Notice and Proposed Rule: OSC Rule - 45-502 - Dividend or Interest Reinvestment and Stock Dividend Plans
Notice and Proposed Rule: OSC Rule - 45-502 - Dividend or Interest Reinvestment and Stock Dividend Plans
NOTICE OF PROPOSED RULE 45-502 UNDER THE SECURITIES ACT,
DIVIDEND OR INTEREST REINVESTMENT AND STOCK DIVIDEND PLANS
Substance and Purpose of Proposed Rule
On September 19, 1997, the Commission published the proposed Rule for comment at (1997) 20 OSCB 4775. The substance and purpose of the proposed Ruleis to provide exemptions from the registration and prospectus requirements of the Securities Act (the "Act") for trades of securities under dividend or interestreinvestment plans, and the cash payment options of dividend or interest reinvestment plans and stock dividend plans, subject to certain terms and conditions, andto provide for simplified disclosure of, and fees for, exempt trades under these exemptions.
The proposed Rule is derived in part from the Rule In the Matter of Dividend Reinvestment and Stock Dividend Plans (1997), 20 OSCB 1218, which in turnincorporated the Blanket Ruling of the same name, (1993)16 OSCB 5928 as amended by an order dated April 26, 1994 (1994), 17 OSCB 1978 (the "BlanketRuling"), which replaced and updated a ruling dated October 27, 1983, 6 OSCB 3737, which in turn replaced and expanded upon a ruling dated March 18, 1982,4 OSCB 511E. The Blanket Ruling exempted certain trades made pursuant to dividend or interest reinvestment plans and stock dividend plans which had a cashpayment option from the application of the registration and prospectus requirements of the Act, subject to certain terms and conditions, and provided forsimplified reporting of the exempt trades under such plans (the "Combined Plan Blanket Ruling").
The proposed Rule also incorporates and replaces the prospectus and registration exemptions for dividend or interest reinvestment plans contained in clauses14(e) and 151(a), respectively, of the Regulation.
As a result of comments received on the proposed Rule, recommendations and further deliberations of the Commission, the Commission has amended theproposed Rule and is re-publishing it for comment.
Changes Made to the Proposed Rule
The purposes of the changes to the proposed Rule are:
(a) to provide that the registration exemption for trades under dividend or interest reinvestment plans and the cash payment option of combined plans areavailable for trades in securities previously acquired in the secondary market, as well as trades in securities by an issuer from treasury;
(b) to remove the restrictions on the types of securities which may be issued under the registration and prospectus exemptions for dividend or interestreinvestment plans;
(c) to provide that the registration and prospectus exemptions for dividend or interest reinvestment plans and the cash payment option of combined plans areavailable for trades in securities of the issuer by trustees, custodians and administrators of such plans; and
(d) to conform the provisions contained in Part 5 of the proposed Rule relating to methods of disclosure of exempt trades more closely to the first traderequirements of Part 4 relating to disclosure, to clarify the exemptions to which the disclosure provisions relate and to clarify the manner in which disclosure maybe made on an annual basis for months other than months in which the thresholds provided for in the annual disclosure provisions are exceeded.
The amended proposed Rule accomplishes the foregoing by
(a) revising sections 2.1 and 3.1 to provide exemptions for trades in securities of the issuer's own issue under these plans and by deleting the restriction of theexemptions to securities traded by way of the issuance of securities;
(b) revising the definition of "dividend or interest reinvestment plan" to delete the provisions which restricted the exemptions to trades to holders of publiclytraded securities and to the issue of publicly traded securities or other securities of the issuer that were redeemable at the option of the holder;
(c) revising sections 2.1 and 3.1 to provide registration and prospectus exemptions for trades by administrators of the issuer in securities of the issuer's own issueunder the applicable plan, by adding a definition of "administrator" (being a trustee, custodian or an administrator of a plan for the issuer) to section 1.1 for thispurpose and changing the definitions of "cash payment option" and "dividend or interest reinvestment plan" to reflect the involvement of administrators; and
(d) replacing references to "reports" with "disclosure" in Part 5 to conform the provisions of Part 5 to section 4.1, amending Part 5 to provide that the disclosureto be made is the disclosure referred to in section 5.1 and by adding subsection 5.4(2) to clarify that the issuer may make disclosure in accordance with the annualdisclosure provisions of section 5.3 for the other calendar months in the annual period excluding such month or months for which disclosure has been made underthe monthly disclosure provisions in subsection 5.4(1).
