Ontario Follows Suit With Securities Act Changes Tightening the Belt on Insider Trading Regulation

The standards expected of market participants are steadily increasing in response to demand to address white collar crime – including amendments to the Ontario Securities Act that took effect on July 1, 2016 to prohibit a person with a “special relationship” to an issuer with knowledge of material undisclosed information from recommending or encouraging a trade in that issuer’s securities. This is just one of several recent amendments to the Ontario securities legislation aimed at tightening up the regulation of insider trading in Ontario. Issuers subject to the Ontario securities legislation should ensure that “insiders” and those in a “special relationship” know about the new prohibition, exercise diligence in safeguarding undisclosed material information, and refrain from engaging in any disclosure, trading and/or recommendations in respect of an issuer when in possession of such information.

By effectively creating a new category of activity drawing sanction for insider trading, Ontario follows suit with other Canadian provinces (British Columbia, Alberta, Saskatchewan, Quebec, Prince Edward Island and New Brunswick) that already prohibit the same conduct.

The Loophole. Before this change, the Ontario legislation only addressed “tipping” by prohibiting a person in a special relationship with an issuer from sharing undisclosed material information about that issuer with another person except in the necessary course of business (section 76(2) of the Act). But it didn’t prohibit that person from recommending or encouraging trading. To deal with this loophole, the Ontario Securities Commission (OSC) resorted to its power to protect the public interest to sanction, on a case-by-case basis, trading activities that didn’t breach the Act, but did impugn the integrity of the capital markets. For example, in one case (Re Finkelstein), a corporate lawyer used non-public material information he acquired by virtue of his role as counsel in an imminent transaction to purchase several millions of dollars of shares for himself and his friends and family; this didn’t breach the Act, but the OSC decided his actions were contrary to the public interest. Critics argued this approach made the insider trading rules unclear and unpredictable.

The Belt Tightening. The most recent amendments to the Ontario Securities Act close this loophole: a person with a “special relationship” to an issuer who has knowledge of material undisclosed information is now also prohibited from recommending or encouraging a trade in that issuer’s securities. The Act defines those in a “special relationship” to include:

• Insiders, affiliates or associates either of the issuer or of a person or company considering making a take-over bid, becoming a party to a reorganization, amalgamation or other arrangement or business combination, or acquiring a substantial portion of the issuer’s property.
• A person or company engaging in a business or professional activity with or on behalf of the issuer or a person or company considering a transaction referenced above.
• A director, officer or employee of the issuer, a subsidiary of it, or a company that controls either the issuer or any company considering a transaction referenced above.
• A person or a company that learns of either a material fact or change with respect to the issuer while being one of the people referenced above.
• A person or company that learns of a material fact or change respecting the issuer from any of the above people, and that knows or ought reasonably to have known that the other person is in such a “special relationship”.

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