Notice: NI - 55-101 - Insider Reporting Exemptions

 

NOTICE OF PROPOSED NATIONAL INSTRUMENT 55-101
AND COMPANION POLICY 55-101CP
EXEMPTION FROM CERTAIN INSIDER REPORTING REQUIREMENTS

AND

RESCISSION OF OSC POLICY 10.1 APPLICATIONS FOR EXEMPTION FROM INSIDER REPORTING OBLIGATIONS FOR INSIDERS OF SUBSIDIARIES AND AFFILIATED ISSUERS

 

This Notice is accompanied by a proposed National Instrument and a Companion Policy,each of which is being published for comment.

Substance and Purpose of Proposed National Instrument and Companion Policy

The purpose of the proposed National Instrument is to provide an exemption from theobligation to file insider reports under Canadian securities legislation for certain directorsand senior officers of subsidiaries and of affiliates of insiders who neither hold thesecurities of a reporting issuer in significant amounts nor are in a position to acquireknowledge of undisclosed material information. The proposed National Instrument alsopermits directors and senior officers of reporting issuers to report acquisitions of securitiesunder automatic securities purchase plans on an annual basis in most circumstances.

The proposed National Instrument is an initiative of the Canadian Securities Administrators(the "CSA"), and is proposed to be adopted as a rule in each of British Columbia, Alberta,Manitoba, Nova Scotia and Ontario, as a Commission regulation in Saskatchewan and asa policy in each of the other jurisdictions represented by the CSA.

As a result of the proposed National Instrument, certain local policies such as OntarioSecurities Commission Policy 10.1, British Columbia Local Policy Statement 3-14 andPolicy Statement No. Q-10 of the Commission des valeurs mobilières du Québec that setout guidelines for applications for exemptions from the insider reporting obligations inthese situations will no longer be necessary when the proposed National Instrument isimplemented. It is proposed that these policies be repealed. In Ontario, Policy 10.1 alsorefers to directors and senior officers of companies that are insiders of the reporting issuer.As relief for these persons is not applied for or granted very often, and because this typeof relief is not covered in similar policies of other provinces and is more appropriately dealtwith on a case by case basis, those insiders are not granted relief under the proposedNational Instrument.

Canadian securities legislation imposes an obligation on insiders to disclose ownershipof and trading in securities of reporting issuers, in part in an attempt to deter illegal insidertrading and to increase investor confidence in the securities market by providing investorsand potential investors with information concerning the trading activities of substantialsecurityholders and other insiders of the issuer. The definition of "insider" in Canadiansecurities legislation, other than the Quebec legislation, includes any person or companybeneficially owning, directly or indirectly, or exercising control or direction over, votingsecurities of a reporting issuer carrying more than 10 percent of the voting rights attachedto all voting securities of the reporting issuer. In Quebec, the definition is slightly differentas an insider includes a person who exercises control over more than 10 percent of a classof voting shares or shares with an unlimited right to a share of the profits or assets of theissuer on a winding-up. Every director or senior officer of an insider of a reporting issueris also an insider of the reporting issuer. Canadian securities legislation, other than theQuebec legislation, stipulates that a company is deemed to beneficially own securitiesbeneficially owned by its affiliates. As a consequence of these definitions, insiderreporting obligations are imposed on directors and senior officers of affiliates of an insiderof a reporting issuer. These directors and officers may have no relationship with thereporting issuer and no access to undisclosed material information concerning thereporting issuer.

Canadian securities legislation also imposes an obligation on insiders to file a report foreach purchase made under automatic securities purchase plans. These purchases aretypically in amounts and at prices and times determined by established formula or criteriaand the only investment decision by the insider is the decision to participate in the plan orcease participation in the plan.

The Canadian securities regulatory authorities have recognized the extent to whichcompliance with the insider reporting requirements can be unnecessarily burdensome andhave, in recent years, provided exemptive relief on a case-by-case basis in response toapplications made on behalf of directors and senior officers of subsidiaries and affiliatesof corporate insiders of reporting issuers and in respect of purchases made underautomatic securities purchase plans. The proposed Companion Policy makes it clear thatthese orders are, except as otherwise provided in them, still in effect notwithstanding theimplementation of the proposed National Instrument. The degree to which the ordersreplicate each other suggests that the process of granting case-by-case exemptions isroutine and for that reason the relief set out in the proposed National Instrument is merited.

