NIN 2000/23 - Republication for Comment of Proposed National Instrument 55-101 and Related Documents - Exemption From Certain Insider Reporting Requirements [NIN - Rescinded]

Published Date:	2000-06-16
Effective Date:	2000-06-15

The Commission, together with other members of the Canadian Securities Administrators (the “CSA”), is republishing for comment proposed National Instrument 55-101 (the “Proposed National Instrument”) and Companion Policy 55-101CP (the “Proposed Policy”) (collectively the “Proposed Instruments”). In British Columbia, the Commission is also publishing for comment proposed consequential amendments to the Securities Rules.

The Proposed Instruments are initiatives of the CSA. The Proposed National Instrument is being proposed for implementation as a rule, regulation or other appropriate instrument in all of the jurisdictions represented by the CSA. The proposed Companion Policy is expected to be implemented as a policy in all of the jurisdictions represented by the CSA.

The Proposed National Instrument contains footnotes that are not part of the Proposed National Instrument. They have been included to provide background and explanation.

Revocation of Local Policy Statement

Effective the date that the Proposed National Instrument comes into force, certain local policies such as Ontario Securities Commission Policy 10.1, British Columbia Local Policy Statement 3-14 and Policy Statement No. Q-10 of the Commission des valeurs mobilières du Québec will be rescinded. These local policies set out guidelines for applications for exemptions from the insider reporting obligations, which will be superseded by the exemptions contained in the Proposed National Instrument.

Background

On August 20, 1999, the Commission, together with the other members of the CSA published for comment proposed National Instrument 55-101 Exemption from Certain Insider Reporting Requirements (the "1999 Proposed National Instrument") and proposed Companion Policy 55-101CP (the "1999 Proposed Policy") (collectively the “1999 Proposed Instruments”).¹

¹ NIN#99/29

As a result of comments received from the commentators during the comment period (summarized in Appendix A), issues raised in discretionary exemptive orders during that period and CSA’s further consideration of the Proposed Instruments, the CSA have revised the 1999 Proposed Instruments and have republished them for comment.

This Notice summarizes changes of a substantive nature that have been made to the 1999 Proposed Instruments. Other changes are in most cases identified in the footnotes to the Proposed Instruments.

Substance and Purpose of Proposed National Instrument

The Proposed National Instrument provides certain exemptions from the obligation to file insider reports under Canadian securities legislation. The Proposed National Instrument:

• provides an exemption from the obligation to file insider reports for certain directors and senior officers of subsidiaries and of affiliates of insiders who neither hold the securities of a reporting issuer in significant amounts nor are in a position to acquire knowledge of undisclosed material information,
  
• permits directors and senior officers of a reporting issuer or a subsidiary of the reporting issuer to report acquisitions of securities of the reporting issuer under automatic securities purchase plans on an annual basis in most circumstances,
  
• permits issuers conducting normal course issuer bids to report acquisitions of securities under such bids on a monthly basis, and
  
• permits an insider of a reporting issuer to report changes in direct or indirect beneficial ownership of, or control or direction over securities by, such insiders pursuant to certain issuer events, such as a stock dividend, stock split, consolidation, amalgamation, reorganization or merger, at the time of their next required insider report.

It is proposed that the Proposed National Instrument will come into force contemporaneously with proposed National Instrument 55-102 System for Electronic Data on Insiders (SEDI) (“proposed National Instrument 55-102”)².

² See NIN#2000/22

Proposed National Instrument 55-102 will establish an electronic filing system for insider trade reports. The CSA may make further changes to the Proposed National Instrument to facilitate the effective implementation of proposed National Instrument 55-102.

Substantive Changes to the Proposed National Instrument

Automatic Securities Purchase Plans

Part 5 of the Proposed National Instrument permits directors and senior officers of reporting issuers to report acquisitions of securities under automatic securities purchase plans on an annual basis in most circumstances.

