CSA Staff Notice 55-315 Frequently Asked Questions about National Instrument 55-104 Insider Reporting Requirements and Exemptions
Question 4

How Do I Report A Grant of Related Financial Instruments Made Prior to April 30, 2010?

Background

1. ABC Inc. (the Issuer) is a reporting issuer in all provinces and territories.

2. I am the CEO of the Issuer and therefore a “reporting insider” for this Issuer under NI 55-104. I did not hold any deferred share units (DSUs) when I became an insider of the Issuer.

3. On March 15, 2010, I received a grant of 100 DSUs.

4. The redemption value of a DSU is equal to the market value of a common share of the Issuer at the time of redemption, in accordance with the DSU Plan. The DSUs are cash-settled and do not provide for or permit settlement in securities of the Issuer. The DSUs do not entitle the holder to voting or other shareholder rights. The DSUs cannot be redeemed for cash until the holder has ceased to be a director, officer or employee of the Issuer.

5. At the time of the grant, I confirmed that the DSUs do not, as a matter of law, constitute securities and are therefore not subject to the ordinary insider reporting requirements applicable to securities. I also confirmed that the Issuer has disclosed the existence and material terms of the DSU Plan in its circular and that I was therefore eligible for the reporting exemption in s. 2.2(b) of Multilateral Instrument 55-103 Insider Reporting for Certain Derivative Transactions (Equity Monetization) (MI 55-103) and, in British Columbia, Part 3 of BCI 55-506 Exemption from insider reporting requirements for certain derivative transactions (BCI 55-506).

6. Accordingly, I did not file an insider report to report the grant of 100 DSUs on March 15, 2010.

7. On April 30, 2010, NI 55-104 came into force.

8. On May 15, 2010, I received a further grant of 100 DSUs.

9. The Issuer has not filed an issuer grant report about this grant.

Questions

1. Do I need to file a report about the March grant of DSUs? If yes, when do I need to file it by? (For example, do I need to file it within 10 days of April 30, 2010?)

2. Do I need to file a report about the May grant of DSUs? If yes, when do I need to file it by?

3. If I need to file a report about the May grant, do I show a balance of 100 or 200 DSUs?

Responses

1. Assuming the DSUs are not securities, and the March grant was properly covered by the exemptions in MI 55-103 and BCI 55-506, you do not need to file an insider report about the March grant. Accordingly, there is no requirement to file a report about the March grant within 10 days of April 30, 2010. However, the next time there is a change in your holdings of DSUs (i.e., the May 15 grant), before you can report this change, you will first need to take a step to reflect the March grant in your holdings. We have set out below two methods for doing this. Either method is acceptable so long as you explain in the General Remarks section which method you are using.

2. Assuming the DSUs are not securities, they would likely be considered “related financial instruments” under NI 55-104. Accordingly, you are required to file an insider report about the May grant within 10 days of the grant, or by May 25, 2010.

Note: If the issuer files an issuer grant report about this grant on or before May 25, 2010, the deadline for the insider report is March 31, 2011. When filing this report, use nature of transaction code 56 – grant of rights. See Part 6 of NI 55-104 for more information.

Note: SEDI does not use the term “related financial instrument”. For the purposes of filing on SEDI, the term “security” applies to both securities and related financial instruments.

3. Before you can file a report about the May 15 grant of 100 DSUs, you will need to reflect the March 15 grant in your holdings. There are two methods for doing this. These are described below.

In order to file an insider report about a grant of securities or related financial instruments, it is first necessary

a. to confirm that the Issuer has created a security designation for this type of instrument, and

b. record an Opening Balance on Initial Report for the DSUs.

If the Issuer has not created a security designation for DSUs, you should contact the Issuer and request the Issuer to add the security designation to its issuer profile supplement. If the Issuer is unable to comply in a timely manner, you should contact the securities regulatory authority that is the principal regulator for the Issuer (generally, the securities regulatory authority in the jurisdiction where the Issuer’s head office is located).

Method 1 – filing an opening balance that shows the March grant

4. Under this method, you can reflect the March grant in your opening balance. (If there are other prior grants of the same type of DSU, aggregate all such grants.)

5. When you record an Opening Balance for the DSUs, you should include a remark in the General Remarks section to explain that you are using method 1. Failure to do this may result in the filing being misleading. For example,

“Opening balance for DSUs reflects grant of 100 DSUs on March 15, 2010. At the time of the grant, the grant was exempt from reporting requirements under Part 2 of MI 55-103 and Part 3 of BCI 55-506”.

Note: Ordinarily, the Opening Balance is intended to reflect the insider’s holdings as of the date the insider became an insider. In this case, if the individual first became an insider on January 1, 2009, but did not receive any DSUs until the March 15, 2010 grant, then the record will be potentially misleading unless the insider also includes a comment in the general remarks section to explain that opening balance for DSUs reflects the grant of 100 DSUs on March 15, 2010.

6. When filing the insider report about the May 15, 2010 grant of DSUs, report the number of DSUs awarded and the equivalent number of underlying common shares. Use nature of transaction code 56 – grant of rights.

For more information, please refer to the section “Insider Report for Deferred Share Units (DSU) or Restricted Share Awards” in the online SEDI help.

Method 2 – notional adjusting transaction

7. Under this method, you would first file an opening balance of “0” for the DSUs.

8. Then, prior to filing an insider report to reflect the May 15 grant of 100 DSUs, you would file a report to show a notional acquisition of the 100 DSUs that were granted on March 15, 2010. (If there are other prior grants of the same type of DSU, aggregate all such grants.)

9. If this method is used, you should use the date of filing as the date of the notional acquisition, and not the actual date of acquisition (i.e., March 15, 2010) for the transaction date.

Note: If you use the actual date of acquisition, or March 15, 2010, this may generate a late filing invoice. If this occurs, contact CSA staff in the jurisdiction which acts as principal regulator for the Issuer for assistance.

10. When you file the report about the notional acquisition, you should include a remark in the General Remarks section to explain that you are using method 2. Failure to do this may result in the filing being misleading. For example,

“Notional transaction to reflect grant of 100 DSUs on March 15, 2010. At the time of the grant, the grant was exempt from reporting requirements under Part 2 of MI 55-103 and Part 3 of BCI 55-506”.

Note: If you do not include an explanation in the general remarks section, this may suggest there was an actual acquisition of 100 DSUs on the date of filing (in addition to the grant of 100 DSUs granted on May 15, 2010). This may result in the public record being misleading. In addition, if the DSU exercise price is based on the share price on the actual date of grant (i.e., March 15, 2010), but the filing date is used as the transaction date without explanation in the general remarks section, this may suggest that DSUs have not been granted in accordance with the DSU plan.