Introduction

On December 10, 2020, the Canadian Securities Administrators (CSA) published Staff Notice 55-317 – Automatic Securities Disposition Plans (the Notice), providing guidance to issuers and insiders on the establishment, administration and disclosure of automatic securities disposition plans (ASDPs).

This Notice is further to the CSA's review of ASDPs as announced on October 24, 2019 and supersedes the guidance provided by the Ontario Securities Commission in Staff Notice 55-701 – Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (the OSC Notice).

Background to ASDPs

Under Canadian securities law, insiders are generally prohibited from trading in an issuer's securities with knowledge of material non-public information (MNPI). As technology has progressed, information regarding financial performance and MNPI has become increasingly available to insiders. Insiders of growth companies involved in potential mergers and acquisitions activity often find that they are subject to special blackout periods that restrict them from trading during the regular quarterly open trading window under the company's insider trading or blackout policy. At the same time, there has been an increasing emphasis on equity as a component of insiders' compensation, and increasing expectations on insiders holding equity. To permit securities dispositions by insiders, Canadian securities laws permit insiders to rely on an insider-trading defence or exemption where the trade in securities is made under an "automatic plan", entered into prior to the insider acquiring knowledge of MNPI.

An ASDP is an arrangement, designed to afford insiders the benefit of this exemption by permitting sales of securities by a third-party dealer, or plan administrator, on behalf of an insider pursuant to predetermined instructions that are not subject to the insider's exercise of discretion.

When designed, established and administered in accordance with meaningful conditions and restrictions, ASDPs can be a legitimate mechanism to ensure that insiders are permitted to sell securities of an issuer even during periods when the insider may be in possession of MNPI. The CSA published the Notice to provide guidance relating to the establishment, administration and use of ASDPs and the disclosure requirements pertaining to trades under such plans in order to reduce the potential for improper insider trades and to assist issuers and insiders in managing market perception of insider trades under ASDPs. While technically ASDPs are entered into by insiders directly with a broker or other plan administrator, the CSA is clear that issuers should be involved in the establishment and administration of ASDPs. The implication is that issuers have increased responsibility for insider trading matters in this area.

Recommendations from the CSA

The key recommendations from the CSA include the following:

Establishment of ASDPs

Insiders entering into ASDPs

The Notice emphasizes that ASDPs should be entered into by an insider in good faith, when the insider does not possess MNPI, and not for the purpose of evading the insider trading prohibition prescribed by Canadian securities laws. The Notice provides the following recommendations:

• Ensure insiders notify the issuer of their intent to enter into an ASDP in order to enable the issuer to provide guidance and oversight of the ASDP to the insider; and
• Ensure insiders obtain issuer certification to provide to the dealer or plan administrator that, to the best of the issuer's knowledge, the insider is not in possession of MNPI when entering into an ASDP and that the ASDP is entered into in accordance with any insider trading policy or other relevant internal policies of the issuer.

Administration of ASDPs

The Notice underlines the importance of ensuring that ASDPs are administered in a way that reduces the risk of inappropriate trading activities, such as the influencing the timing of trades. The Notice provides the following recommendations.

Trading parameters and other instructions

• Provide clear trading parameters and other instructions to the dealer or plan administrator at the time of entering into the ASDP. Instructions should include either a specific formula or specify the number of securities to be sold, and to set any minimum trade price and any rate of frequency of sales;
• Prohibit dealers or plan administrators from consulting with insiders regarding any sales of securities under the ASDP;
• Prohibit insiders from disclosing to the dealer any information concerning the issuer that may influence the execution of the plan.

Minimum term

• The term of the ASDP should be sufficiently long to avoid any potential use of MNPI (e.g., 12 months);
• Avoid a concentration of trades at the beginning of the term of an ASDP to help insiders manage the perception in the market that trades were timed to benefit from MNPI or that information was withheld to the market to benefit insiders; and

Waiting period

• Prohibit trades under an ASDP before the issuer’s next interim financial report or annual financial statements have been filed. The waiting period, being the period between the establishment of the ASDP and the first trade under the plan, should be as long as possible, since the longer the waiting period, the more likely any insider’s MNPI will be obsolete or publicly disclosed prior to the commencement of trading under an ASDP.

