New Rules for Insider Reporting

David Surat and Alfred Page for The Lawyers Weekly

May 14, 2010

The federal government recently enacted a new rule on insider reporting requirements, intended to improve the relevance of insider reporting by focusing the requirements on a smaller group of insiders and accelerating the filing deadlines.

Significant changes reflected in Insider Reporting Requirements and Exemptions (NI 55-104) include:

  • accelerating the deadline for filing insider reports from ten days to five, effective after Oct. 31;
  • limiting the requirement for insider reports to a narrower class of "reporting insiders;"
  • extending the concept of deemed beneficial ownership from the take-over bid regime to insider reporting;
  • simplifying the reporting for equity-based compensation awards;
  • further integrating reporting of derivative transactions with securities transactions; and
  • amending the insider reporting exemption for eligible institutional investors under The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103).

Acceleration of the filing deadline

The reporting deadline for trades by reporting insiders has been shortened from ten calendar days to five. The new deadline will apply to any transactions that occur after Oct. 31, 2010.

The "reporting insider" concept

The new rule require insider reports only from a subset of core insiders of a reporting issuer. The definition of "reporting insider" includes those classes of insiders that are most likely to
  • have ordinary course access to material undisclosed information concerning the reporting issuer; and
  • directly or indirectly exercise, or have the ability to exercise, significant power or influence over the business, operations, capital or development of the reporting issuer.

For example, rather than including all officers of a reporting issuer, only the chief executive officer, chief operating officer and chief financial officer are explicitly listed. This change should simplify compliance for many large issuers, remove the impetus for a number of rule exceptions and routine exemptions and improve the relevance of insider reports generally.

Post-conversion beneficial ownership

Significant shareholders are included in the definition of reporting insider. Beneficial ownership of, or control or direction over, securities with more than ten per cent of the voting rights attached to a reporting issuer's securities are the defining attributes of a significant shareholder.

New rules extend reporting insider treatment to a "significant shareholder based on post-conversion beneficial ownership" which treats securities that may be acquired within 60 days as if they were owned. Accordingly, a shareholder who holds less than ten per cent of the votes attaching to the outstanding securities of a reporting issuer may be a reporting insider as a result of holding convertible securities, such as warrants, or through other rights to acquire securities.

Equity-based compensation

The new rule allows issuers to report grants of stock options and similar securities. If an issuer elects to file such reports, its reporting insiders may rely on an exemption from the normal filing deadline for reporting the receipt of such grants and file a single annual report. The existing exemptions for purchases or sales pursuant to automatic plans have also been continued.

Derivative transactions

The basic insider reporting requirement now applies to both
  • direct or indirect changes in beneficial ownership of, or control or direction over, securities of a reporting issuer, and
  • interests or rights associated with related financial instruments involving a security of the reporting issuer.

The definition of a related financial instrument includes derivatives and other instruments that affect a reporting insider's economic interest in securities of a reporting issuer or economic exposure to a reporting issuer. Accordingly, economic arrangements, such as total return swaps, that were formerly subject to disclosure under Insider Reporting for Certain Derivative Transactions (Equity Monetization) are now integrated in the primary insider reporting requirement.

The rules also include a supplementary insider reporting obligation that applies to any other agreement, arrangement or understanding that has the effect of altering a reporting insider's economic exposure to a reporting issuer that involves a security of the reporting issuer or a related financial instrument. The companion policy and response to the comments published indicate that cash-settled and synthetic arrangements are reportable.

Changes for eligible institutional investors

In order for such investors to continue to report exclusively under the early warning or alternative monthly reporting systems, they must now include disclosure of their position under related financial instruments in these reports, and disclose significant changes in this position. Changes to interests in, or rights or obligations associated with, related financial instruments that have a similar economic effect as an increase or decrease of 2.5 per cent of the investor's security-holding percentage of voting or equity securities of the reporting issuer are considered to be significant.

This obligation is separate from the reporting required for actual changes in an eligible institutional investor's security-holding percentage of voting or equity securities under the early warning and alternative monthly reporting regimes.

David Surat is counsel in the Securities and Capital Markets Group in the Toronto office of Borden Ladner Gervais LLP. Alfred Page is partner and Toronto regional leader of the Securities and Capital Markets Group, and the Venture Capital industry focus group, at the same firm. Find a Canadian corporate lawyer near you
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