Canadian securities regulators have proposed that be insiders be required to file insider reports in respect of derivative-based transactions, including equity monetization transactions.

If adopted, the proposed instrument will ensure that insider transactions involving derivatives, which have a similar effect in economic terms to insider trading activities, are fully transparent to the market.

“We became aware that some insiders and their advisors are interpreting the insider trade reporting requirements very narrowly when it comes to equity monetizations,” said Paul Moore, vice chair of the Ontario Securities Commission. “While it may be possible to argue that, for technical reasons, these transactions are not covered by the existing insider reporting requirements, these transactions clearly come within the spirit of the insider reporting requirements. We are acting jointly with regulators in other Canadian jurisdictions to ensure that insider activities which involve derivative-based transactions are subject to the insider reporting requirements,” he said.

The proposed instrument does not prohibit insiders from entering into monetization transactions. It does, however, require that insiders disclose the existence and material terms of such transactions to the public.

The proposed instrument will also require, in certain circumstances, that insiders disclose the existence of monetization arrangements that were entered into before the instrument comes into effect. The instrument will apply to those pre-existing monetization arrangements, which continue in force after the effective date of the instrument and which continue to have an impact on an insider’s publicly reported holdings.

“If an insider enters into a monetization arrangement before the instrument takes effect, and the insider does not have to disclose the existence of the arrangement, the arrangement may continue to have a material impact on the insider’s future insider reports. The market will have no way of knowing whether the insider’s reports reflect the insider’s true economic position in his or her issuer,” added Moore.

Comments on Multilateral Instrument 55-103 (Insider Reporting for Certain Derivative Transactions), available on the OSC web site (www.osc.gov.on.ca), are requested by May 31, 2003 by the OSC and other Canadian jurisdictions except British Columbia.

The British Columbia Securities Commission has participated in developing the proposed Multilateral Instrument and Companion Policy, but has decided to implement similar requirements by seeking amendments to the British Columbia Securities Act instead. Consequently, British Columbia will not be adopting the Multilateral Instrument and Companion Policy.