Canadian securities regulators announce review of Automatic Securities Disposition Plans

On October 24, the Canadian Securities Administrators (CSA) announced that it is undertaking a review of Automatic Securities Disposition Plans (ASDPs).

What you need to know

• There is currently no national framework governing ASDPs, which are automatic plans under which securities held by an insider may be sold in accordance with the insider’s predetermined set of instructions. The CSA’s review will consider whether the regulatory framework should be enhanced and harmonized across Canada.
• The CSA will consider whether insider reporting relief should continue to be granted for trades under ASDPs, and, if so, under what conditions.
• The CSA has not indicated whether it intends to impose any specific requirements for the implementation of an ASDP.
• Recent ASDP scrutiny illustrates that trades by insiders will often be judged with the benefit of hindsight—accordingly, there is a risk that such trades could be viewed negatively, notwithstanding the fact that they were made under an automatic plan.

Automatic Securities Disposition Plans

An ASDP is a plan under which securities held by an insider may be sold in accordance with the insider’s predetermined set of instructions. Provided that the plan is structured properly to be truly automatic and the insider does not retain discretion over trading decisions once the plan has been set up, ASDPs can facilitate orderly trading by insiders, including during blackout periods or when the insider may otherwise be in possession of material undisclosed information. Ordinarily, insiders are prohibited from trading while in possession of material undisclosed information. However, Canadian securities laws provide insiders with a defence to insider trading for sales or purchases of securities made under automatic plans where the trading instructions were established prior to the insider coming into possession of material undisclosed information.

There is currently no national framework governing ASDPs. And to date, the only regulatory guidance on ASDPs is an Ontario Securities Commission Staff Notice published in 2006.¹ The CSA’s review will consider whether the regulatory framework should be enhanced and harmonized across Canada. In particular, the CSA notes that it is focused on ensuring that ASDPs provide appropriate constraints on trading activity by corporate insiders and do not undermine the fairness of capital markets.

Some issuers who establish an ASDP obtain exemptive relief from insider reporting requirements that permit trades under an automatic plan to be reported on an annual basis (instead of within five days of the trade as required under the rules). However, relaxing the insider reporting requirements under an ASDP has been challenged by investor groups who argue that prompt reporting of insider trades under an ASDP is necessary to ensure transparency and foster investor confidence in the fairness and integrity of the capital markets. The CSA notes that it will consider whether such insider reporting relief should continue to be granted for trades under ASDPs, and, if so, under what conditions. Although existing relief will be unaffected, the CSA has advised that until the review is completed, Canadian regulators are unlikely to grant new ASDP insider reporting relief.

Although the CSA has not indicated whether it intends to impose any specific requirements for the implementation of an ASDP, some advocate for the codification of best practices that include the requirement to issue a press release upon the establishment of the plan, the imposition of a waiting period (between one to three months) before commencement of trades under the plan, a mandatory cooling off period between the termination of a plan and the creation of a new one, limiting the term of the plan (ASDPs typically do not extend longer than 24 months), and a mandatory formula to ensure trades are spread out evenly over the term of the plan.

ASDPs came under scrutiny recently when the Autorité des marchés financiers (AMF), the Québec securities regulator, announced that it was reviewing an ASDP implemented by Bombardier Inc. Bombardier established its ASDP shortly following release of its Q2 results, at a time when most issuers would reasonably conclude that all material information had been disclosed to the market. However, Bombardier’s share price sharply declined thereafter and, following release of its Q3 results, the AMF launched an investigation and directed Bombardier to suspend all sales of securities under the ASDP.

Although the AMF subsequently confirmed that it did not identify any offence or failure under securities legislation by participating senior executives or Bombardier under the ASDP, the AMF concluded that “the rapidly evolving situation at Bombardier shortly after the ASDP was implemented combined with the brief period between its implementation and the start of transactions and the significant volatility in the company’s forecasts and earnings led to a negative perception of the plan”. As a result, the AMF recommended that Bombardier reconsider the merits of maintaining its ASDP. Bombardier chose to follow the AMF’s recommendation and terminated the plan.

As illustrated by the Bombardier example, trades by insiders will often be judged with the benefit of hindsight—accordingly, there is a risk that such trades could be viewed negatively, notwithstanding the fact that they were made under an automatic plan.

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¹See OSC Staff Notice 55-701, “Automatic Securities Disposition Plans and Automatic Securities Purchase Plans”.