New Reporting Requirements Proposed For Canadian Derivatives

by Glen Shapiro, LawAndTax-News.com, New York

25 March 2003

Because of growing concerns that existing insider reporting requirements may not apply to derivative-based transactions, the Canadian Securities Administrators ("CSA") have recently released proposals which would require investors to file reports in respect of derivative-based transactions. The CSA is primarily responsible for developing a harmonized approach to securities regulation across the country, since provinces and territories have their own financial rules and regulators.

The proposals, entitled 'Multilateral Instrument 55-103 - Insider Reporting for Certain Derivative Transactions (Equity Monetisation)' (the "Instrument") state that "The objectives of the Instrument are to improve the market transparency of insider transactions involving 'synthetic' derivatives, to ensure that investment reports are filed with respect to transactions which satisfy the policy rationale for insider reporting but which are not technically governed by the existing insider reporting rules, and to reduce the uncertainty surrounding which arrangements and transactions are subject to an insider reporting requirement. The Instrument reflects the view that timely public disclosure of all insider transactions is necessary in order to maintain the integrity of the insider reporting regime in Canada."

The CSA believes that without the disclosure of these transactions, the investing public may be misled by the publicly reported holdings of investment funds. The reported holdings would no longer reflect the true investment position in a security if the investor has an undisclosed option position.

Equity monetisations aren't currently reported because, under a law that was drafted without regard for innovative derivatives which allows for so-called synthetic sales, when sold stock remains the property of the seller. The prospectuses that promote them are confidential and are ironically protected by the same set of securities law that allows them not to be disclosed.

The term "monetisation" generally refers to the conversion of an asset, such as securities, into cash. A typical transaction would involve an investor selling a 'synthetic' option contract for shares in the company owned by the investor. The investor continues to beneficially own the shares but has "cashed out" his or her position without transferring beneficial ownership.

Once adopted, the new Instrument will have a retroactive effect with respect to such arrangements entered into before its effective date. Submissions on the proposed Instrument will be accepted until May 31, 2003.

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