MSC Notice 2001-18 NOTICE OF PROPOSED NATIONAL POLICY 51-201 DISCLOSURE STANDARDS AND PROPOSED RESCISSION OF NATIONAL POLICY 40 TIMELY DISCLOSURE I. INTRODUCTION The Canadian Securities Administrators (the "CSA" or “We”) have become increasingly concerned about the selective disclosure of material corporate information by companies to analysts, institutional investors, and other market participants. Selective disclosure occurs when a company discloses material non-public information to one or more individuals or companies and not broadly to the investing public. The practice of selective disclosure poses a serious threat to investor confidence in the fairness and integrity of the capital markets. The purpose of proposed National Policy 51-201 Disclosure Standards (“Policy 51-201 ”) is to: (i) describe the timely disclosure requirements and the confidential filing mechanism contained in securities legislation; (ii) provide interpretive guidance on existing legislative prohibitions against selective disclosure; (iii) highlight disclosure practices where companies take on a high degree of risk in light of the legislative prohibitions against selective disclosure; (iv) give examples of the types of information likely to be material under securities legislation; and (v) list some “best disclosure” practices that can be adopted by companies to ensure that they comply with securities legislation. Policy 51-201 is a CSA initiative and is expected to be implemented as a policy in all of the CSA jurisdictions. II. BACKGROUND The Allen Committee In Canada, attention was focused on the practice of selective disclosure in 1995 when The Toronto Stock Exchange Committee on Corporate Disclosure (the “Allen Committee”) released its Interim Report. In the report the Allen Committee acknowledged the importance of meetings with analysts in “fostering open and thorough continuous disclosure practices”. The Allen Committee recognized that “benefits may flow to the markets from the legitimate efforts of securities analysts who use their professional expertise to process detailed data and information
into commentary that investors find useful and can digest relatively quickly and improve the flow of corporate information into the marketplace”. Nevertheless the Allen Committee remained concerned that private meetings with analysts and professional investors had resulted in “selective disclosure of information that should have been disclosed on a general basis”. “Quite apart from any questions of compliance with securities laws”, the Allen Committee noted that this causes “unfairness in the marketplace”. The Allen Committee made a number of recommendations designed to equalize access to information among investors including: group analyst meetings with retail investor access; wide availability of data books and additional information; and electronic access to corporate information. Ontario Securities Commission Staff Survey In October 1999, as a first step in addressing the issue of selective disclosure, staff of the Continuous Disclosure Team of the Ontario Securities Commission (the “OSC”) conducted a survey of disclosure practices of public companies (the “Survey”). Four hundred public companies were randomly selected across all industries to participate in the Survey. The Survey explored several areas including: (i) company policies surrounding meetings and discussions with analysts and other groups; (ii) company responses to requests for information that is not available on the public record; (iii) company procedures if material non-public information is inadvertently disclosed to select groups; and (iv) the existence of company disclosure policies that address these and related issues. The survey was not intended to identify companies that may be selectively disclosing information. Rather the objective of the Survey was to seek input from reporting issuers on current practices and identify areas where additional guidance from the CSA would be appropriate. The results of the Survey were published by the OSC in July 2000. 1 In general, the results of the Survey indicated that the extent and nature of corporate disclosure policies and practices of issuers are not sufficient to reduce the potential for selective disclosure. For example: 71% of the respondents do not have written corporate disclosure policies; 81% of the respondents reported that they have one-on-one meetings with analysts; 1 See Ontario Securities Commission Staff Notice 53-701 Staff Report on Corporate Disclosure Survey ((2000) 23 OSCB 5098). 2
98% of the respondents reported that they typically comment in some form on draft analyst reports; and 27% of the respondents indicated that they express a level of comfort on earnings projections. III. SUMMARY OF POLICY 51-201 Policy 51-201 contains six parts. Part I contains a number of general provisions relating to the policy including our views on the practice of selective disclosure. Part II describes the timely disclosure requirements contained in securities legislation and the confidential filing mechanism available under securities legislation. Part III discusses legislative prohibitions against selective disclosure (“tipping”) and insider trading contained in securities legislation and sets out our views concerning the interpretation of these prohibitions. Sections 3.3 and 3.5 provide interpretive guidance on the “necessary course of business” exception and the “generally disclosed” 2 requirement. Section 3.7 provides an overview of some of the mitigating factors that we may consider in any enforcement proceedings relating to selective disclosure. Part IV gives examples of the types of information likely to be material under securities legislation. Section 4.3 provides that information regarding a company’s ability to meet consensus earnings published by securities analysts should not be selectively disclosed by a company before the public dissemination of a company’s earnings release. If disclosed, such information should be generally disclosed. Part V describes some high risk disclosure practices including: (i) conducting private briefings with analysts; (ii) commenting on draft analyst reports; and (iii) entering into confidentiality agreements with analysts. Section 5.5 outlines our views on companies providing their own earnings “guidance” and section 5.6 outlines our views on the application of National Policy Statement 48 Future-Oriented Financial Information (“NP 48") in such circumstances. Section 5.7 provides guidance dealing with forward-looking statements and the “duty to update”. Note that NP 48 is being reformulated and our reconsideration of NP 48 may have an impact on the preparation and dissemination by companies of all types of forward-looking information. 