Reasons for Changes
At the time it published the proposed Rule, the Commission considered whether the registration exemption for dividend or interest reinvestment plans, and thecash payment option of combined plans, should be restricted to the issuance of securities by the issuer from treasury and proposed that it should be so restricted.As a result of comments received on the proposed Rule, recommendations and the consideration of relevant policy issues, the Commission has reconsidered itsposition on limiting the scope of the registration exemptions in the proposed Rule. The Commission determined the same rationale exists for providing relief fromregistration requirements for trades to plan participants of securities acquired in the secondary market as exists for trades to plan participants of securities by wayof issuance by the issuer. The Commission also notes that the registration requirements would continue to apply to the trade of securities to the issuer or, aswould usually be the case, the administrator, in the market.
At the time it published the proposed Rule, the Commission did not consider the matter of clarifying that the registration and prospectus exemptions provided inthe proposed Rule were available if the securities were traded by issuers to, or by, a trustee, a custodian or an administrator under a plan (an "administrator"). Inlight of the amendments to clause 72(1)(n) and paragraph 19 of subsection 35(1) of the Act under the Red Tape Reduction Act (Ministry of Finance) 1997 whichclarified that those exemptions were available if securities were issued to trustees or administrators of share purchase plans, the cognate provisions included inproposed Rule 45-503 Trades to Employees, Executives and Consultants, published February 20, 1998, (1998) 21 OSCB 1123 which provided that theexemptions contained therein applied to securities traded by issuers to, or by, administrators and in light of the fact that, as noted above, the Commissionproposes that the registration exemption be available for trades of securities acquired in the secondary market, which trades are typically made by a trustee, acustodian or an administrator, the Commission determined this change was useful to clarify the availability of the exemptions in this context.
As a result of comments received on the proposed Rule, recommendations and the consideration of relevant policy issues, the Commission has determined thatthere is no compelling policy rationale for distinguishing among the types of securities for which exemptions are available under the dividend or interestreinvestment plan exemption currently provided by clause 14(e) of the Regulation, on the one hand, and the stock dividend exemption contained in subclause72(1)(f)(i) of the Act, on the other. In the latter case, a shareholder acquires securities of the issuer through dividends in the form of securities, while in theformer case a shareholder acquires securities of the issuer by applying the cash dividends received from the issuer to purchase additional securities of the issuer.Accordingly, the Commission has changed the proposed Rule to delete the restrictions on the types of securities available under the exemptions for dividend orinterest reinvestment plans.
As a result of further review and recommendations, the Commission has determined that the references to "reports" which appear in Part 5 of the Rule should bereplaced with references to "disclosure" to conform the provisions of Part 5 more closely with the provisions of section 4.1 relating to disclosure of exempttrades and that provisions be added to clarify the exemptions to which the disclosure provisions relate. The Commission also determined, upon further review bystaff and its recommendation, to add subsection 5.4(2) to Part 5 to provide greater clarity as to the manner in which the issuer may make annual disclosure forother calendar months in an annual period where the issuer has made monthly reports for certain months because the minimum monthly thresholds for makingannual reports have been exceeded.
Summary of Comments
The Commission received a comment letter dated December 22, 1997 from Osler, Hoskin & Harcourt.
The comment letter supported the Commission's proposal to simplify regulation with respect to combined plans by replacing the various rules and the BlanketRuling with the proposed Rule.
The comment letter did not support the different treatment given to "dividend or interest reinvestment plans" and "stock dividend plans" with respect to the typesof securities issuable under the exemptions for each. As indicated above, the Commission has changed the proposed Rule in this regard.
The comment letter also did not support limiting the availability of the exemption from registration requirements afforded by the proposed Rule to trades whichwere new issuances. As indicated above, the Commission has changed the Rule to provide a registration exemption for trades of securities acquired in thesecondary market.
The comment letter noted that, in many cases, the issuer may wish to establish a trust arrangement or engage the services of an independent third party toadminister the plans and that the definition of "cash payment option" be changed in order to address situations where dividends or interest are payable to a trustplan administrator rather than being paid directly to the beneficial owner. As indicated above, the Commission has changed the proposed Rule to reflect theparticipation of trustees, custodians and administrators in this regard.
