OSC Staff Notice 55-701 Automatic Securities Disposition Plans and Automatic Securities Purchase Plans
Question 1

Is the Exemption in s. 175(2)(b) of the Regulations Available?

Although the exemption in s. 175(2)(b) refers to plans that are typically established by the issuer, staff take the view that this is not a necessary element under Ontario securities law, and an “other similar automatic plan” can include a plan established by an insider and the insider’s broker, provided that the plan is “automatic”, as discussed below, and the other conditions to the exemption are satisfied. (It should be noted, however, that securities legislation in other jurisdictions may limit this exemption to plans established by the issuer.)

We accept that a plan is “automatic” where the insider is able to demonstrate that the insider no longer has the ability to make decisions relating to trading in the securities in the plan and cannot make “discrete investment decisions” through the plan. (For more information on the concept of “discrete investment decisions”, please see, for example, sections 5.2 and 5.5 of the Companion Policy to NI 55-101).

Accordingly, we will generally accept that a plan is an “automatic” plan for the purposes of s. 175(2)(b) of the regulations if it meets the following conditions:

a) At the time of entry into the plan, the insider is not in possession of any material undisclosed information in relation to the issuer.

b) At the time of entry into the plan, in the case of plans that have not been established by the issuer, the insider provides the broker with a certificate from the issuer confirming that the issuer 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 issuer.

c) The trading parameters and other instructions are set out in a written plan document at the time of the establishment of the plan.

d) 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.

e) 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 issuer that might influence the execution of the plan.

f) 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.

Where an insider’s ability to vary, suspend or terminate the plan is not meaningfully restricted, we would likely question whether the plan may genuinely be regarded as an “automatic” plan for the purposes of s. 175(2)(b) of the regulations. This is because the insider retains discretionary authority over the securities in the plan and may be in a position to profit from material undisclosed information by varying, suspending or terminating the plan. For example, if an insider of an issuer establishes an ASDP and then comes into possession of material undisclosed information that is favourable to the issuer, the insider may profit from that information by terminating the plan. Similarly, if the insider comes into possession of material undisclosed information that is adverse to the issuer, the insider could vary the instructions to accelerate the dispositions. In both cases, we would likely take the view that the insider was making discrete investment decisions through the plan.

Where a plan contains meaningful restrictions on the ability to vary, suspend or terminate the plan, we will generally accept that the plan is an “automatic” plan for the purposes of s. 175(2)(b). We have previously advised insiders and their advisers that a simple requirement that the insider represent to the broker that the insider is not in possession of material undisclosed information at the time of the variation, suspension or termination would likely not be sufficient. Meaningful restrictions could include, for example, a requirement that the insider notify the issuer and the public (via a SEDI filing) of a change in instructions which filing would include a representation that the insider is not in possession of any material undisclosed information.