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Securities Law

NIN 98/53 - Proposed National Instruments 62-101, 62-102 and 62-103 - Early Warning System and Related Matters [NIN - Rescinded]

Published Date: 1998-09-04
Effective Date: 1998-09-03
Related Document(s):

The Commission, together with the other members of the Canadian Securities Administrators (the "CSA"), is publishing for comment the texts of proposed National Instrument 62-101, entitled "Control Block Distribution Issues", National Instrument 62-102, entitled "Disclosure of Outstanding Share Data" and National Instrument 62-103, entitled "The Early Warning System and Related Take-Over Bid and Insider Reporting Issues". The proposed National Instruments contain footnotes that are not part of the proposed National Instruments but which have been included to provide background and explanation.

The proposed National Instruments are initiatives of the CSA. They are expected to be adopted as rules in each of British Columbia, Alberta, Manitoba, Ontario and Nova Scotia, as Commission regulations in Saskatchewan and as policies in all other jurisdictions represented by the CSA.

Terms used in the proposed National Instruments that are defined or interpreted in a definition instrument in force in the jurisdiction should be read in accordance with that definition instrument, unless the context otherwise requires.


The proposed National Instruments concern matters that the Ontario Securities Commission (the "OSC") first considered in 1993 relating to proposals for relief from early warning, insider reporting, take-over bid and control person distribution requirements. The OSC published a draft rule on these proposals for comment in 1995 (the "Ontario Draft Rule"). The CSA agreed to use the Ontario Draft Rule as the basis for the proposed National Instruments that will regulate substantially the same matters as the Ontario Draft Rule.

The British Columbia Proposal for Relief from Insider Reporting and Early Warning Reporting

Although the Commission supported most of the elements of the Ontario Draft Rule, it proposed to adopt a different approach to relief from insider reporting and early warning requirements.1

1 NIN#96/25 dated August 1, 1996

Under the Ontario Draft Rule, an institutional investor meeting certain criteria would have been exempt from both the insider reporting and early warning requirements if it reported under an alternative monthly reporting system. The major difference between the British Columbia approach to the alternative monthly reporting system and the Ontario approach lay in how frequently a follow-up filing was required, once the initial report was filed.

A consensus approach to providing relief from the insider reporting requirement and the early warning requirements was reached among the members of the CSA and is reflected in NI 62-103.

Substance and Purpose of Proposed National Instruments

The proposed National Instruments provide limited exemptions for eligible institutional investors from

  • the prospectus requirements applicable to control block distributions,
  • the early warning requirements in section 111(1) and 111(2) of the Securities Act, and
  • the insider reporting requirement in section 70 of the Securities Act.

In addition the proposed National Instruments require a reporting issuer to disseminate reliable information to the public on the designation and number or principal amount of outstanding securities of the reporting issuer.

Summary of Proposed NI 62-101

Proposed NI 62-101

  • exempts a control distribution made by an eligible institutional investor from the prospectus requirements if certain conditions are satisfied, namely that the eligible institutional investor does not have inside information about, or control of, the reporting issuer. The securities must not be subject to any requirements under securities legislation requiring them to be held for a specified period of time if the trade was not a control distribution.
  • provides relief to a pledgee making a distribution from a control block. This provision effectively ensures that for hold period purposes, a pledgee will be entitled to rely on the time that the pledgor held the securities.

Summary of Proposed NI 62-102

Proposed NI 62-102 requires a reporting issuer to include disclosure of outstanding share data in either its annual and interim financial statements filed under securities legislation, or in a supplement to those annual and interim financial statements. If the reporting issuer uses the supplement option, the supplement must be filed and sent to securityholders with the applicable annual and interim financial statements.

Relief from these disclosure requirements is available to non-Canadian reporting issuers that report in other jurisdictions if the issuer has

  • de minimis Canadian shareholdings, or
  • a class of securities registered under section 12(b) or 12(g) of the Securities Exchange Act of 1934 of the United States or is required to file reports under section 15(d) of that Act.

