New insider trading regulation may result in a broadening of liability beyond the executive suite
'Can open – worms everywhere!’ My friend’s succinct phrase must describe perfectly how regulators feel whenever they publish proposed rules for comment. No matter how good their intentions, practitioners can find themselves facing the most unintended of consequences in a heartbeat.
Proposed National Instrument and Companion Policy 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) is no exception. Canadian regulators intend to modernize, harmonize and streamline insider reporting in Canada through changes set out in the proposed instrument. The comment period was open from December 2008 to March 2009. Large-cap companies, institutional investors and law firms provided the most comments. Here are the provisions that sparked the biggest reactions:
1. Accelerate transaction filing deadlines from 10 calendar days to five. Opinion was nearly unanimous that accelerated deadlines should be based on business days rather than calendar days. In the case of issuer or agent-filed reports, this ensures time to receive and verify communication from the insider, reducing the need to file corrections. In the case of insider-filed reports, it ensures assistance will be available to personnel who use the system only occasionally.
Although the System for Electronic Disclosure by Insiders (SEDI) is available 24/7, technical support and filing assistance is available only during business hours. Several commentators suggest that SEDI receive an update and better support systems, or that online training be provided.
2. Reduce the number of reporting insiders. A new definition is provided that requires a reporting insider to have both access to material undisclosed information and significant power over the business of the issuer. Unfortunately, this principles-based approach is supplemented by an extensive list of those considered to be insiders, including ‘a person… responsible for a principal business unit, division or function of… a major subsidiary.’ This provision nearly negates any reduction in the number of reporting insiders for many issuers.
Most organizations feel it is more appropriate to apply the ‘access to information’ and ‘power over the business’ tests to every potential reporting insider. Mitigating this slightly is the proposal that major subsidiaries be redefined to include only those with 30 percent (up from 20 percent) of assets or revenue. One issuer provided its own internal analysis and found that, with the revised definition, only four people came off its current list of 58 reporting insiders. If the ‘access to information’ and ‘power over the business’ tests were applied instead, however, its list would be reduced by 24.
3. Report on ‘related financial instruments’ including compensation programs, such as phantom stocks that cannot be settled for shares. Observers generally agree that disclosure of these types of compensation programs occurs appropriately and adequately in the management proxy circular. In addition, the units granted are non-transferable and do not represent an investment decision on the part of the insider. If anything, the additional disclosure would serve only to obscure investment decisions within a volume of irrelevant information.
4. Disclosure of late filing fees in the proxy circular. Most commentators gave this provision a resounding ‘No’. It appears the CSA, the Canadian regulator, is looking to find an elegant fix to the inconsistent rules of the various provincial regulators by passing the responsibility on to issuers. Three major concerns arise, however.
First, many issuers don’t report for their insiders and would have to set up processes to determine whether late fees were incurred. Even then, issuers may not be able to confirm the accuracy of the information. Next, the information requested is inconsistent with the purpose of the annual proxy circular: providing disclosure to assist with voting on election of directors and other proper business. It is also inconsistent with the disclosure requirements for the annual information form that specifically excludes reporting of late fees.
Finally, most late filings occur by oversight, and disclosure would result in negative attention on both the insider and the issuer.
5. Report on post-conversion beneficial ownership of a security convertible within 60 days. On the surface, this harmonizes with aspects of the early warning requirements for takeover bids and issuer bids. But the purpose of those regulations is not the same as the insider reporting requirements, and this may result in individuals who are not insiders being forced to report.
6. Look-back reporting. There was near-consensus that SEDI (and not SEDAR) is the appropriate place for all insider reporting, including look-back reporting. Observers agree SEDI needs to be fixed so it does not generate late fees when look-back filings are done, rather than moving the filings onto SEDAR, where reporting insiders would require an agent to file.
7. Issuer grant reports. The idea of requiring issuer grant reports for things like option grants stirred much confusion. What seems like a way to reduce the burden on reporting insiders merely increases the burden on issuers because individual filings still need to be completed. There was confusion as to what the filing deadlines would be for individual reporting insiders on the issuer grant transaction.