2 The Québec Securities Act requires that information must first be “generally known”. 3
Finally, Part VI lists some “best disclosure” practices that companies can adopt to help ensure good disclosure practices and compliance with securities legislation. IV. PARALLEL INITIATIVES IN OTHER JURISDICTIONS United States Regulation FD was adopted by the U.S. Securities and Exchange Commission in August 2000 and became effective in the United States on October 23, 2000. 3 Regulation FD requires that reporting companies disclose material information through broad non-exclusionary public means and not selectively to securities analysts and other market professionals. Regulation FD essentially provides that whenever an issuer, or any person acting on its behalf, discloses material non-public information to specified persons, the issuer must simultaneously (for intentional disclosures) or promptly (for non-intentional disclosures) make public disclosure of that information. Regulation FD represents a change in the SEC's approach to the issue of selective disclosure. Over the past thirty years or so, the SEC has framed the issue of potential liability for selective disclosure under principles of fraud law (i.e., Rule 10b-5). 4 Rule 10b-5 is a general anti-fraud rule from which U.S. courts have implied a prohibition against “tipping” and which has evolved and been variously interpreted by U.S. courts over the past several decades. This approach led to uncertain results in establishing which type of selective disclosure is prohibited. 5 Given its recognition that issuers retain control over the precise timing, audience and forum for important corporate disclosure, the SEC has adopted Regulation FD as an issuer disclosure rule. We considered promulgating a rule similar to Regulation FD. We believe, however, that the existing Canadian insider trading and tipping regime sets out a specific and comprehensive code 3 See Release Nos. 33-7881, 34-43154, IC-24599, File No. S7-31-99 Selective Disclosure and Insider Trading. 4 Rule 10b-5 provides that “it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or the mails or of any facility of any national stock exchange: (a) To employ any device, scheme or artifice to defraud; (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading; or (c) To engage in any act, practice or cause of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security”. 5 See for example, Dirks v. SEC, 463 U.S. 646 (1983), in which the U.S. Supreme Court stated that an analyst tippee would be subject to insider trading liability if the tipper breached a fiduciary duty to shareholders in disclosing material non-public information and the tippee knew or should have known of the breach. As articulated by the Supreme Court, breach of a fiduciary duty exists where the "insider" will benefit, directly or indirectly, from the disclosure such as a pecuniary gain or a reputational benefit that will translate into future earnings. 4
which, among other things, prohibits all selective disclosures other than those made in the “necessary course of business”. A chart which compares the Canadian and U.S. rules on selective disclosure is contained in Appendix A to this notice. Australia In November 1999 the Australian Securities and Investment Commission ("ASIC") issued a draft guidance and discussion paper ("Heard it on the Grapevine...") that proposed guidelines for providing investors with fair access to information and avoiding selective disclosure. While not proposing a change in regulations, the paper suggested "best disclosure practices" in keeping with existing regulatory requirements. Following the release of ASIC's draft guidance note, ASIC, together with the Australian Stock Exchange ("ASX"), embarked on a six-month continuous disclosure surveillance campaign. 6 On August 23, 2000 ASIC released its final guidance note entitled "Better Disclosure for Investors". 7 The final guidance note provides issuers with practical steps that companies can take to improve investor access to their information. The guidance principles adopted largely follow the 10 guidance principles that were first articulated in "Heard it on the Grapevine...". Policy 51-201 includes guidance which has been derived from ASIC’s “Better Disclosure for Investors”. V. PROPOSED RESCISSION OF NATIONAL POLICY STATEMENT 40 The OSC, together with the other members of the CSA propose to rescind National Policy Statement No. 40 Timely Disclosure (“NPS 40"). The proposed rescission of NPS 40 will be effective on the date that Policy 51-201 comes into force. We consider that NPS 40 is no longer necessary because: (i) the guidance provided in proposed Policy 51-201 incorporates the guidance previously forming part of NPS 40; and (ii) the relevant exchanges have rules and policies in place concerning timely disclosure. 8 6 ASX continuous disclosure rules require listed companies to reveal immediately any information that could reasonably be expected to affect the company's share price. 7 See https://www.asic.gov.au. 8 See The Toronto Stock Exchange Statement on Timely Disclosure and Related Guidelines, the Canadian Venture Exchange Policy 3.3 Timely Disclosure, and Policy I-8 Timely Disclosure By Listed 5