Summary of Proposed NI 62-103

Proposed NI 62-103 provides exemptions from the early warning requirements, the insider reporting requirement and related provisions to certain institutional investors that have a "passive intent" with respect to their ownership or control of securities of reporting issuers and permits those investors to disaggregate securities that they own or control for the purposes of those requirements in certain circumstances.

Some of the key terms and aspects of NI 62-103 are as follows:

  • "effective control" -This term is used to disqualify an eligible institutional investor from using the alternative monthly reporting system, in certain circumstances and for determining eligibility for relief from the insider reporting requirement. The term should be read in conjunction with the term "deemed effective control" set out in NI 62-103, which creates a rebuttable presumption of effective control at 30 percent, based on votes rather than voting securities.
  • "eligible institutional investor" - This includes financial institutions, pension funds, mutual funds that are not reporting issuers and investment managers. Certain of the relief provided by NI 62-103, including the availability of the alternative monthly reporting system (the "AMRS") and aggregation relief, is available only to eligible institutional investors and reflects the policy decision of the CSA to limit the relief to those investors that have expressed great difficulty in fully complying with the existing early warning system.
Relief from Early Warning Requirements
  • Alternative Monthly Reporting System - An eligible institutional investor, unless it has been disqualified under NI 62-103 is entitled to report under the AMRS instead of the current early warning requirements. An eligible institutional investor must file a report under the AMRS if its ownership or control of securities in a month crosses certain thresholds. The reporting requirements are initially triggered at 10% and thereafter when the level increases or decreases past increments of 2.5% in excess of 10%. Filing is required within 10 days after the end of the month and changes in the level throughout a month do not themselves trigger reporting obligations. For the purposes of calculating security holding percentages, the calculation may be performed at the end of the month.
  • Underwriter Relief - An underwriter is exempt from the early warning requirements and the obligation to report under the AMRS if certain conditions are satisfied. An underwriter relying on the exemption must issue and file a news release containing specific information relating to the proposed underwriting.
Aggregation Relief
  • Separate Business Units - An eligible institutional investor, together with any affiliates or associates, is relieved from the requirement to aggregate holdings of securities of an issuer owned or controlled through a business unit with securities owned or controlled through any other of its business units, if certain conditions are satisfied. The conditions are based on the principle of independence of business units. All entities that are relying on the relief must ensure full compliance with applicable securities legislation, including the specified conditions.
  • Securities Held by an Investment Fund - An eligible institutional investor, together with any affiliates or associates, is permitted to treat securities that are owned or controlled by certain investment funds over which it exercises or shares control, separately from other securities owned or controlled by it, if certain conditions are satisfied. The conditions are based on the principle that the portfolio manager is independent of the eligible institutional investor or its affiliates or associates and investment decisions are made independently by the portfolio manager.
Relief from Insider Reporting Requirement
  • Reporting - An eligible institutional investor is exempt from the insider reporting requirement if it reports under either the early warning requirements or the AMRS and certain conditions are satisfied. The conditions are based on the lack of knowledge of any undisclosed material information concerning the reporting issuer and the lack of any representatives of the eligible institutional investor who are directors or officers of the issuer. In addition, an eligible institutional investor would not be able to rely on the exemption if it possesses "effective control" of the issuer.

Anticipated Costs and Benefits of Proposed NI 62-101

The relief provided by NI 62-101 forms part of the general relief being provided to eligible institutional investors in that Instrument and NI 62-103, which should reduce compliance costs for eligible institutional investors and facilitate the disposition of securities by pledgees.

Anticipated Costs and Benefits of Proposed NI 62-102

The CSA anticipate that investors will benefit through enhanced disclosure of outstanding share data, and reporting issuers will benefit by the enhanced confidence that investors and prospective investors may have in reporting issuers as a result of the disclosure.

There may be some relatively minor costs to reporting issuers associated with compliance with the proposed National Instrument, but the CSA are of the view that the benefits outweigh any potential costs that may be associated with it.