Section 5.1 of the Proposed National Instrument was changed to provide that the exemption extends to securities of a reporting issuer acquired under a plan of a subsidiary of the reporting issuer and to make the reporting exemption available to directors and senior officers of subsidiaries of the reporting issuer where a subsidiary has established a plan that allows its employees to purchase shares of the parent, which is itself the reporting issuer. Section 5.1 was also changed to clarify that the reporting exemption is not available for the acquisition of securities by a director or senior officer pursuant to a lump-sum provision of a plan. Generally speaking, a lump-sum provision is the term used for such a provision in an employee share purchase plan, while the term "cash payment option" is used to describe a similar feature in a dividend or interest reinvestment plan.

Section 5.3 of the Proposed National Instrument now provides that an insider who relies on the exemption from the insider reporting requirements contained in section 5.1 is to report, in prescribed form, all acquisitions of securities under automatic securities purchase plans that have not been previously reported, (a) for any securities acquired under an automatic securities purchase plan which have been disposed of or transferred, within the time required by securities legislation for reporting the disposition or transfer; and (b) for any securities acquired under an automatic securities purchase plan during a calendar year which have not been disposed of or transferred, annually within 90 days of the end of the calendar year. The 1999 Proposed National Instrument provided for annual reporting on the basis of the financial year of the issuer.

The Commission is proposing that Part 5 of the Proposed National Instrument replace subsection 160(2) of the Securities Rules and corresponding provisions of securities legislation in other jurisdictions (see “Consequential Amendments” below).

Normal Course Issuer Bids

A new exemption has been added in Part 6 of the Proposed National Instrument that provides that, despite any requirement of securities legislation relating to the insider reporting requirement that an issuer file a report for each acquisition of securities by the issuer under an issuer bid within 10 days of the date of the acquisition, the issuer may report, in prescribed form, acquisitions of securities by it under a normal course issuer bid within 10 days of the end of the month in which the acquisitions occurred.

The CSA determined that, in light of the requirements in securities legislation and of stock exchanges relating to normal course issuer bids, and in particular, the disclosure requirements relating to such bids, it was not necessary to require that issuers file a report for each acquisition of securities by an issuer under a normal course issuer bid within 10 days of the date of each acquisition, and that it would be sufficient for issuers to report such acquisitions within 10 days following the end of the month in which the acquisitions occurred.

Reporting for Certain Issuer Events

Currently, section 160(2) of the Securities Rules, and corresponding provisions of securities legislation in other jurisdictions, provides for an exemption from the insider reporting requirement upon the occurrence of a corporate event, such as a stock dividend, stock split, consolidation, amalgamation, reorganization, merger or other similar event which affects all holdings of a class of securities in the same manner, where an officer of the issuer files a notice of the event within 10 days of the event. Under proposed National Instrument 55-102, SEDI issuers will be required to report such events. However, under the electronic filing system, such reports will not adjust the individual disclosure for insiders. In light of this, the existing exemption will not effectively co-exist with the new electronic filing system for SEDI issuers and for this reason the Commission proposes to repeal section 160(2) of the Securities Rules (see “Consequential Amendments” below).

The CSA have determined that it is appropriate to provide in Part 7 alternative relief from the insider reporting requirement for insiders affected by issuer events, on the same policy basis as the existing exemption. The CSA believe that this exemption is appropriate, as disclosure is required under securities legislation for such issuer events, and the proportionate holdings of insiders remains the same.

Accordingly, Part 7 of the Proposed National Instrument provides a new exemption from the obligation to report a change in direct or indirect beneficial ownership of, or control or direction over securities by, an insider of a reporting issuer, for securities of the reporting issuer pursuant to an issuer event provided that the insider reports the changes within the time required by securities legislation for reporting any other change in direct or indirect beneficial ownership of, or control or direction over, securities of the reporting issuer.

Alternatives Considered

Consideration was given to continuing the current practice of granting the relief set out in the Proposed National Instrument on an ad hoc basis in response to applications made. The CSA have concluded however that this practice is neither efficient nor effective and accordingly the Proposed National Instrument would provide relief to certain insiders who fall within the scope of the insider reporting requirement. This is a step in implementing the recommendations of the Task Force on Operational Efficiencies that reported to the CSA in 1995.

