CSA Staff Notice 55-312 Insider Reporting Guidelines for Certain Derivative Transactions (Equity Monetization)
Examples

Example 1

On March 1, 2011, John enters into a forward contract with InvestBank under which John agrees to sell, and InvestBank agrees to purchase, 10 shares of ABC Inc. at a price of $109.50 per share. [FN 2] The sale will take place on March 1, 2016. The parties may settle their obligations under the forward contract on a cash settlement basis or by physical delivery of 10 ABC Inc. shares. This contract may be settled at an earlier date, subject to an adjustment to the settlement price. InvestBank hedges its risk under the forward contract through a hedging strategy involving short sales into the secondary market.

Insider Reporting Requirement: John is required to file an insider report within five (calendar) days of March 1, 2011. (See Part 3 of NI 55-104.) For an example of how this transaction would be reported, see below. Unless InvestBank is also a reporting insider of ABC Inc., InvestBank is not required to file an insider report.

Instructions for Example 1

Note: John has accessed the SEDI website at www.sedi.ca, selected “English” as his language of preference, selected “login” at the “Welcome to SEDI” screen, and has logged in by entering his SEDI user ID and his password. John will now see the following screen: “Insider home page”.

1. Enter your insider access key and click Next.

SCREEN: Insider activities

2. Click Insider report (at the top of the screen).

SCREEN: Introduction to insider report activities (Form 55-102F2)

3. Click File insider report (on the navigation bar at the left of the screen)

SCREEN: File insider report (Form 55-102F2) – Select issuer

4. Select and highlight “ABC Inc.” in the list of issuers from the insider profile.

5. Click File insider report.

SCREEN: File insider report – Select security designation 

6. Click on Add insider-defined security (at the bottom of the screen).

Note: Since the forward contract is not a class of security defined by the issuer in its issuer profile supplement, it will be necessary for John to create a new insider-defined security designation for the forward contract.

Note: In SEDI, third-party derivative arrangements are considered to be “securities”. Such arrangements may or may not be considered “securities” under securities law generally, depending upon the facts and circumstances of the arrangement in question. To the extent derivative instruments do not, as a matter of law, constitute securities, they will generally be related financial instruments. See commentary in subsection 1.4(6) of 55-104CP. For insider reporting purposes, it is not necessary to determine whether a derivative instrument is a security or a related financial instrument since both are subject to insider reporting requirements under Part 3 of NI 55-104.

SCREEN: Pop-up warning

Note: At this point, a warning pop-up box should appear: “Warning: You are about to specify an insider-defined security. You must ensure that the security is not already listed.”

7. Click OK.

SCREEN: File insider report – Add insider-defined security designation

8. Use the drop-down menu under the heading Security category, select and highlight Third Party Derivatives.

9. Under the heading Security designation, in the drop-down menu under the subheading Security name, select and highlight Forward Sale.

10. Then, for the Additional description, briefly describe. For example, “10 common shares – settlement date March 2016”.

Note: This adds the security designation “Forward sale (10 common shares – settlement date March 2016)” to your list of insider-defined securities.

Note: Not all of this text will currently be visible in the Additional description box. (The box will only show a limited number of characters at any one time.) However, the full text in this example will be accepted, and will be visible at later stages of the filing process.

11. Under the heading Underlying security designation, in the drop-down menu under the subheading Security category, select and highlight Equity.

12. Then, in the drop-down menu under the subheading Security name, select and highlight Common Shares.

Note: In the context of a forward sale, the underlying security is the security that is the subject of the forward sale.

13. Click Next.

SCREEN: File insider report – Select ownership type

14. In the drop-down menu Ownership type, select and highlight Direct Ownership and click Next.

SCREEN: File insider report – opening balance on initial SEDI report

Note: SEDI requires an opening balance for each type of security. This has to be entered before a report can be filed about a transaction in the security. If the reporting insider has never filed a report about this specific type of security, the reporting insider must enter 0 (zero) as the opening balance. If John has previously entered into another forward contract that has different terms (e.g., a different settlement date or price) from the present forward contract, the present contract would be considered a separate type of security.

15. In the field Opening balance of securities or contracts held, enter 0.

16. In the field Opening balance of equivalent number or value of underlying securities, enter 0.

Note: This screen contains additional fields: General remarks and Private remarks to securities regulatory authorities. In this example, it is not necessary to include any information here.

