On July 8, 2016, the Ontario Securities Act (the Act) was amended to prohibit a person who possesses undisclosed material information from recommending trades or encouraging others to trade in securities of the issuer. The amendment is the latest in a series intended to close gaps in Ontario's insider trading rules. The impetus for these amendments are decisions of the Ontario Securities Commission (OSC) in which the Commission's public interest jurisdiction was used to identify and close gaps in the Act. By making these changes to the Act, the legislature has added clarity to the insider trading rules and greater certainty for market participants.
Prohibition against recommending or encouraging trades when in possession of material undisclosed information
The tipping rule in the Act prohibits a person in a special relationship with an issuer from sharing undisclosed material information about the issuer with another person, other than in the necessary course of business. This prohibition captures circumstances in which a person with inside information conveys the information itself, but it is not wide enough to capture circumstances where a similarly situated person merely recommends or encourages a person to trade in the issuer's securities. This left a gap in the Act that the OSC has previously closed using its public interest jurisdiction. In its decision in in Re Finkelstein (our case summary can be found here), the OSC engaged its public interest jurisdiction in order to make an order against brokers who had recommended that clients purchase securities of a company in relation to which the brokers had material undisclosed information.
The Act, like other provincial securities legislation, has adopted a codified approach to insider trading, setting out the specific instances of trading conduct that is prohibited by insider trading rules. The consequences of this approach is that gaps in the rules will be exposed. The OSC has the ability to address these gaps on a case-by-case basis by finding that conduct that falls outside the ambit of the insider trading rules, while not a breach of the Act, is contrary to the public interest. The difficulty with reliance on the public interest jurisdiction is that the OSC is susceptible to criticism that the insider trading rules are not predictable. Moreover, without proving a breach of the Act, the sanctions that can be imposed for wrongful trading conduct are limited. The recent amendment to the Act to capture recommending or encouraging trading is consistent with other recent efforts by the legislature to close different gaps identified in the insider trading rules, which we reported on previously (read our full analysis of Re Donald here and our article, "Developments in Insider Trading" here). These legislative amendments closed gaps in the Act relating to the issuers to which the insider trading prohibition applies and the range of relationships that can bring a person within the ambit of the insider trading rules.
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