The proposed Companion Policy also makes it clear that the proposed National Instrumentonly provides an exemption from the insider reporting requirements and not from liabilityfor improper trading under Canadian securities legislation.

Summary of Proposed National Instrument

The proposed National Instrument is divided into five parts.

Part 1 contains a definition section.

Part 2 provides an exemption from insider reporting for directors and senior officers ofsubsidiaries of a reporting issuer, other than persons who are directors or senior officersof significant subsidiaries or who in the ordinary course receive information as to materialfacts or material changes concerning the reporting issuer prior to general disclosure. Theexemption is also not available to a person who is an insider of the reporting issuer insome other capacity and not otherwise exempted. A significant subsidiary is defined to bea subsidiary that represents 10 percent or more of the consolidated assets or 10 percentor more of the consolidated revenues of the reporting issuer.

Part 3 provides an exemption for directors and senior officers of affiliates of insiders of areporting issuer. This exemption is not available to directors or senior officers who, in theordinary course, receive information as to material facts or material changes concerningthe reporting issuer before general disclosure of the material fact or material change. Itis also not available to directors or senior officers of an affiliate that supplies goods orservices to, or has contractual arrangements with, the reporting issuer or a subsidiary, thenature and scale of which could reasonably be expected to have a significant effect on themarket price or value of the reporting issuer's securities. The exemption is also notavailable to a person who is an insider of the reporting issuer in some other capacity andnot otherwise exempted. It should be noted that Part 3 does not apply in Quebec, asunder the Québec Securities Act directors and senior officers of affiliates of insiders do nothave insider reporting obligations.

Part 4 provides an exemption from the obligation to report purchases under automaticsecurities purchase plans provided that each insider reports the purchases when reportinga sale of securities or, if none have been sold, on an annual basis. The exemption in Part4 is not available if the insider also satisfies the insider test under securities legislation thatis triggered by shareholdings in excess of 10 percent.

Part 5 imposes an obligation on the reporting issuer to maintain a list of all insiders of thereporting issuer exempted by Parts 2 and 3 of the proposed National Instrument and thebasis on which each insider comes within the exemption.

Summary of Proposed Companion Policy

The proposed Companion Policy has five parts. The first part sets out the purpose of theproposed Companion Policy. The second part provides commentary on the definition of"automatic securities purchase plan". The third part makes it clear that the proposedNational Instrument only provides an exemption from the insider reporting requirement andnot from the provisions in Canadian securities legislation imposing liability for improperinsider trading. The fourth part deals with the reporting of acquisitions or dispositions bya director or senior officer of a reporting issuer of securities, other than under an automaticpurchase plan. Those transactions must be reported within the time period required bysecurities legislation. The report filed for acquisitions under the automatic purchase planmust reconcile acquisitions under the plan with other acquisitions or dispositions. The fifthpart states that previous exemptive orders are, except as otherwise provided in them, stillin effect notwithstanding the implementation of the proposed National Instrument.

Terms used in the proposed Companion Policy that are defined or interpreted in theNational Instrument or a definition instrument in force in the jurisdiction should be read inaccordance with the National Instrument or definition instrument, unless the contextotherwise requires.

Authority for the Proposed National Instrument

In those jurisdictions in which the proposed National Instrument is to be adopted as a ruleor regulation, the securities legislation in each of those jurisdictions provides the securitiesregulatory authority with rule-making or regulation-making authority in respect of thesubject matter of the proposed National Instrument.