The comment letter also noted that a number of U.S. issuers offered combined plans which permit transfers of securities from one participant's account to theaccount of another participant, which the comment letter stated would constitute "trades" under the Act. The comment letter stated an exemption from theregistration requirements of the Act for such trades may not be available to participants in such plans in all circumstances. The comment letter also stated that thefirst trade exemptions set out in the proposed Rule do not permit a trust or plan administrator to "net" a request from one participant to dispose of theparticipant's securities against a need to acquire additional securities with the dividend or interest funds or cash purchase funds received. The comment suggeststhat the rules be changed to permit such transfers. In effect, the comment proposes that dividend or interest reinvestment plans and combined plans be used as avehicle for the disposition of securities by shareholders, as well as the acquisition of securities by shareholders and that relief should be provided to participantsfor this purpose. The Commission believes that this goes beyond the intent and scope of the relief provided by the Blanket Ruling and clause 14(e) of theRegulation which is to provide relief for the acquisitions of securities under such plans. The Commission declines to extend such registration relief to thesubsequent sale of such securities.
The comment letter also suggested that the two percent threshold in subparagraph 3.1(b)(1) be increased to conform with the de minimis thresholds of fivepercent or 10 percent used elsewhere in the Act and Regulations. The comment letter also suggested that the words "to the best of the issuer's belief" be added toqualify the beneficial ownership branch of the de minimis Ontario market test provided in the proposed Rule.
After consideration, the Commission has declined to make either of these changes. As to the de minimis threshold, the threshold of 10 percent was used in otherproposed Rules, such as Rule 45-503 Trades to Employees, Executives, and Consultants, and Rule 72-501 Prospectus Exemption for First Trade Over a MarketOutside Ontario, to provide a threshold for a definition of a de minimis Ontario market for the purposes of determining that regulation by Ontario securitieslegislation was not appropriate, for example, in the case of restrictions on resale if there was a market outside Ontario. The use of the two percent threshold insubparagraph 3.1(b)(i) is not used for this purpose, but rather for the purpose of limiting the number of securities which can be issued under the cash paymentoption of a combined plan without a prospectus. This provides a quantitative restriction so that these plans are not used for "back door" underwritings, to reflectthe intention these exemptions not be used to allow significant capital raising by issuers. As to the other suggested change, the Commission believes the newproposed alternative beneficial and registered holder tests for the purpose of defining a de minimis Ontario market provide significantly more flexibility to issuersin allowing them to utilize this status. Adopting the suggested change would require the imposition of a duty to make reasonable inquiries. The Commissionbelieves no further change is necessary.
The comment letter also stated that it was not appropriate for an issuer who is not a reporting issuer in Ontario and of which only a small portion of the holdersof securities are in Ontario to be subject to the payment of annual fees. The comment letter voiced the suspicion that such issuers would not be likely to be awareof any obligation to pay such a fee. The Commission has determined to maintain the fees requirements proposed in the proposed Rule. The Commission notesthat fees are applied generally for securities traded under prospectus exemptions and indeed a fee is already charged under subsection 21(2) of Schedule 1 to theRegulation for a dividend or interest reinvestment plan or a stock dividend plan operated under the exemption provided in clause 72(1)(h) of the Act. TheCommission also notes that fees are charged on a comparable basis for the operation of employee and similar plans. The Commission expects that, to the extentforeign issuers seek legal advice as to the extension of dividend or interest reinvestment plans or stock dividend plans into Canada, they will be apprised byCanadian counsel of the available exemptions and the applicable fees. By providing for an annual fee of $100 for securities acquired under the exemptions underthe Rule on the same basis as prospectus exempt distributions of securities under employee and similar plans, and by removing the existing $375 fee for dividendor interest reinvestment and stock dividend plans under subclause 72(1)(h), the proposed Rule clarifies, simplifies and provides for consistency as to the feespayable in this regard.
The comment letter also proposes that the Commission should have included in the proposed Rule provisions to permit investors to participate in the cashpayment option of a combined plan without the requirement of the investor already holding at least one security. The Commission proposes to continue to reviewthis matter, as previously indicated in the Notice of the proposed Rule published on September 19, 1997, as the Commission believes that this raises a significantpolicy issue. While the Commission continues to consider this matter, however, it determined that the proposed Rule should be made in the existing form, so asto continue the benefits of the existing relief relating to dividend or interest reinvestment plans and the cash payment options of combined plans and to make theother changes as described.
Regulations to be Revoked or Amended
As indicated in the Notice accompanying the proposed Rule published on September 19, 1997, the Commission proposes to revoke clause 14(e), subsection19(5) and subsection 69(3) of the Regulation and subsection 21(2) of Schedule 1 to the Regulation and proposes to amend subsection 21(1) of Schedule 1 to theRegulation to delete the exception for notices in respect of a dividend or interest investment plan or a stock dividend plan.