Anticipated Costs and Benefits of Proposed NI 62-103

NI 62-103 will facilitate compliance by persons who have generally represented that full compliance with the early warning and related requirements is unduly burdensome. It will also ensure the consistent dissemination of important information concerning significant holdings to the marketplace. In so doing, it will enable the marketplace to operate more efficiently, but it will entail certain compliance costs.

In permitting a monthly reporting alternative, the CSA have attempted to minimize these costs, as well as any possible impact on trading patterns. In addition, the CSA have attempted to design an alternative early warning system similar to the one available in the United States. It is broader than the system in the United States in the sense that its use is not limited to certain classes of passive institutional investors, but is somewhat more restrictive in that it requires follow-up reporting at narrower intervals. It is also less demanding than its American counterpart, in that the CSA at this time are not proposing disclosure similar to that required of major passive investors in the United States.

In permitting aggregation relief, the CSA have tried to respond to the increasing diversity and integration of the Canadian financial services industry, and have attempted to minimize unnecessary costs, while seeking to ensure the dissemination of information that the market requires to operate efficiently.

Other elements of NI 62-103 allow exemptions from a number of filing and reporting requirements, which should serve to reduce compliance costs.

Specific Requests for Comment

The Commission des valeurs mobilières du Québec ("CVMQ") requests comment on the two following issues relating to NI 62-103.

First, an "eligible institutional investor" includes a financial institution and a "financial institution" includes entities engaged in financial services activities that are supervised and regulated under the insurance laws of the United Kingdom of Great Britain and Northern Ireland. An insurance company meeting this requirement is therefore one type of "eligible institutional investor" and may be entitled to the various types of relief provided. The CVMQ requests comment on whether the definition of "financial institution" should be expanded to include entities engaged in financial services activities that are entitled to carry on business in Canada and that are supervised and regulated under the insurance laws of any country.

Second, the CVMQ requests comment on whether the structure of the relief from aggregation is appropriate in that it enables the creation of a large number of business units which will be automatically entitled to aggregation relief provided that the specified criteria are satisfied.

For example, within a trust company, the company funds and the guaranteed funds would be considered separate business units as long as the criteria are respected. It appears important to the CVMQ that securities regulators be able to exercise their judgment regarding the application of the criteria in such cases.

Therefore the CVMQ would propose to provide aggregation relief only to

  • general accounts and segregated funds of a life insurance enterprise,
  • a Canadian portfolio of an insurance enterprise, and
  • for a trust company, the securities portfolio in which the estate, trust and agency funds invested would be treated separately from the securities portfolio in which the company and the guaranteed funds were invested.

Other eligible institutional investors would be entitled to obtain aggregation relief on a discretionary basis upon request to the securities regulatory authorities. Consequently, the CVMQ requests comment on this proposal in order to obtain insight as to its practicability and to find out if other institutional investors should benefit from automatic aggregation relief.


Interested parties are invited to make written submissions with respect to the proposed National Instrument. Submissions received by December 7, 1998 will be considered.

Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario 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
Department of Government Services and Lands, Newfoundland and Labrador
Registrar of Securities, Northwest Territories
Registrar of Securities, Government of the Yukon Territory

c/o Daniel P. Iggers, 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, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 17th Floor
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:

Brenda Leong
British Columbia Securities Commission
(604) 899-6647

David Sheridan
Alberta Securities Commission
(403) 297-2630

Barbara Shourounis
Saskatchewan Securities Commission
(306) 787-5645

Douglas Brown
Manitoba Securities Commission
(204) 945-0605

Tanis J. MacLaren
Ontario Securities Commission
(416) 593-8259

Fernand Lavigne
Commission des valeurs mobilières du Québec
(514) 873-5326

Bill Slattery
Nova Scotia Securities Commission
(902) 424-7355

DATED at Vancouver, British Columbia, on September 3, 1998

Douglas M. Hyndman

Ref: NIN#96/25