Amendments, suspension and termination

The Notice states that ASDPs should contain meaningful restrictions on the ability of insiders to amend, suspend or terminate the plan. The Notice provides the following recommendations:

• Impose a limit on the number or nature of permitted amendments to the ASDP;
• Prohibit any amendment, suspension or termination during trading blackouts under the issuer's insider trading policy;
• Require the insider and issuer to represent to the dealer or plan administrator, and request the issuer to certify the representation, that the insider is not in possession of MNPI at the time of the amendment, suspension or termination;
• Impose the waiting period to apply following any amendment or suspension;
• Require the issuer or insider to disclose in a news release filed to SEDAR the circumstances that led to the amendment, suspension or termination and, where applicable, the nature of the amendment, together with a representation by the insider that the insider was not in possession of any MNPI at the time of such amendment, suspension or termination; and
• Insiders should obtain the approval of the board of directors of the issuer for any amendment, suspension or termination.

Guidance on disclosure of ASDPs

Disclosure regarding the ASDP

The Notice recommends that the issuer or the insider disclose relevant information regarding the ASDP by way of a news release filed on SEDAR. Specifically, the Notice recommends that the issuer or insiders disclose: (i) the establishment of the plan; (ii) the plan's principal terms and conditions such as the parties to the plan, its term, the waiting period before trades can start under the plan and the restrictions on the ability of the insider to amend, suspend or terminate the plan; and (iii) the number of securities to be sold under the ASDP and the minimum price at which the securities can be sold.

Insider reports and disclosure

Insiders that are "reporting insiders", as defined in National Instrument 55-104 – Requirements and Exemptions (NI 55-104), are required to file an insider report each time there is a trade in securities of the issuer by or on behalf of the insider under an ASDP. When filing an insiders report, an insider should specify that the trades were made under an ASDP.

The CSA reminds insiders that a transfer of an insider's securities to a dealer or a plan administrator for the purpose of an ASDP is a transfer that should be reported in accordance with section 3.3 of NI 55-104, which requires the filing of a report disclosing all transfers of control over the securities that the insider holds in the issuer.

The role of issuers

Although ASDPs are arrangements entered into between an insider and a dealer or plan administrator, the role of issuers in providing oversight of ASDPs is critical. It is recommended that issuers take an active role by overseeing the establishment and administration of ASDPs by insiders to ensure that the ADSPs and insiders comply with Canadian securities laws and the relevant insider trading policies of the issuer. The following actions are recommended for issuers:

• Include in insider trading policies a restriction against the entering into of ASDPs during the issuer’s trading blackout periods;
• Ideally establish insider ASDPs themselves or at least review the terms and conditions of the ASDP established by the insider to assess whether they are automatic in substance, comply with the issuer’s insider trading policy and contain protections against inappropriate trading activities by insiders;
• Review and confirm that the insider is not in possession of MNPI when entering into the ASDP and that the ASDP is entered into in accordance with any relevant policies of the issuer. Once confirmation has been obtained, provide certification to the dealer of plan administrator that the insider is not in possession of MNPI;
• Periodically confirm that the insider continues to comply with the terms and conditions of the ASDP and any insider trading policy or other relevant internal policies adopted by the issuer; and
• Monitor the use of the ASDP upon the occurrence of significant events in the life of the issuer before those events are publicly disclosed.

By taking these proactive steps to assess the ASDPs and to ensure compliance with securities laws and the issuer’s policies, an issuer will be provided with an opportunity to manage market perception and avoid potential reputational harm associated with an inadvertent or apparent breach of securities laws.

Conclusion

The Notice was published to provide useful and practical guidelines for both issuers and insiders to better establish and administer ADSPs and ensure compliance with applicable securities law, appropriate corporate governance practices and increase confidence in the fairness of capital markets. In the Notice, the CSA has made clear an expectation of issuer involvement in the establishment and administration of ASDPs. As a result, issuers should carefully consider the implications of ASDPs in establishing or modifying insider trader policies and be cautious when insiders establish ASDPs. Once an ASDP has been implemented, issuers should remain involved and ensure that they periodically confirm the insiders’ compliance with the approved ASDPs and insider trading policies. Further, issuers should ensure they are kept appraised of and address any developments that could result in reputational harm to the issuer.

This article follows our previous client alert “Automatic securities disposition plans: Best practices and recent guidance”.

For more information regarding the content of this insight, please contact the authors Bill Gilliland and Joshua Mamdani.