Anticipated Costs and Benefits

The Proposed National Instrument will be beneficial to certain market participants who fall within the scope of the insider reporting requirement of Canadian securities legislation as they will in some cases be relieved from reporting and in other cases will have to report less frequently. In addition, those persons or the reporting issuer of which they are an insider will no longer have to incur the expense of applying for relief. The only costs imposed by the Proposed National Instrument arise from the requirement in Part 4 to maintain a list of exempted insiders.

The Canadian securities regulatory authorities are of the view that the benefits of the Proposed National Instrument outweigh the costs.

Consequential Amendments

In order to avoid inconsistencies between the Securities Rules and the Proposed National Instrument, consequential amendments to the Securities Rules will be required. In particular, it is the intent of the Commission to repeal subsections (1) and (2) of section 160 of the Securities Rules.

Subsection 160(1) of the Securities Rules provides that upon the occurrence of a stock dividend, stock split, consolidation, amalgamation, reorganization, merger or other similar corporate event that affects all holdings of a class of securities in the same manner, on a per share basis, the reporting requirements of section 87 of the Securities Act will be deemed to have been satisfied as they apply to a holder of the class of securities of an issuer that is affected, where an officer of the issuer files written notice of the event, including a description of the effect on each class of securities of the issuer that is affected, on or before the 10th day after the event.

As described above, subsection 160(1) will not effectively co-exist with the electronic filing system proposed to be established under proposed National Instrument 55-102 for SEDI issuers.

Similarly, subsection 160(2) of the Securities Rules provides that upon the acquisition by a person or company of securities of an issuer through a stock dividend plan, a share purchase plan or other plan available to a class of security holders, employees or management of an issuer, the reporting requirements of section 87 of the Securities Act are deemed to have been satisfied as they apply to the person or company if an officer of the issuer files written notice including a description of the transaction and the effect upon the holdings of the person or company on or before the 10th day after the transaction. This exemption will also not effectively co-exist with the new electronic filing system for SEDI issuers.

Relief in respect of the same subject matter as subsection 160(1) and (2) is being provided by Parts 5 and 7 of the Proposed National Instrument. Accordingly, for SEDI issuers, it is appropriate that the exemptions be repealed. The CSA was of the view that it was preferable that the same exemptive relief be available for insiders of all issuers and that additional exemptive relief should not be provided to non-SEDI issuers. Moreover, as the provisions of Parts 5 and 7 of the Proposed National Instrument provide relief with respect to the same subject matter as the relief provided in subsections 160(1) and (2) of the Securities Rules and, in most cases, the provisions of Parts 5 and 7 of the Proposed National Instrument will be of more benefit to insiders than the relief currently provided by subsections 160(1) and (2), the CSA believes that these subsections can be repealed with little cost to insiders of non-SEDI issuers.

The exemptive relief provided by Part 5, as noted above, is not available if the insider also satisfies the insider test under securities legislation that is triggered by shareholdings in excess of 10%, whereas the exemptive relief provided by subsection 160(2) provides exemptive relief to such persons. As it is proposed to repeal the existing exemptions in subsections 160(1) and (2) of the Securities Rules for all issuers, and the relief provided by the provisions of Parts 5 and 7 of the Proposed National Instrument does not provide precisely the same relief in precisely the same manner, and does not provide the relief to all insiders, the Commission invites comments on the proposed repeal of section 160. In particular, the Commission invites comments on whether the relief provided in subsections 160(1) and (2) should be retained for non-SEDI issuers.

Comments

Interested parties are invited to make written submissions with respect to the Proposed Instruments and the consequential amendments. Submissions received by August 16, 2000 will be considered.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission in duplicate, as indicated below.

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Registrar of Securities, Northwest Territories
Registrar of Securities, Nunavut
Registrar of Securities, Yukon Territory

c/o John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows:

Claude St Pierre
Secrètaire
Commission des valeurs mobilières du Québec
800, square Victoria, 22e ètage
C.P. 246, Tour de la Bourse
Montréal, Québec H4Z 1G3

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions cannot be maintained.

