On December 10, 2020, the Canadian Securities Administrators (CSA) published guidance under Staff Notice 55-317 – Automatic Securities Disposition Plans (Staff Notice) for issuers and insiders on the establishment, use and disclosure of automatic securities disposition plans (ASDPs or Plans). The Staff Notice was developed further to the CSA’s review of ASDPs that was announced on October 24, 2019, as discussed in our previous article. The Staff Notice sets out a number of recommended best practices, which are set out below.   

Background to ASDPs

Canadian securities laws generally prohibit persons in a “special relationship” with an issuer, including, among others, insiders (such as an issuer’s directors and officers), who are in possession of material non-public information (MNPI) with respect to that issuer, from trading in that issuer’s securities. However, such securities laws provide an exemption to this insider trading prohibition where a trade in securities is made under an automatic plan such as an ASDP entered into before the insider acquired MNPI. 

An ASDP enables pre-planned sales of securities between an insider and a dealer or an arm’s length third party in accordance with a predetermined schedule and set of instructions. An ASDP can be a legitimate trading mechanism for insiders when it is properly established and administered.

CSA guidance  

Establishment of an ASDP

The Staff Notice emphasizes the importance of ensuring that ASDPs are entered into in good faith (and not for the purpose of sidestepping the insider trading prohibition), and that issuers carefully oversee the establishment (and use) of ASDPs by its insiders. The Staff Notice offers specific guidance in this regard, such as:

• Ensuring that insider trading policies include specific restrictions against entering into ASDPs during trading blackouts.
• Reviewing the terms of ASDPs to confirm that they are automatic in substance and contain protections against inappropriate trading activities.
• Obtaining an issuer certification to the dealer or Plan administrator that, to the best of its knowledge the insider is not in possession of MNPI when entering into the ASDP, and that the ASDP has been entered into in accordance with all relevant internal policies of the issuer, including its insider trading policy.
• Confirming periodically that insiders are complying with the terms of the ASDP and other relevant internal policies of the issuer, including its insider trading policy.
• Monitoring the use of the ASDP before significant events are disclosed by the issuer (e.g. mergers and acquisitions, divestitures and material changes).

Administration of an ASDP

The Staff Notice also underlines the importance of ensuring that ASDPs are administered in a way that reduces the risk of inappropriate trading activities (e.g. influencing timing of trades). The Staff Notice provides the following recommendations in this regard:

• Trading parameters and other instructions
• Providing clear trading parameters and other instructions in writing to the dealer or Plan administrator when entering into an ASDP. This can be accomplished by setting out a formula or by specifying the number of securities to be sold, a minimum trade price, and date or frequency of sales.
• Prohibiting dealers or Plan administrators from consulting with insiders regarding any sales under the Plan.
• Prohibiting insiders from disclosing to dealers or Plan administrators any information concerning the issuer that might influence the execution of the Plan.
• Minimum term
• Setting the minimum term of the ASDP sufficiently long (e.g. 12 months) to avoid any potential use of MNPI and avoiding concentrating trades at the beginning of the term.
• Waiting period
• Prohibiting trades from starting before the issuer’s next interim financial report or annual statements, as applicable, have been filed. The waiting period, being the period between the establishment of the Plan and the first trade under the Plan, should be as long as possible, since the longer the waiting period, the more likely any MNPI known to an insider will have been publicly disclosed or become outdated.

ASDPs should also impose meaningful restrictions on an insider’s ability to amend, suspend, or terminate the ASDP, including:

• Limiting the number or nature of permitted amendments.
• Prohibiting any amendment, suspension or termination during blackout periods.
• Requiring insiders to confirm to the dealer or Plan administrator that the insider is not in possession of MNPI at the time of the amendment, suspension or termination.
• Requiring the issuer to certify to the dealer or Plan administrator that, to the best of the issuer’s knowledge, the insider is not in possession of MNPI when amending, suspending or terminating the ASDP.
• Requiring the issuer to certify to the dealer or Plan administrator that the amendment, suspension or termination is in accordance with any relevant internal policies of the issuer, including its insider trading policy.
• Imposing a waiting period after any amendment or suspension.
• Disclosing in a news release that is disseminated and filed on the System for Electronic Document Analysis and Retrieval (SEDAR), the circumstances that led to the amendment, suspension or termination, the nature of the amendment (where applicable) and a representation that the insider was not in possession of any MNPI at the time.
• Obtaining approval of the board of directors of the issuer for any amendment, suspension or termination.

