Canada’s New Insider Reporting Regime

Articles

National Instrument 55-104 Insider Reporting Requirements and Exemptions (“NI 55-104”) and related Companion Policy 55-101 will come into force in Canada on April 30, 2010. NI 55-104 consolidates the principal insider reporting requirements and most exemptions into one instrument. NI 55-104 will replace the following instruments:

  • National Instrument 55-101 Insider Reporting Exemptions;
  • Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions (Equity Monetization); and
  • British Columbia Instrument 55-506 Exemption from insider reporting requirements for certain derivative transactions.

In Ontario, the main insider reporting requirements will remain in the Securities Act but the substance of those requirements will be the same as in the new NI 55-104. The goal of NI 55-104 is to make it easier for issuers and insiders to understand their obligations and to help promote effective compliance. NI 55-104 implements the following changes to the current insider reporting regime:

  • the number of persons required to file insider reports will be reduced;
  • generally, insiders are required to disclose all compensation granted through a stock-based compensation arrangement, regardless of whether stock is actually issued;
  • an issuer may file an issuer grant report, similar to the current issuer event report, which will allow an insider to defer reporting of acquisitions through a stock-based compensation arrangement; and
  • after a six-month transition period, insiders required to file insider reports will be required to file within five calendar days, rather than the current 10 calendar days.

Persons Required to File Insider Reports

Under NI 55-104, only “reporting insiders” are subject to reporting obligations. All insiders will still be subject to insider trading requirements.

The following individuals are reporting insiders:

  1. the CEO, CFO, COO of the reporting issuer or of a major subsidiary of the reporting issuer;
  2. a director of the reporting issuer or of a major subsidiary of the reporting issuer;
  3. a person or company responsible for a principal business unit, division or function of the reporting issuer;
  4. a management company that provides significant management or administrative services to the reporting issuer or a major subsidiary of the reporting issuer, every director of the management company, every CEO, CFO and COO of the management company, and every significant shareholder of the management company; and
  5. any individual performing functions similar to the functions performed by any of the insiders described above.

The reporting issuer itself will be a reporting insider if it has purchased, redeemed or otherwise acquired its own security. The reporting issuer’s officers and the directors and officers of any subsidiary of the reporting issuer will be a reporting insider if he or she:

  • in the ordinary course receives or has access to information as to material facts or material changes concerning the reporting issuer before the material facts or material changes are generally disclosed; and
  • directly or indirectly, exercises, or has the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer.

Reporting Insider Through Connection with a Reporting Issuer or a Major Subsidiary

NI 55-104 retains the concept of a “major subsidiary” of the reporting issuer; however, to qualify as a major subsidiary, the subsidiary must account for 30% or more (formerly 20% or more) of the reporting issuer’s consolidated assets or revenues, based on its most recent financial statement.

Reporting Insider Through Connection with a Significant Shareholder

A “significant shareholder” is a person or company that has beneficial ownership of, or control or direction over securities of an issuer carrying more than 10% of the voting rights attached to the issuer’s outstanding voting securities. The calculation of 10% of the voting rights is done taking into account any securities that are convertible into the reporting issuer’s security within 60 days following that date or a right or obligation permitting or requiring the person or company to acquire beneficial ownership of the security within 60 days.

A significant shareholder is a “reporting insider”. Further, the CEO, CFO, COO and every director of a significant shareholder are each a “reporting insider” if they have access to undisclosed material facts or changes concerning the reporting issuer.

Related Financial Instruments

NI 55-104 requires disclosure for all stock-based compensation arrangements. It is sometimes unclear in the current regime if an insider needs to report compensation received that is based on the stock of the reporting issuer. NI 55-104 will require disclosure of such compensation by requiring disclosure for “related financial instruments”.

To the extent the following derivative instruments do not, as a matter of law, constitute securities, they will be considered related financial instruments and insiders will have to report any change in beneficial ownership:

  1. a forward contract, futures contract, stock purchase contract or similar contract involving securities of the insider’s reporting issuer;
  2. options issued by an issuer other than the insider’s reporting issuer;
  3. stock-based compensation instruments, including phantom stock units, deferred share units, restricted share awards, performance share units, stock appreciation rights and similar instruments;
  4. a debt instrument or evidence of deposit issued by a bank or other financial institution for which part or all of the amount payable is determined by reference to the price, value or level of a security of the insider’s reporting issuer (a linked note); and
  5. most other agreements, arrangements or understandings that were previously subject to an insider reporting requirement under current Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions.

The BC Securities Act currently requires disclosure if an insider enters into a transaction involving a related financial instrument. NI 55-104 will require disclosure of any change in the insider’s interest in, or right or obligation associated with, a related financial instrument.

Issuer Grant Reports

To facilitate insider reporting of stock-based compensation arrangements, NI 55-104 will allow an insider to satisfy his/her disclosure requirements by filing a deferred insider report for any security or related financial instrument that:

  • the compensation arrangement under which the security or related financial instrument was granted has been previously disclosed in a public document, such as an information circular, on SEDAR; and
  • the reporting issuer has previously filed in respect of the acquisition an issuer grant report on SEDAR.

An issuer grant report must include:

  1. the date the option or other security was issued or granted;
  2. the number of options or other securities issued or granted to each director or officer;
  3. the price at which the option or other security was issued or granted and the exercise price;
  4. the number and type of securities issuable on the exercise of the option or other security; and
  5. any other material terms that have not been previously disclosed or filed in a public filing on SEDAR.

The deferred reporting procedure is the same as the current procedure insiders follow to take advantage of the exemption for Automatic Securities Purchase Plans, which is still available in NI 55-104. To comply with the deferred reporting procedure, an insider must report any disposition within five days of the disposition or transfer and a transaction-by-transaction summary of all acquisitions by March 31 of the next calendar year.

Filing Deadline

Under NI 55-104, the filing deadline for insider reports will be reduced to five calendar days, rather than 10 calendar days, from the date of any change in the beneficial ownership of, or control or direction over, securities of the reporting issuer or any interest in, or right or obligation associated with a related financial instrument. Beneficial ownership passes when the offer to buy or sell is accepted. For comparison, the filing deadline for insider reports in the United States is two business days. The filing deadline for an insider’s initial report will remain 10 calendar days. A calendar day includes weekends and holidays but a business day does not.

When a reporting issuer becomes an insider of another issuer, the CEO, CFO and COO and every director of both issuers will be deemed to have been insiders of the other for the past six months and will have to file insider reports retroactively.

If NI 55-104 comes into force on April 30, 2010 as expected, the filing deadline will be reduced to five days on October 31, 2010.

Suggestions for Reporting Issuers

In order to prepare for the changes, we recommend that reporting issuers:

  • determine which insiders are reporting insiders and notify insiders who are no longer subject to insider reporting requirements;
  • review any stock-based compensation arrangements that are not currently being reporting by insiders and determine if insiders need to start reporting;
  • encourage reporting insiders to file their insider reports within five calendar days as soon as possible;
  • provide all reporting insiders a copy of this Securities Law Update to inform them of the changes to their reporting requirements; and
  • undertake an analysis to determine whether the reporting issuer will file issuer grant reports.

If you have any questions about the new insider reporting requirements, contact any member of Clark Wilson LLP’s Corporate Finance & Securities Group.