The Ontario government has recently amended the insider trading rules under the Ontario Securities Act (the "Act")1. The Act's prohibitions have been expanded so as to restrict a company (an "issuer" under the Act) and those in a special relationship with a company from recommending or encouraging the sale or purchase of such company's securities where such person making the recommendation possesses undisclosed material information.
Insider Trading – An Overview
Insider trading prohibitions under the Act encompass two general prohibitions. These prohibitions limit the ability of a company, in certain situations, and those in a "special relationship"2 with a company, to:
- buy or sell the securities of such company (i.e. the"true" insider trading prohibition), and
- share inside information, not in the ordinary courseof business (i.e. the "tipping" prohibition).
It is the latter of these two restrictions that the amendment has broadened.
Recommending Was Not Tipping
Before the amendments came into force, the tipping prohibition restricted the sharing of material undisclosed information.3 However, this prohibition did not catch instances where a company or person in a special relationship with that company prompted another person to make a trade without informing them of any particular material fact or material change. In other words, simply giving an indication that one should buy or sell a security did not itself constitute the sharing of material undisclosed information.
Amendment to the Ontario Securities Act Regarding Recommendations
The newly enacted s. 76(3.1) of the Act provides that no company, no person in a special relationship with a company, and no person that is considering or evaluating whether to engage in a transaction with the company shall recommend or encourage, other than in the necessary course of business, another person to purchase or sell securities of the company with the knowledge of a material fact or material change with respect to the company that has not been generally disclosed.
The amendments codify certain actions already taken by the Ontario Securities Commission (the "OSC") through the use of its discretionary public interest power, and thereby may increase certainty for insiders. Recently, for example, in Re Finkelstein et al.,4 the OSC used its public interest power to find against certain investment advisers who recommended the shares of target companies; this despite those advisers technically being onside the tipping prohibitions. The OSC may therefore not need to rely on its public interest jurisdiction in future similar cases. Moreover, we note that the change brings Ontario legislation closer into line with the securities legislation in other Canadian provinces, many of which already prohibit such recommendations.5
Footnotes
1 Ontario Budget Measures Bill 173, Schedule 26, s. 2 (1), which received royal assent on April 19, 2016 and was proclaimed into force effective July 1, 2016.
2 The definition of "special relationship" under the Act includes, among others, those who (i) are an insider, affiliate, or associate of (A) the issuer, (B) a company considering certain transactions with the issuer or its securityholders; (ii) are engaging in business or advisory services with a company; (iii) learned of the material fact or material change with respect to the issuer while the person or company was previously in a special relationship; and (iv) learn about a material fact or change with respect to the issuer from another person or company that is in a special relationship with the issuer where that person knows or ought reasonably to have known that the other person or company is a person or company in such a relationship; see the Act, ss. 76(5).
3 See the Act, ss. 76(2) and (3).
4 OSC, March 24, 2015.
5 For e.g. Securities Act (British Columbia), s. 57.2(5) and Securities Act (Alberta), s. 147(5).
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