Comments
Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by March 27, 1998 will be considered.
Submissions should be made in duplicate to:
Daniel P. Iggers, SecretaryOntario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario
M5H 3S8
A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As the Act requires that a summary ofwritten comments received during the comment period be published, confidentiality of submissions received cannot be maintained.
Questions may be referred to:
Cynthia RogersLegal Counsel
Ontario Securities Commission
(416) 593-8261
Proposed Rule
The text of the proposed Rule follows, together with footnotes that are not part of the proposed Rule but have been included to provide background andexplanation.
DATED: February 27, 1998
ONTARIO SECURITIES COMMISSION RULE RULE 45-502 - DIVIDEND OR INTEREST REINVESTMENT AND STOCK DIVIDEND PLANS
TABLE OF CONTENTS
PART TITLEPART 1 DEFINITIONS AND INTERPRETATION
1.1 Definitions
1.2 Interpretation
PART 2 EXEMPTION FOR TRADES UNDER A DIVIDEND OR INTEREST REINVESTMENT PLAN
2.1 Exemption for Trades Under a Dividend or Interest Reinvestment Plan
PART 3 EXEMPTION FOR TRADES UNDER THE CASH PAYMENT OPTION OF A COMBINED PLAN
3.1 Exemption for Trades Under the Cash Payment Option of a Combined Plan
PART 4 RESTRICTIONS ON FIRST TRADES IN SECURITIES ACQUIRED UNDER SECTION 2.1 OR 3.1
4.1 Restrictions on First Trade in Securities Acquired Under Section 2.1 or 3.1
PART 5 DISCLOSURE OF EXEMPT TRADES
5.1 Disclosure
5.2 Disclosure Before Resale
5.3 Annual Disclosure
5.4 Monthly Disclosure
5.5 Form of Disclosure
PART 6 FEES
6.1 Fees
PART 7 EXEMPTION
7.1 Exemption
RULE 45-502
DIVIDEND OR INTEREST REINVESTMENT
AND STOCK DIVIDEND PLANS1
PART 1 DEFINITIONS AND INTERPRETATION
1.1 Definitions - In this Rule
"administrator" means, for an issuer, a trustee, a custodian or an administrator of a plan of the issuer2;
"cash payment option" means a provision in a plan under which a participant is permitted to make cash payments to purchase from the issuer or an administratorof the issuer securities of the issuer's own issue, in addition to the securities
(a) purchased using the amount of the dividend or interest payable to or for the account of the participant; or
(b) acquired as a stock dividend or other distribution out of earnings or surplus;
"class of securities" means the class or the series of a class of securities that are issuable under the relevant plan;
"combined plan" means a plan that contains a cash payment option;
"dividend or interest reinvestment plan"3 means an arrangement under which a holder of securities of an issuer is permitted to direct that the dividends or interestpaid on those securities be applied to the purchase from the issuer or an administrator of the issuer of securities of the issuer's own issue;
"plan" means a dividend or interest reinvestment plan or a stock dividend plan; and
"stock dividend plan" means an arrangement under which securities of an issuer are issued by the issuer to holders of securities of the issuer as a stock dividendor other distribution out of earnings or surplus.
1.2 Interpretation - The term "special relationship", when used in reference to a person or company in a special relationship with a reporting issuer, shall beinterpreted in accordance with subsection 76(5) of the Act.
PART 2 EXEMPTION FOR TRADES UNDER A DIVIDEND OR INTEREST REINVESTMENT PLAN
2.1 Exemption for Trades Under a Dividend or Interest Reinvestment Plan4 - Sections 25 and 53 of the Act do not apply to a trade by an issuer or anadministrator of the issuer5 in a security of the issuer's own issue under a dividend or interest reinvestment plan of the issuer.
