their issuer's stock, or are awarded securities-based compensation, such as stock options of their issuer.
Enter the automatic securities trading plan.
An automatic securities trading plan is an arrangement between an insider and his or her broker or other arm's length administrator (broker) made in accordance with the guidance set out in the Staff Notice (defined below). It involves the purchase (referred to as an automatic securities purchase plan or ASPP), or sale (referred to as an ASDP) of an insider's securities in accordance with a set of directives that are provided long before any trades are made. These plans enable insiders to avail themselves of an exemption from insider trading prohibitions and liability under subsection 175(2)(b) of the General Regulation promulgated under Ontario's Securities Act(Act).
The instructions often provided to a broker in connection with an ASDP or ASPP will include an aggregate number of securities of the issuer that the insider wishes to purchase or sell within a given amount of time. The instructions will also indicate that the broker will execute the purchases and/or sales of the securities at the times and in the amounts that the broker decides, without the insider having any sightline into precisely when or how many of such securities are purchased or sold. The only information the insider typically receives is a report post-transaction from his or her broker. Thus, purchases and sales of securities are performed pursuant to the automatic trading plans regardless of whether the insider is in possession of Inside Information at the time or if a black-out period established by the employer is in effect. The plan might also include other guidance related to how the trades are made, such as a price floor or ceiling.
Automatic trading plans are mechanisms that provide relief to insiders from insider trading restrictions and liability where securities of an issuer are traded pursuant to them. They enable insiders to sell their holdings or purchase additional securities in an issuer without having to worry about being offside the insider trading rules.
The current ASDP regime in Ontario
Generally speaking, in Ontario, if a trade is made pursuant to an ASPP or ASDP, the regulations under the Act provide an exemption to the insider trading prohibitions and the liability that attaches thereto, so long as the plan was entered into at a time when the insider did not have Inside Information and the plan was made in accordance with the guidance in the Staff Notice.
In 2006, the Ontario Securities Commission released OSC Staff Notice 55-701 – Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (Staff Notice), which provides guidance with respect to insider trading and reporting exemptions for the purchase and sale of securities under certain automatic trading plans.
According to the Staff Notice, a plan will be considered a qualifying ASDP or ASPP for the purposes of the exemption if the following conditions are met:
- The insider is not in possession of any Inside Information in relation to the issuer at the time of entry into the plan;
- Where plans are not established by the issuer, at the time of entry into the plan, the insider obtains a certificate from the issuer that certifies the issuer is aware of the plan and, to the issuer's knowledge, the insider is not in possession of any Inside Information;
- The trading parameters and other instructions are set out in writing in the plan document at the time of entry into the plan;
- The plan provides that the broker is not permitted to consult with the insider regarding any sales under the plan and that the insider cannot disclose to the broker any information concerning the issuer that might influence the execution of the plan;
- There are restrictions in the plan with respect to the ability of the insider to vary, suspend or terminate the plan that effectively prevent the insider from profiting from Inside Information through the variance, suspension or termination of the plan; and
- The plan was given or entered into in good faith, and not as part of a plan or scheme to evade the insider trading prohibitions.
In general, an insider trading report must be filed on the System for Electronic Disclosure (SEDI) every time a trade is made of an issuer's securities by a reporting insider of that issuer, whether the trade was made pursuant to an automatic trading plan or otherwise. National Instrument 55-104 – Insider Reporting Requirements and Exemptions (NI 55-104) provides for an alternate requirement whereby insider trading reports are only required to be filed for purchases and certain sales of securities on an annual basis. Importantly, this alternate yearly reporting requirement does not apply to sales of securities made under ASDPs. In the past, the CSA has given exemptive relief to insiders who have made sales pursuant to ASDPs. In such circumstances, the CSA has allowed insiders to utilize the preferable alternate yearly reporting requirement where the insider can demonstrate the plan is a qualifying plan in accordance with the Staff Notice, including that the plan is genuinely an automatic plan and the insider cannot make discrete investment decisions through it. It is this exemptive relief that the CSA has announced it is unlikely to grant until it completes its review of ASDPs, although existing insider reporting relief will not be impacted.
