The Canadian Securities Administrators (the “CSA”) announced on October 24, 2019, that they are undertaking a review of automatic securities disposition plans (“ASDPs”). The stated objective of this review is to ensure that such plans “remain a legitimate mechanism of trading” by insiders that “do not undermine the fairness” of Canadian capital markets.
What you need to know:
- The CSA are reviewing the use by insiders of ASDPs, which are currently permitted by certain exemptions under applicable securities legislation.
- There is no current indication that the CSA expect to restrict the legitimate use of ASDPs, although the review could result in regulatory guidance being revised from that provided by OSC staff in 2006 as to the conditions to the availability of the relevant exemptions.
- The review may potentially also result in changes to the CSA’s views on the granting of certain exemptive relief from the reporting by insiders of their sales under ASDPs.
- While those persons with existing insider reporting relief are not expected to be affected, those seeking such relief in the future or the renewal of existing relief may need to wait until the review is completed.
As we have previously discussed, Canadian securities laws generally prohibit the trading of a public company’s securities by insiders when those insiders are in possession of material undisclosed information concerning the issuer or its securities (“MNPI”). An exemption exists, however, where the sale of securities is made pursuant to a so-called “automatic plan” entered into prior to the insiders’ acquisition of knowledge of the MNPI. Such automatic plans may also cover the purchase of securities (in such case, “ASPPs” and, together with ASDPs, “plans”) which we assume are intended to be dealt with similarly to ASDPs in the current exercise.
These automatic plans have become increasingly popular in Canada (as well as in the United States), as they allow insiders, who may from time to time possess MNPI or be otherwise restricted by trading “black-outs”, to arrange the purchase or sale of their securities of the company of which they are insiders. Where trading would otherwise be limited by the possession of MNPI or black-out periods, these plans provide insiders an enhanced opportunity (including a ready-made defence against potential liability or litigation) by permitting them to trade securities over a pre-determined period of time and subject to pre-determined trading instructions given to an arm’s length broker. Insiders, who have determined to sell all or a portion of, or add to, their holdings, are relieved from having to do so only during limited “open-trading” windows.
Over the last number of years, ASDPs and ASPPs in Canada have generally been structured to comply with OSC Staff Notice 55-701 – Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (the “2006 OSC Staff Notice”), which provides guidance as to how to ensure such plans can avail themselves of the relevant exemption (provided by section 175(2)(b) of the Regulations under the Securities Act (Ontario) (the “Exemption)) from the prohibition against insider trading.
Pursuant to the 2006 OSC Staff Notice, to fall within the Exemption the plan must be entered into in good faith and be truly "automatic", which includes satisfaction of the following criteria:
- the insider must be able to demonstrate that the insider (i) does not have decision making ability over the trading of the securities governed by the plan; and (ii) cannot make "discrete investment decisions" through the plan;
- the insider must not be in possession of MNPI at the time that the insider enters into, amends or terminates the plan (and if the plan has not been established by the issuer, the insider must obtain a certificate from the issuer and provide it to the broker confirming that the issuer is aware of the plan and that the insider is not in possession of MNPI);
- the trading parameters and other pertinent instructions must be set out in a written plan document;
- the plan must contain "meaningful restrictions" on the ability of the insider to vary, suspend or terminate the plan having the effect of ensuring that the insider cannot profit from MNPI through a decision to vary, suspend or terminate the plan; and
- the plan must prohibit a broker from consulting with the insider regarding any sale or purchase under the plan, and the insider from disclosing information to the broker concerning the issuer that might influence the execution of the plan.
Additional Criteria to Consider
While each plan is structured to address the needs and circumstances of the particular issuer and its insiders, the following additional criteria should also be considered:
- compliance with the issuer’s own insider trading policies and procedures;
- imposition of a waiting or “cooling off” period between the entering into of, and commencement of the first trades under, the plan;
- public disclosure of the plan’s adoption, both by the insider through the insider’s SEDI filings and, in certain circumstances, by the issuer; and
- restrictions on amendments or early termination of the plan.