PART 3 EXEMPTION FOR TRADES UNDER THE CASH PAYMENT OPTION OF A COMBINED PLAN
3.1 Exemption for Trades Under the Cash Payment Option of a Combined Plan6 - Sections 25 and 53 of the Act do not apply to a trade by an issuer or anadministrator of the issuer7 in a security of the issuer's own issue under the cash payment option of a combined plan of the issuer
(a) if the issuer is
(i) a reporting issuer and, to the best of its belief, is not in default under the Act or the regulations, or
(ii) an issuer, other than a reporting issuer, of which the class of securities is listed and posted for trading, traded, or quoted, on
(A) The Montreal Exchange,(B) the Alberta Stock Exchange,
(C) the Vancouver Stock Exchange,
(D) the New York Stock Exchange,
(E) the American Stock Exchange,
(F) the Nasdaq Stock Market, or
(G) the London Stock Exchange Limited; and
(b) if
(i) in the financial year of the issuer during which the trade takes place, the aggregate number of securities issued under the cash payment option of the combinedplan before the trade, plus the aggregate number of securities issued in the trade, does not exceed two percent of the number of the securities of the class ofsecurities outstanding at the commencement of that financial year,
(ii) at the time of the trade, persons or companies whose last address as shown on the books of the issuer is in Ontario and who held securities of the class ofsecurities
(A) did not hold more than 10 percent of the outstanding securities of the class of securities, and
(B) did not represent in number more than 10 percent of the total number of holders of securities of the class of securities; or
(iii) at the time of the trade, persons or companies who are in Ontario and who beneficially own securities of the class of securities
(A) did not beneficially own more than 10 percent of the outstanding securities of the class of securities, and
(B) did not represent in number more than 10 percent of the total number of holders of securities of the class of securities.
PART 4 RESTRICTIONS ON FIRST TRADES IN SECURITIES ACQUIRED UNDER SECTION 2.1 OR 3.1
4.1 Restrictions on First Trade in Securities Acquired Under Section 2.1 or 3.1 - A person or company may trade a security acquired under an exemptioncontained in section 2.1 or 3.1 only
(a) if the first trade is made under a prospectus for which a receipt has been obtained from the Director;
(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act; or
(c) if
(i) at the time of the trade, the issuer of the security is a reporting issuer and has been a reporting issuer for at least 12 months,
(ii) in the case of a person or company that is in a special relationship with the issuer, the person or company has reasonable grounds to believe that the issuer isnot in default under the Act or the regulations,
(iii) disclosure to the Commission has been made of the trade under section 2.1 or section 3.1 in accordance with Part 5,
(iv) no unusual effort is made to prepare the market or to create a demand for the security and no extraordinary commission or consideration is paid for the trade,and
(v) the trade is not a control person distribution.
PART 5 DISCLOSURE OF EXEMPT TRADES8
5.1 Disclosure - The disclosure contemplated by section 4.1 for securities acquired under the exemptions contained in sections 2.1 and 3.1 shall, and thedisclosure required by clause 72(5)(b) of the Act for securities acquired under the exemption contained in subclause 72(1)(f)(i) of the Act may, be made by theissuer in accordance with this Part.
5.2 Disclosure Before Resale - The disclosure referred to in section 5.1 may be made by the issuer by disclosing the date of the trade, the number of securitiespurchased and the purchase price paid or to be paid, in
(a) an information circular or take-over bid circular filed in accordance with the regulations; or
(b) a letter filed by a person or company certifying that the person or the company has knowledge of the facts contained in the letter
if in either case the filing is effected before any resale of the securities.
5.3 Annual Disclosure - The disclosure referred to in section 5.1 may also be made by the issuer when the plan is commenced and not less frequently thanannually after the first disclosure, if the volume of trading in securities of the class of securities issued in any calendar month under the plan in reliance on theexemptions described in section 5.1 does not exceed one percent of the securities of that class that were outstanding at the beginning of the calendar month inwhich the securities were issued.
5.4 Monthly Disclosure
(1) If the volume of trading in securities issued under the plan in reliance on the exemptions does exceed one percent of the securities of the class of securitiesthat were outstanding at the beginning of the calendar month in which the securities were issued, the disclosure referred to in section 5.1 may be made by theissuer for that calendar month, within 10 days after the end of the month.
(2) The issuer may make disclosure in accordance with section 5.3 for the other calendar months in the annual period excluding such month or months for whichdisclosure has been made under subsection (1)9.
5.5 Form of Disclosure - For the purposes of sections 5.3 and 5.4, the disclosure may be made in the form of a letter filed disclosing the date of the trade, thenumber of securities purchased and the purchase price paid or to be paid, and certifying that the person or the company has knowledge of the facts contained inthe letter.
PART 6 FEES
6.1 Fees - The issuer shall pay a fee of $100.00 for securities issued under each of the exemptions contained in subclause 72(1)(f)(i) of the Act and sections 2.1and 3.1
(a) on the date the plan is commenced; and
(b) on each anniversary of the date of commencement of the plan, if securities were issued or distributed in Ontario under the plan during the twelve-monthperiod preceding the date of the anniversary.
PART 7 EXEMPTION
7.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictions as may be imposed in theexemption.