Written by Kahlan K. Mills and Allegra Hessels
On October 24, 2019, the Canadian Securities Administrators (CSA) announced that it is undertaking a review of Automatic Securities Disposition Plans (ASDPs). ASDPs allow company insiders to sell their company securities through a broker in accordance with predetermined instructions. Currently, provincial and territorial securities laws provide an insider trading defence for trades made under automatic plans; however, there is no national framework governing such plans. The CSA’s review of ASDPs will consider whether the regulatory framework should be enhanced and harmonized across Canada. Specifically, the CSA has indicated that the review will examine whether these plans provide appropriate constraints on trading activities of insiders and will be informed by relevant international developments in this area. Until the CSA completes its review and updates the market on its conclusions, CSA staff are unlikely to recommend new insider reporting relief for trades done under ASDPs. Existing insider reporting relief will be unaffected.
Insiders of public companies who wish to buy or sell shares in their company face a number of issues. The company's insider trading policy will likely permit insider trading only during certain "trading windows" after the quarterly release of the company's financial statements. In addition, under securities laws generally, the insider will be prohibited from trading whenever he or she is in possession of non-public material information regarding the company. These restrictions often result in insiders being unable to trade company stock for extended periods of time. ASDPs permit insiders to set up automatic trading plans with a broker at a time when the insiders are not in possession of non-public material information. The plans must be automatic in the sense that the following criteria must be met:
- At the time of entry into the plan, the insider is not in possession of any material undisclosed information in relation to the company.
- At the time of entry into the plan, in the case of plans that have not been established by the company, the insider provides the broker with a certificate from the company confirming that the company is aware of the plan and certifying that, to the best of its knowledge, the insider is not in possession of material undisclosed information about the company.
- The trading parameters and other instructions are set out in a written plan document at the time of the establishment of the plan.
- The plan contains meaningful restrictions on the ability of the insider to vary, suspend or terminate the plan that have the effect of ensuring that the insider cannot profit from material undisclosed information through a decision to vary, suspend or terminate the plan.
- The plan provides that the broker is not permitted to consult with the insider regarding any sales under the plan and that the insider cannot disclose to the broker any information concerning the company that might influence the execution of the plan.
- The plan to purchase or sell securities was given or entered into in good faith and not as part of a plan or scheme to evade the insider trading prohibitions.
ASDPs have been under increased scrutiny from regulators and institutional investors in Canada and the United States. For example, some institutional investors have advocated for amendments to the requirements respecting ASDPs which would include providing that ASDPs be subject to a mandatory delay between the adoption of an ASDP and the execution of the first trade pursuant to such a plan and that company insiders should not be allowed to make frequent modifications or cancellations of ASDPs.
The CSA’s review will also consider whether relief should continue to be granted from insider reporting for trades done under ASDPs and, if so, under what conditions. Such relief, while not requested by all issuers setting up ASDPs, has been granted several times in the last decade. Given the CSA's ongoing review, issuers who are looking to implement ASDPs at this time should seek legal advice.