The proposed National Instrument is being proposed for implementation in Ontario as arule. In Ontario, the following provisions of the Securities Act (Ontario) (the "Ontario Act")provide the Ontario Securities Commission (the "Ontario Commission") with authority toadopt the proposed National Instrument as a rule. Paragraph 143(1)10 of the Ontario Actauthorizes the Ontario Commission to prescribe requirements in respect of the books,records and other documents required by subsection 19(1) of the Ontario Act to be keptby market participants. Paragraph 143(1)11 of the Ontario Act authorizes the OntarioCommission to make rules regulating the listing or trading of publicly traded securitiesincluding requiring reporting of trades and quotations. Paragraph 143(1)30 of the OntarioAct authorizes the Ontario Commission to make rules providing for exemptions from anyrequirement of the insider trading provisions of the Ontario Act contained in Part XXI of theOntario Act. Paragraph 143(1)39 of the Ontario Act authorizes the Commission to makerules, among other things, respecting the media, format, preparation, form, content,execution and certification of documents required under the Ontario Act.

Related Instruments

The proposed National Instrument and proposed Companion Policy are related to eachother as they deal with the same subject matter. In Ontario, the proposed CompanionPolicy is related to sections 106 to 109 of the Securities Act (Ontario) and Part VIII of theRegulation to the Act.

Alternatives Considered

Consideration was given to continuing the current practice of granting the relief set out inthe 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 andaccordingly the proposed National Instrument would provide relief to certain insiders whofall within the scope of the insider reporting requirement. This is a step in implementingthe recommendations of the Task Force on Operational Efficiencies that reported to theCSA in 1995.

Unpublished Materials

In proposing the National Instrument and Companion Policy, the CSA has not relied on anysignificant unpublished study, report, decision or other written materials.

Anticipated Costs and Benefits

The proposed National Instrument will be beneficial to certain market participants who fallwithin the scope of the insider reporting requirement of Canadian securities legislation asthey will in some cases be relieved from reporting and in other cases will have to reportless frequently. In addition, those persons or the reporting issuer of which they are aninsider will no longer have to incur the expense of applying for relief. The only costsimposed by the proposed National Instrument arise from the requirement in Part 5 tomaintain a list of exempted insiders.

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

Comments

Interested parties are invited to make written submissions with respect to the proposedNational Instrument and Companion Policy. Submissions received by November 19, 1999will be considered.

Submissions should be sent to all of the Canadian securities regulatory authorities listedbelow 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

Department of Government Services and Lands, Newfoundland and Labrador

Registrar of Securities, Northwest Territories

Registrar of Securities, Nunavut

Registrar of Securities, 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 duQuébec as follows:

Claude St Pierre,Secretary
Commission des valeurs mobilières du Québec
Tour de la Bourse
C.P. 246, 22nd Floor
Montréal, Québec H4Z 1G3

 

A diskette containing the submissions (in DOS or Windows format, preferablyWordPerfect) should also be submitted. As securities legislation in certain provincesrequires that a summary of written comments received during the comment period bepublished, 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
[email protected]
(604) 899-6748
or (800) 373-6393 (in B.C.)

Agnes Lau
Deputy Director, Capital Markets
Alberta Securities Commission
[email protected]
(403) 422-2191

Barbara Shourounis
Director
Saskatchewan Securities Commission
[email protected]
(306) 787-5645

Doug Brown
Counsel
Manitoba Securities Commission
[email protected]
(204) 945-2548

Paul De Souza
Forensic Accountant, Enforcement Branch
Ontario Securities Commission
[email protected]
(416) 593-8295

Sylvie Lalonde
Conseillère en réglementation
Commission des valeurs mobilières du Québec
[email protected]
(514) 940-2199 Ext. 4555

 

Text of Proposed Rescission of Ontario Securities Commission Policy 10.1

OSC Policy 10.1 is replaced by the proposed National Instrument.

The text of the proposed rescission is:

"Ontario Securities Commission Policy 10.1 Applications for Exemption from InsiderReporting Obligations for Insiders of Subsidiaries and Affiliated Issuers is rescindedeffective upon the date proposed National Instrument 55-101 comes into force."

Proposed National Instrument and Companion Policy

The text of the proposed National Instrument and Companion Policy follows, together withfootnotes that are not part of the proposed National Instrument and Companion Policy, asapplicable, but have been included to provide background and explanation.

DATED: August 20, 1999.