New guidance on automatic securities disposition plans (ASDPs) published by the Canadian Securities Administrators on December 10, 2020 focuses on the reduction of the potential for improper insider trades and enhancing transparency around the establishment and use of ASDPs.
CSA Staff Notice 55-317 Automatic Securities Disposition Plans (the Staff Notice) notably sets out the following recommendations:
- Oversight by the issuer when establishing and using ASDPs to seek to ensure compliance with securities legislation and any insider trading or internal policies of the issuer.
- Establishment of a term for the ASDP that is sufficiently long to reduce the risk of potential use of material non-public information (MNPI).
- Implementation of a longer waiting period prior to the first transaction made under the plan. The CSA recommend waiting until the issuer's next interim financial report or annual financial statements prior to the start of trades under an ASDP.
- Imposition of meaningful restrictions on the insider's ability to amend, suspend or terminate the ASDP to seek to ensure that MNPI cannot be used to benefit the insider.
- Disclosure of relevant information regarding an ASDP by way of news release filed on SEDAR.
As we have previously discussed, insiders of public companies are generally restricted by Canadian securities laws from trading the company's securities while in possession of MNPI. However, insiders may avail themselves of an exemption from the insider trading restrictions by entering into an "automatic plan", prior to the insiders' acquisition of any MNPI, to sell securities. Most typically, such plans take the form of an arrangement between the insider and a dealer or a plan administrator, providing for the sale of the issuer's securities during a predetermined period with predetermined instructions.
Directors and officers are often encouraged to hold a significant number of securities in accordance with corporate share ownership policies and share based compensation arrangements. However, as a result of blackout periods related to quarterly and annual filings as well as potential securities offerings and M&A transactions, directors, officers and other insiders of reporting issuers are often unable to dispose of these securities for significant portions of the year. Consequently, ASDPs provide directors and officers with the ability to comply with insider trading prohibitions and blackout periods yet maintain the ability to dispose of securities where appropriate. Where an insider may otherwise be restricted from selling the issuer's securities through the possession of MNPI or trading "black-outs", ASDPs provide a way to navigate trading restrictions by allowing insiders to sell securities of the company to which they are an insider in a pre-determined way.
New Guidance on the Establishment and Administration of ASDPs
To address recent concerns that certain features of an ASDP may be contrary to the public interest, the CSA have provided the following guidance in the Staff Notice with respect to establishing and administering ASDPs.
Establishment of the ASDP
Entering into the ASDP by Insider: As previously discussed, ASDPs should only be entered into by an insider in good faith and without the possession of MNPI. The CSA recommend that issuers include in their insider trading policies a restriction against the entering into of ASDPs during the issuers' trading blackout periods. In practice, it is also advisable to include provisions in an issuer's insider trading policy that require internal approval of any ASDP entered into by an insider.
Oversight by Issuer: To seek to ensure compliance with securities legislation and internal insider trading policies, the CSA recommend that the issuer have oversight of the establishment and use of ASDPs by its insiders. It is further recommended that part of this oversight include a review of the terms and conditions of ASDPs to seek to ensure the plans are truly automatic and contain sufficient protections against misuse.
Additionally, the Staff Notice recommends that issuers:
- certify to the dealer involved in the ASDP that to the issuer's knowledge the insider is not in possession of MNPI at the time of entering into the plan;
- take reasonable steps designed to ensure the insider is complying with the ASDP and internal policies of the issuer (for example, by requiring insiders to certify compliance at regular intervals); and
- monitor the use of the ASDP upon the occurrence of significant events (including material changes and M&A transactions) before such events are publicly disclosed.
Administration of the ASDP
Trading Parameters and Other Instructions: To reduce the risk, or perception of risk, of an insider inappropriately influencing the timing of trades or number of securities sold under an ASDP, the CSA recommend that the insider provide clear trading parameters in writing to the dealer or plan administrator when entering into such plan. After creating an ASDP, the insider should also be prohibited from consulting with or providing information to the dealer regarding the sale of securities under the ASDP.
Minimum Term: The CSA remain flexible on the length of the term for an ASDP. However, they suggest that the term be sufficiently long (for example 12 months), in order to seek to avoid the use, or perception of use, of any MNPI. While this may be difficult to achieve in practice, the CSA also recommend that trading parameters under the ASDP avoid concentrating trades at the beginning of the term.