Questions may be referred to any of the following:

Laura Startup
Senior Legal Counsel
Policy and Legislation
British Columbia Securities Commission
lstartup@bcsc.bc.ca
(604) 899-6748
or (800) 373-6393 (in B.C.)

Stephen Murison
Legal Counsel
Alberta Securities Commission
stephen.murison@seccom.ab.ca
(403) 297-4233

Barbara Shourounis
Director
Saskatchewan Securities Commission
barbara.shourounis.ssc@govmail.gov.sk.ca
(306) 787-5645

Doug Brown
Deputy Director, Legal Division
Manitoba Securities Commission
dbrown@cca.gov.mb.ca
(204) 945-2548

Iva Vranic
Manager, Corporate Finance
Ontario Securities Commission
ivranic@osc.gov.on.ca
(416) 593-8115

Sylvie Lalonde
Conseillère en réglementation
Commission des valeurs mobilières du Québec
sylvie.lalonde@cvmq.com
(514) 940-2199 Ext. 4555

DATED at Vancouver, British Columbia, on June 15, 2000.


Joyce C. Maykut, Q.C.
Vice Chair

Ref: LPS#3-14
NIN#99/29
NIN#2000/22
NI 55-102
Sections 160(1) and (2), Securities Rules

This NIN refers to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database.

Three comment letters were received, one from The Great-West Life Assurance Company, one from the Canadian Bankers Association and one from Québécor Inc., in response to the request for comments published by the Commission and other CSA members on August 20, 1999.

General Comments

One commentator indicated that it welcomed the initiative of the CSA in proposing the National Instrument. Another commentator indicated that it recognized and applauded the significant steps taken by the CSA to streamline and decrease the administrative burden with respect to reporting requirements.

Definition of Automatic Securities Purchase Plan

One commentator requested that the definition of “automatic securities purchase plan” in the 1999 Proposed Instrument be amended in order to extend the insider reporting exemptions to a plan of a subsidiary of a reporting issuer and to directors and senior officers of the subsidiary, where such a subsidiary has established a plan that allows its employees to purchase shares of the parent, which is itself the reporting issuer.

The CSA have determined that the proposed revision is reasonable, as there is no reason not to include a plan of a subsidiary of the reporting issuer in the definition of an “automatic securities purchase plan” and to extend the exemption to directors and senior officers of subsidiaries of reporting issuers. Accordingly, the definition of “automatic securities purchase plan” in section 1.1, and section 5.1 have been changed to add the words “or subsidiary of a reporting issuer” where appropriate.

A commentator submitted that the definition of “automatic securities purchase plan” should be amended to include dividend reinvestment plans offered by registered broker dealers, given that the Canadian securities regulators have on numerous occasions granted exemptions to such plans. The commentator also submitted that the optional cash component of such plans should also be included in the definition of “automatic securities purchase plan” as such plans are subject to restrictions as to when purchases are actually made, which make them unlikely to be abused for the purposes of insider trading.

The CSA have determined that the definition of “automatic securities purchase plan” need not be revised to include dividend or interest reinvestment plans (“DRIPs”), given that the Proposed Policy specifically states that the definition of “automatic securities purchase plan” includes DRIPs so long as the criteria in the definition are met.

The CSA have determined not to extend the definition of automatic securities purchase plans to DRIPs offered by registered dealers, as there are more discretionary elements to the participation of insiders in such arrangements. The CSA also determined not to extend the definition of automatic securities purchase plans to DRIPs offered by registered dealers, as they believe that it is appropriate to restrict the exemption to plans of reporting issuers of which the directors or senior officers are insiders, on the basis that this will effectively promote compliance with the requirements contained in the exemptions. The CSA note that, to the extent that registered dealers are subsidiaries of reporting issuers, the directors and senior officers of those reporting issuers and their subsidiaries will be able to avail themselves of the automatic securities purchase plan exemption provided by the Proposed National Instrument.