In the 2006 OSC Staff Notice, there is a discussion as to the possibility of disclosure requirements arising in connection with trades under a plan, including not only on the part of the insider and its obligations under insider and other reporting rules, but on the part of the issuer. This gives rise to the question of the role to be played more generally by the issuer in respect of plans. Issuers may wish to oversee the use of plans by insiders:
- to ensure compliance with their own disclosure obligations;
- to avoid any possible illegitimate trading which may adversely affect issuers’ reputations, among other concerns, although plans may offer greater certainty in connection with insiders’ intentions regarding the trading of their stock positions and an avoidance of liability (the materiality of information only needs to be measured at the outset of a plan not at the time of each trade);
- to ensure consistency between the plans and the issuer’s internal trading policies and blackout periods, including the timing of adoption, amendment or termination relative to MNPI;
- to involve themselves in a review of the terms of the plans to ensure consistency with applicable law and perhaps sponsor a particular form of plan documentation; and
- to put themselves in a position to ensure appropriate certification of the state of knowledge regarding the possession of MNPI.
The CSA’s recent announcement refers to their review being informed by relevant international developments, which are likely to include a consideration of the experience in the United States in respect of plans adopted under Rule 10b5-1 (“Rule 10b5-1”) promulgated by the U.S. Securities and Exchange Commission (the “SEC”), which is similar to the Exemption. The safe harbour under Rule 10b5-1 provides that a person’s purchase or sale of securities will be held not to be on the basis of MNPI where the person demonstrates that, before becoming aware of the MNPI, the person: (i) entered into a binding contract to purchase or sell the securities, (ii) instructed another person to purchase or sell the securities for the instructing person’s account or (iii) adopted a written plan for trading securities. The contract, instruction or plan must: (i) specify the amount of securities to be purchased or sold and the price at which, and date on which, the securities are to be purchased or sold, (ii) include a written formula, algorithm or computer program to determine the amount, price and date, or (iii) not permit the person to exercise any subsequent influence over how, when or whether to effect the trades, provided any person exercising influence must not have been aware of the MNPI. Purchases or sales must have occurred pursuant to the contract, instruction or plan, including that the subject person shall not alter or deviate therefrom by changing the amount, price or timing and not carry out any hedging. Finally, the contract, instruction or plan must be entered into in good faith and not as part of a plan or scheme to evade the relevant prohibitions.
Exemptive Relief from Insider Reporting
Trades under a plan must be reported under Canadian insider reporting rules, within five calendar days of each trade. Insiders have historically been able to obtain relief upon request in order to report trades under a plan on an annual basis. The CSA will consider whether and under what conditions such relief from insider reporting for trades undertaken under plans should continue to be granted. According to the CSA, it is unlikely that CSA staff will recommend new insider reporting relief for trades made under plans until their review is complete and reported on publicly, although existing relief should not be affected.
The CSA have noted the absence of a national framework governing the trades under plans and the insider trading defence presented thereby. The review will therefore also consider whether the plans provide “appropriate constraints” on insider trading activity, as well as whether the applicable provincial and territorial regulations should be harmonized across Canada.
The 2006 OSC Staff Notice was intended as a stop gap measure pending development by the CSA of a more comprehensive set of guidelines. In addition to guidance on ASDPs and ASPPs, OSC staff also indicated that they may provide specific guidance on trading in managed accounts where full discretionary authority for trading rests with a portfolio advisor. This is also an area where the legislation across the country is not entirely harmonized and can result in differing analysis as to whether fully managed accounts are covered. For this and the other reasons cited above, the review announced by the CSA is welcome. No timeline for the completion by the CSA of their review has so far been provided.
1 General rules and regulations, Securities Exchange Act 17 CFR 240.10b5-1.
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.