Waiting Period: The CSA recommend a longer waiting period between the creation of an ASDP and the first transaction made under the plan. Instead of the commonly observed 30-day waiting period, the CSA recommend that trades under an ASDP occur following the filing of the issuer's next interim financial report or annual financial statements. The rationale for a longer waiting period being that the longer the period of time, the less likely it is that information held when entering into the plan remains relevant and/or undisclosed prior to any sale under the plan.
Amendments, Suspension and Termination: While ASDPs may legitimately require amendment, suspension or termination from time to time, it is generally expected that such actions take place only in limited circumstances. Where amendments are required, the CSA strongly encourages that ASDPs include "meaningful restrictions" on an insider's ability to do so in order to avoid the perception that the ASDP is not truly automatic.
Some restrictions surrounding amendments, suspension and termination recommended by the CSA include:
- setting a limit on the number or type of permitted amendments;
- prohibiting any action during trading blackouts;
- having the insider represent to the dealer or plan administrator that they are not in possession of MNPI;
- utilizing the waiting period discussed above after any amendment or suspension; and
- requiring the issuer or insider to disclose in a news release filed on SEDAR why such amendment, suspension, or termination was made, including a representation that the insider was not in possession of MNPI at such time.
It is expected that observing the CSA's guidance with respect to press releasing amendments, suspensions or the termination of ASDPs may result in an increase in the number of ASDP-related press releases, as historically not all insiders and issuers have publicly announced these types of occurrences, particularly when they did not constitute material information in respect of the issuer.
New Guidance on Disclosure of ASDPs
While this may prove onerous for insiders and issuers, the CSA recommend disclosing information about ASDPs on SEDAR as they are established by way of a news release. The CSA do not appear to suggest that news release disclosure should depend on whether the establishment of a given ASDP constitutes material information considering the identity of the insider, the number or value of securities involved, or other relevant circumstances. Once again, it is expected that complying with this guidance may result in numerous ASDP-related press releases that are of marginal interest to the market. According to the Staff Notice, the news release should discuss the establishment of the plan, its terms and conditions, including many of the items discussed above (for example, the term, waiting period, and restrictions on amendments, suspensions, and terminations), and the number of securities to be sold and the minimum price, if applicable. While the CSA suggest that this type of information will provide useful information to the market as to the insider's views of the issuer's prospects, such details are also arguably influenced by personal financial decisions and go far beyond disclosure that has been recommended pursuant to past CSA guidance or that would apply under U.S. securities laws and market practices.
When filing insider reports, the CSA suggests specifying that the trades were made pursuant to an ASDP. While historically relief from the insider reporting obligation has been available to insiders relying on ASDPs, allowing such insiders to report on an annual rather than timely basis, the CSA stopped granting such relief in 2019 when it announced it would be reviewing ASDP practices.
Previous Guidance on Automatic Plans
While the Staff Notice provides significant guidance with respect to ASDPs, it is not entirely new. Since 2006, automatic plans in Canada have generally been structured to comply with OSC Staff Notice 55-701 - Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (OSC Staff Notice 55-701). OSC Staff Notice 55-701 discusses how insiders can structure automatic plans to rely upon the relevant exemption provided by section 175(2)(b) of the Regulations under the Securities Act (Ontario) from the prohibition against insider trading. While the Staff Notice supersedes OSC Staff Notice 55-701 with respect to guidance on ASDPs, OSC Staff Notice 55-701 continues to apply to automatic securities purchase plans established under Ontario Securities Laws.
The Staff Notice was published to fill gaps in previous guidance regarding ASDPs, and to address recent concerns surrounding the potential misuse of ASDPs, ensure good corporate governance, and increase confidence in the fairness of capital markets. While the Staff Notice does not implement new legal requirements or modify current ones, it does provide a comprehensive set of guidelines to which insiders and issuers may now rely upon when developing and implementing ASDPs, many of which are already being followed. Nonetheless, certain new guidelines, especially those relating to enhanced waiting periods and detailed press release disclosure, may result in changes to existing practices. For further information, please see CSA Staff Notice 55-317 Automatic Securities Disposition Plans (December 10, 2020).
This article was co-authored with the assistance of Holly Anderson, articling student.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.