VI. UNPUBLISHED MATERIALS In proposing Policy 51-201, we have not relied on any significant unpublished study, report, decision or other written materials. VII. RELATED INSTRUMENTS In Manitoba, Policy 51-201 is related to section 112 (insider trading and tipping prohibitions) of The Securities Act (Manitoba). VIII. COMMENTS Interested parties are invited to make written submissions with respect to proposed Policy 51-201 and the proposed rescission of NPS 40. In particular, we are requesting comment on: (i) our approach to the “necessary course of business” exception. For example, should the “necessary course of business” exception cover communications made to a potential private placee? (See section 3.4 of the policy); (ii) our approach for determining how a company may satisfy the “generally disclosed” requirement under the tipping provisions. For example, are there other means of satisfying the “generally disclosed” requirement? (See section 3.5 of the policy); and (iii) the practicalities of a company implementing the recommended “best disclosure” practices in Part VI of the policy. Submissions received by July 25, 2001 will be considered. Companies of the Bourse de Montréal Inc. (formerly the Montreal Exchange). 6
Submissions should be sent to all of the Canadian securities regulatory authorities listed below in care of the Ontario Securities Commission, in duplicate, as indicated below: British Columbia Securities Commission Alberta Securities Commission Saskatchewan Securities Commission The Manitoba Securities Commission Ontario Securities Commission Office of the Administrator, New Brunswick Registrar of Securities, Prince Edward Island Nova Scotia Securities Commission Department of Government Services and Lands, Newfoundland and Labrador Registrar of Securities, Government of the Northwest Territories Registrar of Securities, Government of the Yukon Territory Registrar of Securities, Nunavut c/o John Stevenson, Secretary Ontario Securities Commission 20 Queen Street West Suite 1903, Box 55 Toronto, Ontario M5H 3S8 E-mail: jstevenson@osc.gov.on.ca Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows: Denise Brosseau, Secretary Commission des valeurs mobilières du Québec Stock Exchange Tower 800 Victoria Square P.O. Box 246, 22nd Floor Montréal, Québec H4Z 1G3 A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of the written comments received during the comment period be published, confidentiality of submissions received cannot be maintained. 7
Questions may be referred to any of: Sheryl Thomson Senior Legal Counsel British Columbia Securities Commission (604) 899-6778 E-mail: sthomson@bcsc.bc.ca Cameron McInnis Associate Chief Accountant British Columbia Securities Commission (604) 899-6767 E-mail: cmcinnis@bcsc.bc.ca Jane Brindle Legal Counsel Alberta Securities Commission (403) 297-4482 E-mail: jane.brindle@seccom.ab.ca Barbara Shourounis Director Saskatchewan Securities Commission (306) 787-5842 E-mail: bshourounis@ssc.gov.sk.ca Sophie Jean Conseillère en réglementation Commission des valeurs mobilières du Québec (514) 940-2199 ext#4578 E-mail: sophie.jean@cvmq.com Susan Wolburgh Jenah General Counsel Ontario Securities Commission (416) 593-8245 Email: swolburghjenah@osc.gov.on.ca 8
Rossana Di Lieto Legal Counsel, General Counsel’s Office Ontario Securities Commission (416) 593-8106 E-mail: rdilieto@osc.gov.on.ca Lisa Enright Senior Accountant Continuous Disclosure (416) 593-3686 E-mail: lenright@osc.gov.on.ca Christopher Byers Legal Counsel, General Counsel's Office Ontario Securities Commission (416) 593-8058 Email: cbyers@osc.gov.on.ca IX. TEXT OF POLICY 51-201 The text of Policy 51-201 follows, together with footnotes that have been included to provide further background and explanation. DATED: May 25, 2001. 9
APPENDIX A COMPARISON OF “TIPPING” PROVISIONS IN CANADIAN SECURITIES LAW AND REGULATION FD NOTE: The “tipping” provisions contained in securities legislation are generally similar across Canada. However, the CSA caution that some differences do exist in these legislative provisions. Market participants should therefore consult the applicable legislation of each province and territory for details of the relevant prohibitions. ELEMENTS “TIPPING” PROVISIONS REGULATION FD Basic Rule or No reporting issuer and no person or Whenever an issuer, or any person Prohibition company in a special relationship with acting on its behalf, discloses any a reporting issuer shall inform, other material nonpublic information than in the necessary course of regarding the issuer or its securities to business, another person or company any person described in the regulation, of a material fact or material change the issuer shall make public disclosure (“privileged information” in the case of the information: of Québec) with respect to the (1) simultaneously, in the case of an reporting issuer before the material intentional disclosure; and fact or material change has been (2) promptly, in the case of a non-generally disclosed intentional disclosure Scope of Communications by a reporting issuer Communications by an issuer, or any Communications and any person or company in a person acting on its behalf Covered special relationship with a reporting “Person acting on behalf of an issuer” is (Communications issuer defined as: “By”) “Person or company in a special any senior official of the issuer or any relationship with a reporting issuer” other officer, employee, or agent of an includes: issuer who regularly communicates with directors, officers, or employees of certain persons enumerated in the the reporting issuer regulation or with holders of the issuer’s insiders, affiliates or associates of securities the reporting issuer persons or companies engaged in any business or professional activity with the reporting issuer a person or company that learns of material information about the reporting issuer while a director, officer, employee, insider, affiliate or associate of the reporting issuer a person or company that learns of material information about the reporting issuer from anybody else and knows, or reasonably should 10
