Back in September 2001, we provided a Securities Law Update reviewing the significant changes to the insider reporting rules brought about by SEDI (CLICK HERE to view). These changes, as well as the new timing requirements, are reviewed in this edition of the Securities Law Update.

Electronic Filing System

The basic change is that insiders of so-called "SEDI issuers" will be required to file their insider reports in electronic form through SEDI, rather than using the current paper filing methods.

SEDI issuers are reporting issuers, other than mutual funds, that are required to file their disclosure documents in electronic format through SEDAR, the System for Electronic Document Analysis and Retrieval, which has been operational since January 1997 and is available on the Internet at http://www.sedar.com/. Generally, this applies to all Canadian public companies, although there are exceptions in certain cases for foreign companies whose connection with Canada is limited. It may also include issuers of exchangeable shares, even though their insiders will generally have been exempted from the insider reporting requirements.

SEDI will have its own web site, at http://www.sedi.ca/, and is intended to be available, subject to maintenance and related requirements, seven days a week, twenty-four hours a day. The SEDI system will be funded through a charge on SEDI issuers, ranging from $250 to $2,500 per annum, with charges pro-rated for 2003. Insiders will not be required to pay a fee unless insider reports are filed late, in which case a fee equal to $50 per business day, per issuer (subject to a maximum of $1,000 per issuer within one financial year) will be levied, in accordance with the new Ontario Securities Commission Rule 13-502, entitled Fees.

In addition to insiders of SEDI issuers being required to file their insider reports through SEDI, the issuers themselves will also have to register, file and update certain information electronically to facilitate the filing of insider reports, including confidential contact information and information regarding their outstanding securities held by insiders. Issuers that previously filed "issuer profile supplements" on SEDI when it was last operational are required to update their existing SEDAR profiles before May 5, 2003. Issuer profile supplements will have to be filed between May 5, 2003 and May 30, 2003, even if issuers have already registered and filed such reports during the period from October 29, 2001 to January 31, 2002, when SEDI was operational. Issuers that become SEDI issuers on or after May 30, 2003 will have three business days from the date they become a SEDI issuer to file such a report.

SEDI issuers will be required to designate those securities held by insiders in their issuer profile supplements, rather than all issued and outstanding securities of such SEDI issuers. For example, if a SEDI issuer has common shares and preferred shares outstanding, but its insiders hold only common shares, then the SEDI issuer will only be required to designate the common shares in its issuer profile supplement, not both the common shares and preferred shares. An amended issuer profile supplement must be filed immediately by any SEDI issuer if it issues any security to any insider that has not already been disclosed in its issuer profile.

Issuer events, such as stock Pidends, stock splits, stock consolidations and mergers, that affect all holdings must be reported one business day after the event, starting on June 9, 2003. SEDI issuers will not be required to report any issuer event that occurred prior to June 9, 2003.

Insiders of non-SEDI issuers will continue to be required to file their insider reports in paper form.

Insiders of SEDI issuers, on the other hand, will have to electronically file, and update, "insider profiles" identifying themselves and their relationship with the issuer. Insider profiles must be filed again by insiders of SEDI issuers even if they registered and filed such profiles during October 29, 2001 to January 31, 2002, when SEDI was last operational. However, it is our understanding that if an exchangeable share issuer obtained insider reporting relief from the securities regulatory authorities for its insiders, such insiders will not be required to file insider profiles. After filing their insider profiles, insiders of SEDI issuers will be required to file amended insider profiles within ten days of a change in the information disclosed in such insider profiles. Once the insider profile has been filed, the insider in question can file insider reports electronically. Insider reports will be required to be filed electronically commencing on June 9, 2003. Certain categories of information will be maintained in confidence. The SEDI system forms also purport to clarify a number of interpretational issues, such as when a holding is direct (direct holdings are said to include broker or depositary holdings), that the trade date rather than the settlement date should be reported, and that prices should not be reduced by commissions paid.

Derivatives

The information required to be reported is substantially the same as for the existing paper form, except that a separate section has been added for third-party derivatives to facilitate insider reporting of trades in exchange-traded derivatives or over-the-counter options or other derivatives. The paper form of the insider report has also been revised to reflect derivatives. We believe that the OSC's intention is, among other things, to capture, as appropriate, equity monetization transactions by insiders under which they part with economic risk in their security positions while retaining beneficial ownership, control and direction of the securities in question. Anecdotally, many such transactions have not been reported to date in insider reports, as the underlying legal obligation has not changed. The policy and spirit of insider reporting rules, as well as the letter in certain cases, may capture certain equity monetization transactions, even today. In particular, the CSA note the provisions applicable to puts, calls and other transferable options under Ontario securities law, as well as the even broader provisions applicable to puts, calls and other rights or obligations under B.C. securities law. Expiry or maturity dates, as well as the price and number of underlying securities, among other things, will have to be disclosed, which may affect unwindings. In fact, the CSA has proposed an instrument, Multilateral Instrument 55-103, that explicitly requires reporting by insiders of equity monetization arrangements. The proposed instrument would also require insiders to report pre-existing monetization arrangements if such arrangements remain in effect on the effective date of the instrument.

Timing of Filing Insider Reports

The timing of insider reports will be accelerated to ten days following the date of the trade in all provinces, whereas at present that requirement does not apply in all provinces, including British Columbia.

Certain Paper Filings Will Continue

Certain reports, including reports of transfers of securities into the name of an agent, custodian or nominee, and certain reports by mutual fund management companies, will continue to be required to be filed in paper form.

U.S. MJDS Issuers Unaffected; Other Foreign Issuers May Be Affected

The Canada-U.S. Multijurisdictional Disclosure System exemptions for insiders of U.S.-incorporated public companies who comply with U.S. insider reporting requirements will continue to be available, although it appears that issuer profiles may be required to be filed. However, it has been proposed that current exemptions for insiders of non-U.S.-incorporated public companies subject to U.S. requirements to file U.S. forms be repealed, and therefore such issuers would be required to make appropriate SEDI filings (unless they are not SEDI issuers).

Early Warning Reports Unaffected

Early warning reports, including alternative monthly reports, will continue to be filed under SEDAR, rather than SEDI.

Filing through Authorized Agents, including Stikeman Elliott LLP

In general, reporting will likely be accomplished through authorized agents such as law firms, as is the case with SEDAR, and a security access system for insiders and issuers. Stikeman Elliott LLP intends to become an authorized agent and thus will be in a position to assist its clients and their insiders with their SEDI filings.