The CSA disagree with the suggestion that the optional cash component of an automatic securities purchase plan be included in the definition of “automatic securities purchase plan.” The decision to invest an additional amount of cash is discretionary and by its very nature falls outside of the ambit of an automatic securities purchase plan. A number of precedent decisions have declined to grant exemptive relief in respect of the optional cash component of such plans, and the CSA are of the view there is no good reason to change the regulatory position on this point.

Definition of Senior Officer in Securities Legislation -
Narrow Insider Reporting Requirements

A commentator submitted that the definition of “senior officer” should be narrowed such that the insider reporting requirements would not apply to a senior officer who is a vice-president of a reporting issuer or a vice-president of a subsidiary (including a significant subsidiary) of a reporting issuer so long as:

a) the vice-president is not in charge of a principal business unit, division or function of the reporting issuer or subsidiary, as the case may be;

b) the vice-president does not receive, in the ordinary course, information as to material facts or changes concerning the reporting issuer before the material facts or changes are generally disclosed; and

c) the vice-president is not an insider of the reporting issuer or a subsidiary in any other capacity.

It was submitted that the foregoing proposal would bring the insider reporting requirements more into line with the approach taken by the United States Securities and Exchange Commission and with other existing reporting requirements, such as those found in Form 40 which only require disclosure with respect to “executive officers” of an issuer, as opposed to all “senior officers”. The commentator was of the view that narrowing the insider reporting requirements would relieve the large administrative burden currently placed on certain issuers, particularly where titles are often conferred on individuals that “are honorific in nature and may not necessarily reflect the level of managerial responsibility of the individual”.

The CSA have determined that the Proposed National Instrument should not be revised to narrow the definition of “senior officer” for insider reporting purposes, as it is outside the scope of the Proposed National Instrument at this time to significantly amend the definition of insider contained in securities legislation. The CSA believe that this comment raises broader issues which the CSA are currently reviewing. Pending the results of such review, the CSA will consider exemption applications on a case by case basis in this regard.

Annual Reports

A commentator noted that individuals who are required to file insider reports within 90 days of the financial year end of certain issuers may have difficulty in complying because the statements produced by the issuers which such persons need in order to file such reports are only delivered to them on a calendar quarterly basis. The commentator therefore requested that the deadline for the annual reporting requirement for acquisitions of securities under an automatic securities purchase plan be extended to March 31 or, in the alternative, that the 1999 Proposed Instrument be changed to permit an issuer or insider to elect to report within 90 days of the end of either the calendar year or the fiscal year, in order to ensure that the required information is available on a timely basis to the persons required to file insider reports.

The CSA have determined that it is appropriate for the annual reporting to be on a calendar year basis. The CSA believe that this addresses the concern raised by the commentator, without the necessity of providing for an election. This change has been made in section 5.3 of the Proposed National Instrument.

List of Exempted Insiders

A commentator noted that the 1999 Proposed Instrument requires reporting issuers to maintain a list of all insiders exempted by the Instrument and the basis upon which such insiders are exempt. The commentator stated that for certain large institutions, the task of keeping a list of all insiders pursuant to this section is very burdensome. Instead, the commentator proposed that this requirement be amended such that a reporting issuer only be required to maintain a list of individuals who are required to file insider reports.

The CSA decided that it was appropriate to require issuers to keep a list of all those insiders who fall within the exemptions from insider reporting requirements. As a result, section 4.1 (formerly section 5.1) was added to the 1999 Proposed National Instrument. Section 4.1 is less onerous than the terms of numerous prior orders where issuers were required to provide copies of the list to the regulators and to promptly notify the regulators of any changes to the list. In the CSA’s view, requiring issuers to maintain a list of all those individuals who are exempt from the insider reporting requirements is a logical step; otherwise, it would be difficult for regulators to review an issuer’s practices in this regard. The CSA assume that, as a practical matter, determinations will have to be made by issuers as to the insiders who are eligible for relief under the Proposed National Instrument in any event, so that the maintenance of such a list should not be unduly onerous. Consequently, the CSA have determined that section 4.1 (formerly section 5.1) of the Proposed National Instrument should not be changed.




The Securities Rules, B.C. Reg. 194/97, is amended by repealing section 160.