have known, that they are a person or company in a special relationship. Québec securities legislation extends the prohibition to communications by persons: having privileged information that, to their knowledge, was disclosed by an insider, affiliate, associate or by any other person having acquired privileged information in the course of his relations with the reporting issuer; and by persons having acquired privileged information that these persons know to be such Scope of Communications made to another Communications person or company Covered (Communications “To”) 11 Communications made to securities market professionals or holders of the issuer’s securities, including: a broker or dealer, or a person associated with a broker or dealer an investment adviser, an institutional investment manager or a person associated with either of the foregoing an investment company or an affiliated person, or a holder of the issuer’s securities under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information Excluded are communications made: to a person who owes a duty of trust or confidence to the issuer (such as an attorney, investment banker, or accountant) to a person who expressly agrees to maintain the disclosed information in confidence to an entity whose primary business is the issuance of credit ratings, provided that the information is disclosed solely for the purpose of developing a credit rating and the
Materiality Any information “that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value” of the securities “Privileged information” is defined in Québec securities legislation as any information “that has not been disclosed to the public and that could affect the decision of a reasonable investor” Timing of Required An issuer must first generally Disclosure disclose material information before it discloses it to any person or company Where a “material change” occurs in the affairs of a reporting issuer, the issuer must immediately issue and file a press release disclosing the nature and substance of the change, followed by a material change report filed within ten days of the date on which the change occurred Standard of Material information must first be 12 entity’s ratings are publicly available in connection with securities offering registered under the Securities Act U.S. case law interprets materiality as follows: information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision there must be a substantial likelihood that a fact “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information available” For an “intentional” selective disclosure, the issuer is required to publicly disclose the same information simultaneously a selective disclosure is “intentional” when the issuer or person acting on their behalf either knows or is reckless in not knowing, prior to making the disclosure, that the information is both material and nonpublic When an issuer makes a non-intentional disclosure of material nonpublic information, it is required to make public disclosure “promptly” “promptly” means as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange) after a senior official of the issuer learns that there has been a non-intentional disclosure that the senior official knows, or is reckless in not knowing, is both material and nonpublic An issuer must make “public
Required “generally disclosed” before it can be Disclosure communicated to another person or company Provincial securities legislation does not define “generally disclosed” Québec securities legislation uses the term “generally known” “Necessary Course Communication of material of Business” undisclosed information “in the necessary course of business” is exempt from the “tipping” provisions Liability and Violations of the “tipping” provisions Defences are subject to enforcement action by the appropriate provincial securities regulatory authority These proceedings can include: administrative proceedings before provincial tribunals for orders in the public interest, including cease trade orders, suspensions of registration, removal of exemptions and prohibitions from acting as director or officer of an issuer civil proceedings before the courts for a declaration that a person or company is not complying with provincial securities law and for the imposition of any order the courts consider appropriate, or proceedings in provincial offences court for fines or imprisonment or both No person or company shall be found to have breached the “tipping” provisions if they can prove that they reasonably believed that the material information in question had been generally disclosed (or, in Québec, was generally known) 13disclosure” of material nonpublic information it discloses “Public disclosure” is defined in the regulation to include: the furnishing or filing with the Securities and Exchange Commission of a Form 8-K in the alternative, disclosure “that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public” Violations of Regulation FD are subject to enforcement action by the Securities and Exchange Commission These proceedings can include: administrative proceedings for cease-and-desist orders, or civil proceedings for injunctive relief or fines Regulation FD does not create any new duties under the antifraud or private litigation provisions of U.S. securities law there is no liability for an issuer under Rule 10b-5 and there is no creation of private liability for issuers solely for violations of Regulation FD
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.