On December 10, 2020, the Canadian Securities Administrators (CSA) issued Staff Notice 55-317 Automatic Securities Disposition Plans (SN 55-317), providing recommendations for issuers and insiders on the establishment, administration and disclosure of Automatic Securities Disposition Plans (ASDPs).
SN 55-317 replaces the Ontario Securities Commission’s previous guidance on ASDPs included in OSC Staff Notice 55-701 Automatic Securities Disposition Plans and Automatic Securities Purchase Plans, though the guidance included therein with respect to Automatic Securities Purchase Plans remains relevant in Ontario.
BACKGROUND TO ASDPs
Under Canada’s securities legislation, there is an exemption from the general prohibition on insiders of an issuer trading securities with knowledge of material non-public information (MNPI) with respect to the issuer. The exemption is in respect of an “automatic plan” that was entered into by the person or company prior to the acquisition of knowledge of the MNPI.
An ASDP is an arrangement between an insider and a dealer or a plan administrator that involves the sale of securities of an issuer over a predetermined period and in accordance with a predetermined set of instructions. When established and administered with meaningful conditions and restrictions, ASDPs can be a legitimate trading mechanism to ensure that insiders are able to sell securities of an issuer even during periods when the insider is in possession of MNPI.
The CSA have issued SN 55-317 to provide guidance relating to the establishment and use of ASDPs and the report of 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.
ESTABLISHMENT OF AN ASDP
Insiders Entering into ASDPs: The CSA state that insiders should enter into ASDPs in good faith. If the plan is entered into when the insider is in possession of MNPI, the insider trading exemption under securities legislation will not be available.
Issuer Oversight: The CSA recommend that the issuer oversee the establishment and use of ASDPs by its insiders, including by:
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Reviewing the terms and conditions of ASDPs to determine if they are automatic in substance and contain protections against inappropriate trading activities
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Certifying to the dealer 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
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Periodically confirming the insider’s compliance with the terms and conditions of the ASDP and any relevant policies of the issuer
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Monitoring the use of the ASDP when significant events occur in the life of the issuer (e.g., merger, divestiture, etc.) and before those significant events are publicly disclosed
ASDP ADMINISTRATION
Trading Parameters and Other Instructions: When entering into the ASDP, it is recommended that the insider provide clear trading parameters and other instructions.
Minimum Term: The CSA recommend that the term of an ASDP is set to be sufficiently long to avoid any potential use of MNPI (for example, 12 months).
Waiting Period: The CSA recommend that trades under an ASDP do not start until after a waiting period (which would end after the issuer’s next interim financial report or annual financial statements have been filed).
Amendments, Suspension and Termination: The CSA recommend imposing restrictions on an insider’s ability to amend, suspend or terminate (each, a “Change”) an ASDP, such as:
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Prohibiting any Change during trading blackouts under the issuer’s insider trading policy
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Requiring that the insider represent to the dealer or plan administrator that the insider is not in possession of MNPI at the time of the Change
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Requiring the insider to request that the issuer certify to the dealer or plan administrator that the insider is not in possession of MNPI at the time of the Change and that the Change is in accordance with any relevant policies of the issuer
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Imposing the waiting period recommended above after any amendment or suspension
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Requiring that the issuer or the insider disclose in a news release filed on SEDAR the circumstances that led to the Change and, where applicable, the nature of the amendment, together with a representation by the insider that the insider did not possess any MNPI at the time of such Change
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Obtaining the approval of the board of directors of the issuer for any Change
DISCLOSURE
Disclosure Regarding the ASDP: To promote transparency, the CSA recommend that the issuer or the insider publicly disclose the establishment of the plan and the plan’s principal terms and conditions, including the number of securities to be sold under the ASDP and the minimum price at which these securities can be sold, if applicable.
Disclosure in Insider Reports: When filing the required insider reports, the CSA recommend that insiders specify in the comment section that the trades were made under an ASDP in order to inform the market that the decision to sell securities was previously made by the insider at the time of entering into the ASDP. Additionally, an insider’s transfer of securities to the dealer or 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 Insider Reporting Requirements and Exemptions, which requires an insider to file a report disclosing all transfers of control over the securities they hold in the issuer.
CONCLUSION
The CSA consider these recommendations as consistent with the principles of good corporate governance and transparency in relation to the establishment and use of ASDPs and the report of trades under such plans. As a result, SN 55-317 provides guidance that can reduce the potential for improper insider trades under ASDPs and can assist both issuers and insiders in managing market perception of insider trades under these plans.
