Legal Updates

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Tuesday, September 20, 2016

Effective July 1, 2016, the Ontario Securities Act (the “OSA”) was amended to add a new prohibition on “recommending” to the existing insider trading rules (the “Amendment”). The Amendment was adopted as  part of Bill 173, Jobs for Today and Tomorrow Act (Budget Measures), 2016 (Ontario), which received royal assent on April 19, 2016, and was proclaimed into force effective July 1, 2016. The Amendment expands the insider trading provisions of the OSA by prohibiting a person who has knowledge of material, non-public information in respect of a reporting issuer from recommending or encouraging another person to trade in securities of that issuer, even if the person making the recommendation does not disclose any inside information.

Prior to the Amendment, the OSA prohibited only: (i) the purchase and sale of securities of any issuer by persons who have a ‘special relationship’ with that issuer; and (ii) the sharing of inside information, other than in the necessary course of business. The latter situation is referred to as “tipping”, which only captures scenarios where the material information itself is communicated.

The new “recommending” offence, which is codified in section 76(3.1) of the OSA, now prohibits any issuer, person or company in a special relationship with an issuer from recommending or encouraging, other than in the necessary course of business, another person or company to purchase or sell securities of an issuer, where the issuer, person or company making the recommendation has knowledge of a material fact or material change with respect to that issuer that has not been generally disclosed.

The Amendment closes the previous gap in the insider trading restrictions under the OSA to make it illegal for anyone who is in possession of material undisclosed information to recommend or encourage another person to purchase securities of an issuer, even where such insider has not communicated any such information to the person to whom they are making the recommendation.

The Amendment was made largely in response to the Ontario Securities Commission’s (the “OSC”) 2015 insider trading and tipping decision in the high-profile case Re Finkelstein et al. In the Finkelstein case, while there was an absence of a technical breach of the insider trading provisions under the OSA, the OSC relied on its discretionary public interest power to make an order and impose sanctions against certain investment advisers who were found to have engaged in insider tipping and trading by recommending that clients purchase securities of a company in relation to which the respondents possessed material undisclosed information that was leaked to them by a mergers and acquisitions lawyer. With the enactment of the Amendment, the OSC will no longer have to rely on its discretionary public interest jurisdiction to take enforcement action against insiders who recommend or encourage trades to others, without actually divulging any inside information.

The Amendment provides insiders and industry advisers with greater clarity around the scope of insider trading restrictions in Ontario.

If you have any questions with respect to insider trading or section 76(3.1) of the OSA in particular, please contact Jeff Hergott or any other contact in our Corporate Finance practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.