Securities Act closes loophole - what does it mean for advisors?

Securities Act closes loophole - what does it mean for advisors?

Securities Act closes loophole - what does it mean for advisors? In the interest of maintaining fair market competition, one of the most recent amendments to the Ontario Securities Act has created a new category of activity that would warrant sanction for insider trading.

This new amendment – which follows those already made by other Canadian provinces such as British Columbia, Alberta, and Saskatchewan – prohibits a person with a “special relationship” to an issuer with knowledge of undisclosed material information from recommending or encouraging a trade in that issuer’s securities, according to an article published on the Mondaq Business Briefing website.

Prior to the change, Ontario legislation only prohibited “tipping” in the sense that someone with undisclosed material information about an issuer is not allowed to share that information with a third party, except in the necessary course of business. That left an opportunity for some to strongly encourage or recommend a trade involving that issuer’s securities: as long as they did not disclose the information behind the recommendation, they were in the clear.

The OSC used to deal with such instances on a case-to-case basis, using its discretion to determine if an action technically didn’t breach the act, but nonetheless compromised the integrity of the capital markets. This approach, however, was criticized because it made insider trading rules unclear and unpredictable.

With the new amendment, those with a “special relationship” to an issuer with undisclosed material information are now restricted from even recommending or encouraging a trade in that issuer’s securities. The term “special relationship” encompasses different categories, including but not limited to:
  • 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.

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