Best practices for ASDPs
Issuers are usually involved in the implementation of ASDPs because the issuer will typically need to exempt the plan from its insider trading policy to allow for trades during regular or special black-out periods. As such, issuers should ensure that the plans its insiders are entering into comply with the best practices regarding the use of automatic trading plans. Such best practices include:
- Waiting period. There should be a period of time, ranging from 30 days to six months, before the commencement of trading under a plan.
- Press release. Issuers should issue a press release announcing that an insider has entered into an automatic trading plan. This will address questions that investors may have when they see that trades were made by insiders during black-out periods or periods where insiders may have had Inside Information. It will also allow investors to assess and scrutinize the plan.
- SEDI report. Reporting insiders should note in the SEDI report filed in connection with the trade that the trade was made pursuant to an ASDP or ASPP.
- Amendments, terminations and suspensions. Insiders should not be able to easily or quickly terminate, suspend or amend their plans. The imposition of a limit on the number or nature of permitted amendments or an inability to terminate a plan within a period of time after adoption is recommended. Additionally, any amendments, terminations or suspensions that are acceptable, should only be allowed during permitted trading windows.
- Term of plan. Plans should include a minimum and a maximum term. The term of the plan should be sufficient to guard against allegations of impropriety.
- Undisclosed trading schedule. Insiders should not be aware of the precise timing of when the securities subject to the plan will be traded.
Issuers or insiders who are considering putting an automatic trading plan in place should engage counsel who have a deep understanding of the best practices, issues surrounding the preparation of such plans and the process for implementation, including to avoid the appearance of impropriety.
The CSA's announcement that it is considering putting in place a national framework to govern ASDPs is significant and, in the event it is implemented, will bring Canada more in line with the United States. In the United States, Rule 10b5-1 (Rule) governs automatic trading plans at the national level.
It is interesting to note that the CSA only makes reference to undertaking a review of ASDPs, and is silent on ASPPs. Whether ASPPs will be considered as part of a subsequent review, or included in the possible national regime, remains to be seen.
An issue that we will be keeping an eye on in the CSA's eventual update to the market will be whether it identifies a similar phenomena as has been recognized by the academic community in the United States. According to a US study conducted in 2006,1 participants of the 10b5-1 plans generated, on average, abnormal positive returns. One possible contributing factor to this result is timing the disclosure of information in a manner that would benefit the timing of the trades made under their 10b5-1 plan. For example, an insider might be aware that dispositions are made under his or her plan on the first trading day of each month. Knowing this, the insider may ensure the timing of disclosure that might negatively affect the stock price occurs after the dispositions under the insider's own plan have already occurred. Thus, it has been argued by some scholars that, despite the objective of the 10b5-1 plan being to protect insiders' pre-planned non-Inside Information-based trades from liability, the Rule still appears to enable "strategic trading". Any appearance of impropriety pursuant to an automatic plan may weaken investor confidence in capital markets.
We would expect any national framework adopted by the CSA in relation to ASDPs and other automatic trading plans to include protections against the utilization of ASDPs for strategic trading behaviour. Progress in this regard might be made by requiring certain (current) best practices, such as imposing restrictions on amending, terminating or suspending plans and prohibiting the disclosure of the trading schedule of the plan.
Assuming the majority of plans are not used for strategic trading, there are many benefits to adopting ASDPs. Insiders benefit because they no longer need to be concerned about trading black-out periods, they obtain relief from insider reporting and can monetize their accumulated equity in their company without having to put the time into the day-to-day activities related to trading. Companies benefit because they can avoid the negative impact on their reputation that allegations of improper trading by their insiders might cause, can ensure that the instructions in the plan are aligned with the insider's interest and the long-term interests of shareholders, and the company's share price may also be more insulated from market reaction to the perception that insiders are selling securities in reaction to an occurrence around the time of the trade. A national regime will also be beneficial for insiders and issuers who would no longer need to be concerned about differences in the rules across Canada.
Insiders or issuers who are interested in putting an ASPP or ASDP in place, or in learning more about how a national ASDP framework might impact them.
1Alan D. Jagolinzer, "Do Insiders Trade Strategically within the SEC Rule 10b5-1 Safe Harbor?", Stanford University Graduate School of Business, Working Paper, December 2006.
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