A tough year for North American insider trading enforcement
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PDF 93 Kb, 11 pages. Trading by insiders per se is not illegal; most laws governing the issue allow insiders to trade in the securities of corporations with which they have a connection, provided they do not possess material confidential information about the corporation.
Insider trading is proscribed, however, when the insider possesses material confidential information that may be used for his or her benefit when trading in the securities of the corporation. There are a number of reasons why improper insider trading is regulated. Without regulation, insiders could use important inside information to their own advantage and to the disadvantage of outside investors.
Both the federal and provincial governments have jurisdiction to enact laws relating to insider trading. Provincial jurisdiction is based on the authority to enact laws relating to property and civil rights, while federal jurisdiction is based on the authority of the federal Parliament to create laws regulating federal corporations. At the provincial level, insider trading is regulated under provincial corporations laws and securities statutes. Companies incorporated federally under the CBCA are also subject to the insider trading provisions found in that statute.
The result is a certain amount of overlap and duplication. The overlap and duplication of the federal and Ontario insider trading requirements were the subject of a Supreme Court of Canada decision in the early s. In Multiple Access Ltd. McCutcheon3 the provisions of the Ontario Securities Act allowing compensation for loss suffered as a result of insider trading were held to apply to a federally incorporated corporation, even though the corporation was subject to similar insider trading requirements under federal law.
The majority of the Court held that the insider trading provisions of both the Canada Corporations Act 4 and the Ontario Securities Act were valid. Writing for the majority, Dickson, J. Providing safeguards against the malfeasance of the managers is strictly within what might properly be called the constitution of the company.
Thus, the majority found that insider trading provisions have both corporate law and securities law aspects. Because they considered these aspects to be of roughly equal importance, the majority felt that one did not have to prevail over the other.
The minority of the Court three judges took a different view, however. They concluded that the provisions of the Ontario Securities Act were constitutionally valid, being directed to regulating the holding and trading of securities in Ontario. Insider trading provisions were first introduced at the federal level in as part of the Canada Corporations Act and subsequently carried over into the CBCA in There are three main components of the provisions: An insider who buys or sells the security of the corporation while possessing knowledge of confidential information that, if generally known, might reasonably be expected to affect materially the value of any of the securities of the corporation, is liable to compensate the person on the other side of the transaction for any damages suffered because of the transaction.
As well, the insider is accountable to the corporation for any benefit or advantage received or receivable sections 4 and 5 of the CBCA. If someone received confidential information while an insider, but subsequently ceased to hold his or her position in respect of the corporation e.
As well, even a completely unrelated person will become an insider of the corporation if that person receives the material confidential information i. It includes any financial instrument of the corporation traditionally defined as a security e. A court that finds that someone engaged in insider trading can assess any measure of damages it considers relevant in the circumstances.
The CBCA provides exceptions in certain circumstances. For example, if, when the insider traded the securities of the corporation, he or she reasonably believed that the confidential information had been generally disclosed, then the insider will not be liable for insider trading. Other exceptional circumstances are also set out in the CBCA and regulations. An insider may not tip their family members, friends, or anyone else to give them an advantage in deciding whether to buy or sell securities of the corporation.
The insider may also be accountable to the corporation for any benefit or advantage received or receivable by the insider for disclosing the information to the tippee sections 6 and 7. In addition, as mentioned above, if the tippee knows, or ought reasonably to know, that they received a tip from an insider, then the tippee also becomes an insider of the corporation subject to civil liability if he or she engages in insider trading or further tipping section 1 h.
In tipping cases, damages are measured in the same way as for insider trading cases, and similar exceptions are provided in circumstances where, for example, the person giving the tip thought that the confidential information had been generally disclosed. It is an offence for an insider to sell securities of a distributing corporation 15 that the insider does not own or has not fully paid for short selling section 1.
The CBCA provides an exception for an insider who owns another security that is convertible into the security sold, or an option or right to acquire the security sold, if the insider exercises the conversion, option or privilege and transfers the security to the buyer within 10 days of the sale section 3.
It is also an offence for an insider to sell a call or buy a put 16 in respect of a security of the corporation section 2. For the purposes of these speculative trading offences, the definition of insider is much narrower than that used for general insider trading and tipping. The Criminal Code also includes insider trading provisions.
Note, however, that the definitions of insider, insider trading and tipping are slightly different in the criminal context than they are in the civil context.
As discussed earlier in this paper, the provincial governments also have jurisdiction to enact laws relating to insider trading, and they have done so. Provincial business corporations statutes regulate insider trading in respect of provincially incorporated companies, which are not subject to the CBCA. In addition, provincial securities legislation provides a tertiary layer of insider trading regulation for all companies subject to these Acts, regardless of where they were incorporated.
A detailed description of the types of insider trading prohibitions contained in provincial legislation is beyond the scope of this paper. For the purposes of the insider reporting obligation, insider generally means a director, senior officer or a significant security holder of the corporation. In most cases, insider reports may be filed electronically over the Internet using the System for Electronic Disclosure by Insiders SEDIa national insider reporting system.
The public may search and look at information filed on the SEDI website. Untilthe CBCA also included an insider reporting requirement. This was repealed to eliminate duplicative filing requirements when the CBCA was amended significantly in by Bill S