Disclosure of an ASDP

News release

To enhance transparency and improve the market perception of the sale of securities by insiders, the Staff Notice advises issuers and insiders to disclose the details of their ASDPs by way of news release disseminated and filed on SEDAR. The Staff Notice recommends that disclosure in the news release should include:

• That the Plan was established.
• What the principal terms of the Plan are (e.g. parties, term, waiting period, restrictions on changes to the Plan).
• The number of securities to be sold under the Plan and the minimum price at which the securities can be sold, if applicable.

As noted above, it is recommended that any special circumstances occurring in connection with the Plan, such as its amendment, suspension, or termination, also be disclosed in a news release.

Insider reports    

Insiders that are “reporting insiders” (as defined in National Instrument 55-104 – Insider Reporting Requirements and Exemptions) are required to file an insider report each time there is a trade in securities of the issuer by or on behalf of the insider under an ASDP. When filing an insider report on the System for Electronic Disclosure by Insiders, known as SEDI, it is recommended that insiders specify in the comment section of such report that the trades were made under an ASDP.

Dentons’ insight

Automatic securities purchase plans

While the Staff Notice provides helpful guidance on ASDPs, it does not cover automatic securities purchase plans (ASPPs). An ASPP is essentially similar to an ASDP, but it involves the purchase, instead of the sale, of securities. These plans are often used in connection with normal course issuer bids but can also be used by directors and executive officers to increase their holdings of company equity to support compliance with share ownership policies and guidelines. While the guidance provided in the Staff Notice supersedes the guidance with respect to ASDPs in OSC Staff Notice 55-701 – Automatic Securities Disposition Plans and Automatic Securities Purchase Plans (2006 OSC Staff Notice) that was issued in 2006, the 2006 OSC Staff Notice guidance with respect to ASPPs remains relevant for issuers and insiders that establish ASPPs under Ontario securities law. It is unclear whether ASPPs will be considered in subsequent guidance or reviews at the national level by the CSA, however many of the best practices for ASDPs could reasonably be ‘reverse engineered’ and applied to support the establishment, administration, and disclosure of ASPPs that are consistent with the principles of good corporate governance and transparency.

Strategic trading concerns

Many of the rules provided in the Staff Notice centre on protecting against the utilization of an ASDP for “strategic trading” behaviour in an effort to foster investor confidence in the ASDP regime. The perceived fairness of an ASDP may be weakened if insiders have too much flexibility and/or control in adopting, amending, suspending, or terminating an ASDP. Similarly, frequent or ill-timed amendments or changes to an ASDP may give rise to the perception that the change is motivated by MNPI and thus potentially cast doubt on the automatic nature of the Plan.

However, the Staff Notice does not specifically address the concern described in our previous article with respect to the potential for insiders with knowledge of their ASDP disposition schedule from timing the disclosure of information in a manner that would benefit the timing of the trades. For example, an insider might be aware that dispositions are made under his or her Plan on the first trading day of each month. Knowing this, an insider may ensure the timing of disclosure that might negatively affect the stock price occurs after the dispositions under the insider’s own Plan have already occurred. Issuers concerned with this potential should consult with counsel to carefully review the terms of any Plan to minimize or eliminate any features that might enable “strategic trading”.

Avoiding insider trading liability

ASDPs can be a useful way for insiders who may be subject to extended trading blackouts or who may frequently be in possession of MNPI to monetize their accumulated equity in a manner that does not require their constant vigilance and attention (once the Plan is set-up). To ensure that an ASDP is well designed and administered, it is essential for issuers and insiders to understand their roles and obligations.

By incorporating the conditions and restrictions set out in the Staff Notice, ASDPs can: (i) reduce the potential for improper trading activities, (ii) assist issuers and insiders in managing the market perception of sales of securities by insiders, and (iii) reduce potential reputational exposure and litigation risks associated with the improper use of Plans by insiders.

While following the recommendations presented in the Staff Notice is helpful, it is not a substitute for a legal determination regarding the availability of the legal defense to protect insiders from insider trading liability. We invite insiders and issuers who are interested in putting an ASDP or ASPP in place, or in learning more about how the Staff Notice might impact them, to contact Ora Wexler, Kim Lawton or Stuart Ruffolo.

The authors would like to thank Emeleigh Moulton in connection with her assistance with this article.