Canada: Insider Trading

Last Updated: December 16 2015
Article by Stewart L. Muglich

The two most common areas which see disciplinary action against issuers and non-registrants under the securities regulation are: (1) trading in securities without an appropriate exemption from the prospectus and registration requirements, and (2) insider trading. Ensuring that you have an applicable exemption from the prospectus and registration requirements was the subject of an earlier article (see "Are Securities Law Applicable to Me?"). Insider trading is the subject of this article.

Insider trading laws cover transactions in an issuer's securities by insiders and other persons in a special relationship with the issuer, and impose strict liability for realizing profits from certain transactions as well as other fines and criminal penalties. In addition, the provisions against insider tipping prohibit disclosure of non-public material information by insiders and individuals who are in a special relationship with an issuer.

Who is an Insider?

The first thing to consider is who is an insider. An insider typically includes any of the following:

  • A director or officer of an issuer.
  • A director or officer of a person that is itself an insider or subsidiary of an  issuer.
  • A person that has beneficial ownershipof and/or control or direction over (directly or indirectly) securities of an issuer carrying more than 10% of the voting rights attached to the issuer's outstanding voting securities (a significant shareholder).

The definition of an officer typically includes all of:

  • A chair or vice chair of the board of directors, a chief executive officer (CEO), a chief operating officer (COO), a chief financial officer (CFO), a president, a vice- president, a secretary, an assistant secretary, a treasurer, an assistant treasurer and a general manager.
  • Every individual who is designated as an officer under a by-law or similar authority of the issuer.
  • Every individual who performs functions similar to those normally performed by an individual referred to above.

Likewise, the definition of a director includes anyone performing a similar function or occupying a similar position for a reporting issuer.

A reporting issuer can also be an insider itself if it has purchased, redeemed or otherwise acquired its own securities and will be an insider for so long as it holds such securities.

Who is a Person in a Special Relationship?

A person in a special relationship is defined as any of the following:

Insiders, Affiliates and Associates. Any person that is an insider, affiliateor associate of:

  • the issuer;
  • a person proposing a take-over bidof the issuer;
  • a person proposing a reorganization, amalgamation, merger or plan of arrangement or similar business combinationwith the issuer or a transaction to acquire a substantial portion of the issuer's property.

Doing Business. Any person that is engaging in or proposing to engage in any business or a professional activity (such as legal or auditing services) with:

  • the issuer;
  • a person proposing a takeover bid of the issuer;
  • a person proposing a reorganization, amalgamation, merger or plan of arrangement or similar business combination with the reporting issuer or a  transaction to acquire a substantial portion of the issuer's property.

Directors, Officers and Employees. Any person who is a director, officer or employee of:

  • the issuer or a subsidiary of the issuer;
  • a person that controls (directly or indirectly) the issuer;
  • a person proposing a takeover bid of the issuer;
  • a person proposing a reorganization, amalgamation, merger or plan of arrangement or similar business combination with the issuer or a transaction to acquire a substantial portion of the issuer's property;
  • any person that is or is engaging in or proposing to engage in business or a professional activity with:
  • the issuer;
  • a person proposing a takeover bid of the issuer;
  • a person proposing a reorganization, amalgamation, merger or plan of arrangement or similar business combination with the issuer or a transaction to acquire a substantial portion of the issuer's property.

Possession of Material Information. Any person that learned material information about the issuer while that person was in a special relationship with the issuer.

Tippee. Any person that learned material information about the issuer from a person that is in a special relationship with the issuer (or learned material information while such person was in a special relationship with the issuer) and ought to have known that the other person was in a special relationship with the issuer.

What is Material Information?

Material information includes material facts and material changes and is, generally, any information relating to the business and affairs of the issuer that results in or would reasonably be expected to result in a significant change in the market price or value of any of the issuer's listed securities.

Even if a reporting issuer may not be required to disclose material information under securities laws (for example, because the information does not trigger the requirements to file a material change report) a reporting issuer remains subject to the rules of the securities exchange on which it is listed. The TSX and TSXV material disclosure requirements are broader than the requirements of securities laws. A reporting issuer may be required to issue a press release to disclose material information to comply with stock exchange rules even though the information need not yet be disclosed in accordance with securities laws.

What are the Prohibitions on Insider Trading and Tipping?

The British Columbia Securities Act (the "BCSA") prohibits anyone in a special relationship with a issuer from trading securities of the issuer with knowledge of material information that has not been generally disclosed to the public. This is the law against insider trading. The BCSA also prohibits an issuer and anyone in a special relationship with the issuer from providing material information to anyone (except in the necessary course of business) before the material information has been generally disclosed to the public. This is the law against insider tipping. There are also prohibitions against insider trading and tipping under the Criminal Code, a discussion of which are beyond the scope of this article.

Sanctions. Under the BCSA, companies or persons found guilty of insider trading or insider tipping can be:

  • Subject to a fine of not more than $3,000,000 or imprisonment for a term of not more than three years for contravening securities laws.
  • In addition to any imprisonment imposed above, subject to a minimum fine equal to the profit made or loss avoided and a maximum fine of the greater of $3,000,000 and an amount equal to triple the profit made or loss avoided.
  • Liable to compensate for damages to the buyer or seller of securities (insider trading) or any person that bought or sold securities to or from a tippee (insider tipping).
  • Prohibited in trading in securities or acting as an officer or director of an issuer.

In addressing selective disclosure matters (tipping), the Canadian Securities Administrators has indicated that they will consider mitigating factors, including:

  • Whether and to what extent the issuer has implemented, maintained and followed reasonable disclosure policies and procedures to prevent contraventions of the tipping provisions.
  • Whether any selective disclosure was unintentional.
  • What steps were taken by the issuer to disseminate information that had been unintentionally disclosed (including how quickly the information was generally disclosed).

Defences and Exemptions. The BCSA and the regulations to the BCSA include a number of defences or exemptions to the prohibition against insider trading and tipping.

If a person in a special relationship with the issuer trades securities with knowledge of undisclosed material information, they will be liable to compensate the buyer or seller for damages unless they prove that they reasonably believed that the material information had been generally disclosed.

A person guilty of tipping will be liable to compensate anyone who bought or sold securities from a tippee unless they can prove they reasonably believed that the material information had been generally disclosed.

An insider that proves that they reasonably believed that the other party to a trade or who had been tipped actually had knowledge of the material information is exempt from insider trading and tipping laws.

Issuer Best Practices

Many public companies have adopted internal compliance programs for their directors and officers that cover insider trading matters including blackout periods and disclosure policies. The purpose behind these programs is to ensure that:

  • Any transaction by an officer or director is not perceived as, or does not result in, insider trading.
  • The short timetable for reporting any transaction is met.

The programs should be implemented through one or more written policies that are distributed to all directors, officers and employees who may learn material information before it is generally disclosed. There should be an acknowledgment signed and kept on file indicating receipt, understanding and acceptance of responsibility to comply with the requirements described in each policy.

Companies should consider not only implementing a specific compliance program but also requiring directors and officers to:

  • Either:
    • notify compliance personnel before entering into any transaction; or
    • obtain prior approval of (pre-clear) any transaction before it can be completed.
  • Notify compliance personnel immediately or within a very short period of time (up to 24 hours) after entering into any transaction, that the transaction has been completed, and include a description of the transaction so that compliance personnel can prepare any necessary report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Stewart L. Muglich
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