In December, the Canadian Securities Administrators (CSA) published guidance for issuers and insiders on the establishment, administration and disclosure of automatic securities disposition plans (ASDPs). Recommended practices set out in the guidance include oversight by the issuer, specific disclosure, a waiting period prior to the first transaction made under the ASDP, and meaningful restrictions for ASDP amendments, suspensions and terminations.
What you need to know
- The CSA’s guidance generally is consistent with existing practices for ASDPs but provides a national framework that is aimed at enhancing transparency and reducing the potential for improper insider trades under ASDPs.
- Although the guidance does not modify existing legal requirements, some of the recommendations go beyond common market practices and/or requirements and guidance previously published by Canadian and U.S. regulators, such as the degree of oversight by issuers and the enhanced disclosure regarding ASDPs. In particular, the CSA recommends that the issuer or insider issue a news release disclosing the ASDP and its key terms, such as the parties to the plan, its term, the waiting period before trades can start, the number of securities that can be sold under the ASDP and the minimum price at which the securities may be sold if specified in the ASDP’s trading parameters, and any restrictions on the insider’s ability to amend, suspend or terminate the plan.
Canadian securities laws ordinarily prohibit insiders from trading securities while they possess material non-public information (MNPI). Insiders, however, have a defense if they can prove that the sales or purchases were made under an automatic plan, such as an ASDP, and that the trading instructions were established before the insider came into possession of the MNPI. ASDPs, therefore, can facilitate orderly trading of securities and exercises of equity-based awards by insiders, including during blackout periods or when the insider might be in possession of MNPI, provided that the plan is structured to be truly automatic and the insider does not retain discretion over trading decisions during the term of the plan.
Some concerns have been raised, however, about potential misuse of ASDPs, because insiders can control the timing of an ASDP’s adoption, amendment, suspension or termination and do so while they possess MNPI.
In addition, some issuers that established ASDPs prior to the publication of the CSA guidance obtained exemptive relief from insider reporting requirements, so that trades under an automatic plan can be reported on an annual basis (instead of within five days of the trade as normally required under the rules). Some investor groups have raised concerns about these relaxed insider reporting requirements on the grounds 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.
New CSA guidance
In light of concerns raised about ASDPs, in October 2019 the CSA announced their intention to review the structure and operation of ASDPs. That review culminated in the publication on December 10, 2020 of new guidance on ASDPs, CSA Staff Notice 55-317. This guidance generally is consistent with Canadian market practices for ASDPs.
1. Establishment and administration of the plan
The CSA has reiterated that plans must be entered into in good faith and not for the purpose of evading the insider trading prohibition: the defense to the insider trading prohibition will not be available for trades under ASDPs entered into when the insider possessed MNPI. This is consistent with the U.S. standard for automatic plans. To guard against concerns that plans may be entered into when insiders possess MNPI, the CSA recommends that issuers consider amending their insider trading policies to include a specific restriction against entering into ASDPs during blackout periods.
The CSA also recommends that issuers oversee or participate in the establishment and use of ASDPs by their insiders and should periodically confirm the insider’s compliance with the ASDP and the issuer’s insider trading and other applicable policies. Issuers also should certify to a dealer or administrator involved in an ASDP that (i) the insider did not possess MNPI when an ASDP was established, and (ii) the ASDP complies with the issuer’s insider trading and other applicable policies. Once an ASDP is established, issuers should consider whether to suspend an ASDP in the course of significant corporate developments.
In addition to including predetermined trading parameters or instructions and provisions prohibiting the dealer or agent from consulting with the insider about sales under the plan and the insider from disclosing any information about the issuer that might influence the execution of the plan, under the new guidance, an ASDP should:
- include a minimum term (e.g., 12 months) that is long enough to avoid any potential misuse of MNPI;
- avoid concentrating trades at the beginning of the plan’s term;
- include a waiting period between the plan’s establishment and the first sales, with no sales before the issuer’s next interim or annual financial statements have been filed; and
- contain enhanced restrictions on the insider’s ability to amend, suspend or terminate the plan, such as a requirement for the insider to obtain the approval of the issuer’s board of directors for any amendment to, or suspension or termination of, the plan.
2. Disclosure of ASDPs
Insider reporting requirements apply to trades in connection with an ASDP and the CSA has indicated it is unlikely to recommend insider reporting relief for trades under ASDPs. In addition, the CSA has recommended the following additional disclosures in connection with ASDPs.
- When an ASDP is adopted, the issuer or insider should issue and file a news release disclosing the ASDP and its key terms, such as the parties to the plan, its term, the waiting period before trades can start, the number of securities that can be sold under the ASDP and the minimum price at which the securities may be sold if specified in the ASDP’s trading parameters, and any restrictions on the insider’s ability to amend, suspend or terminate the plan.
- The issuer or insider also should issue and file a news release regarding any amendment, suspension or termination of the ASDP.
The CSA has indicated that the pricing information it has recommended be included in news releases announcing an ASDP is valuable information for the market. We note this information has not typically been included in disclosures concerning ASDPs in the past, and it is not a typical feature of U.S. plan disclosures.
Implications for cross-listed issuers
U.S. securities laws also prohibit the purchase or sale of a security based on MNPI but provide an affirmative defense against violations if trades are made pursuant to automatic plans. Although the new CSA guidance is consistent with U.S. requirements, and compliance with the CSA guidance generally will satisfy the applicable U.S. requirements, the new CSA guidance goes further by recommending that plans be press released and that pricing information be disclosed as well.
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This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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