17. Click Next (at the bottom of the screen).

SCREEN: File insider report – Final review

18. Click Certify.

SCREEN: Certification

19. Click OK to Accept.

SCREEN: File insider report – Completed

Note: John has now filed his opening balance for the security designated “Forward sale (10 common shares – settlement date March 2016)”. It is now necessary to file a report about the transaction involving this security entered into on March 1, 2011.

20. At the prompt “File another transaction?” click Yes.

SCREEN: File insider report – Select a transaction option

Note: Make sure “Same security & holder” is selected.

SCREEN: File insider report – Enter transaction information

21. In the Date of transaction field, select March 1, 2011.

Note: Since John entered into the forward contract on March 1, 2011, enter this date. Do not enter the date of the anticipated settlement (i.e., March 1, 2016) here.

22. In the drop-down menu Nature of transaction, select and highlight the appropriate code. Since John has acquired rights and obligations under a derivative contract, select “70 – Acquisition or disposition (writing) of third party derivative”.

Note: For information about “nature of transaction” codes, see the online help function on SEDI.

23. Enter a number in the Number or value of securities or contracts acquired field. Enter 1 here.

Note: Since John has acquired rights and obligations under a derivative contract, enter 1 after the field Number or value of securities or contracts acquired. Leave the Number or value of securities or contracts disposed of field blank.

Note: Since John has specified a derivative as the security, there are additional fields in which to enter the equivalent number or value of the underlying securities to which the derivative relates.

24. Enter a number in the Equivalent number or value of underlying securities disposed of field. Enter 10 here.

25. Next to the field Unit price or exercise price, click the Not Applicable box.

26. In the field Conversion or exercise price, enter 109.50.

Note: Since John has not paid any consideration (in this example) for the forward contract, he would click the Not Applicable box next to the field Unit price or exercise price. Since the forward contract obliges John to sell 10 ABC Inc. shares at $109.50 per share on March 1, 2016, John would enter 109.50 in the field Conversion or exercise price.

27. In the Date of expiry or maturity field, select March 1, 2016.

Note: Since the anticipated date of settlement is March 1, 2016, this will be the date of expiry or maturity.

28. Enter the following information in the General remarks field:

Forward contract to sell 10 shares at $109.50 per share on March 1, 2016. Contract may be settled by cash or by delivery of 10 shares. Contract may be settled at earlier date, subject to price adjustment.

Note: If it is not possible to adequately describe a transaction or to include all of the material terms of a transaction in the space provided, consider making reference to a public document (e.g., a news release issued by the issuer) that further describes the transaction. Alternatively, this information may be included in a schedule that may be filed in paper format by facsimile in accordance with the provisions of Part 3 of NI 55-102. Fax the schedule to the facsimile number of the securities commission set out on Form 55-102F6. We recommend that you make reference to this filing by facsimile in the General remarks field on SEDI. Staff will make this schedule available to the public on request.

29. Enter additional information, as necessary, in the Private remarks to securities regulatory authorities field.

Note: This is an optional field. These remarks will only be accessible by securities regulatory authorities. Leave this field blank if no remarks are necessary.

SUMMARY – The information should appear as follows:

30. Click Next.

SCREEN: File insider report – Final review

31. Ensure that the details of your report are complete and accurate.

32. Click Certify (at the bottom of the screen).

SCREEN: Certification Pop-Up

33. Review the certification information carefully.

34. Click OK to accept.

SCREEN: File insider report -Completed

35. At the prompt “File another transaction?” click No.

36. Logout

John has now completed the filing of his insider report relating to the forward contract. This report will normally be publicly available on SEDI within five minutes of filing.

Note: Generally, where a reporting insider files an insider report in respect of a third-party derivative such as a forward contract, the reporting insider will be required to file a second report at the time the derivative is settled, matures or otherwise closed out. For example, John in this example will be required to file an insider report within five days of March 1, 2016 (assuming that the contract settles on that date and that John is still a reporting insider on that date). The report will show i) a disposition of the forward contract, and ii) a disposition of the underlying common shares.

FN 2 In this example, $90 is assumed to represent the present value of $109.50 on March 1, 2016. Assuming an annual compounding of 4%, John and InvestBank are in the same position (absent any consideration of taxes) whether they proceed by way of a sale today at $90 or a sale five years from today at $109.50. In the case of a sale today, John receives $90, which he may then invest at 4%. Assuming an annual compounding return of 4%, at the end of five years, John will have received cash in the amount of $109.50. In the case of the forward sale at the end of five years, John will have received cash in the amount of $109.50.