Proposed Policy: OSCP - 33-601 - Guidelines for Policies and Procedures Concerning Inside Information
Proposed Policy: OSCP - 33-601 - Guidelines for Policies and Procedures Concerning Inside Information
NOTICE OF PROPOSED POLICY AND RESCISSION OF POLICY OF THE
ONTARIO SECURITIES COMMISSION UNDER THE SECURITIES ACT
33-601
GUIDELINES FOR POLICIES AND PROCEDURES
CONCERNING INSIDE INFORMATION
Purpose of Proposed Policy and Rescission of Policy
The purpose of the proposed Policy is to provide general guidelines to registrants for policies and procedures concerning undisclosed material information("inside information"). The proposed Policy replaces Ontario Securities Commission Policy Statement No. 10.2 Guidelines for Establishment of Procedures inRelation to Confidential Information ("OSC Policy 10.2").
Section 175 of the Regulation (the "Regulation") under the Securities Act (the "Act") provides limited exemptions from restrictions concerning "insider trading"set out in subsection 76(1) of the Act, and the concomitant civil liability provisions set out in section 134 of the Act. Under the Act, difficult problems arise forintegrated securities firms. Employees of the firm may obtain inside information through an activity that may provide an opportunity for profit in its trading oradvising activities. The prohibitions against trading or informing would place the firm at risk in terms of quasi-criminal and civil liability if it continued its normaltrading or advising activities.
Subsection 175(1) of the Regulation provides, in effect, that a person or company (i.e. both the firm and the responsible employees) may avoid quasi-criminaland civil liability under the Act if the firm or employee can prove that no individual with actual knowledge of an undisclosed material fact or material changemade, or participated in the making of, the decision to buy or sell a security to which the material fact or material change relates. Subsection 175(3) of theRegulation provides that in determining whether a person or company has sustained the burden of proof required under subsection 175(1) of the Regulation, itshall be relevant whether and to what extent policies and procedures have been put in place to prevent contraventions of subsection 76(1) of the Act by personsmaking or influencing investment decisions on its behalf and to prevent transmission of information concerning an undisclosed material fact or material changecontrary to subsection 76(2) or (3) of the Act.
The Commission is of the view that registrants should develop, implement, maintain and enforce reasonable policies, procedures and organizational arrangementsto safeguard inside information and ensure that there is no improper buying, selling or informing. The proposed Policy sets out general guidelines for suchpolicies and procedures. The Commission recognizes that the circumstances of each registrant will differ and accordingly does not consider it appropriate orfeasible to mandate particular policies or procedures.
The selection and implementation of appropriate policies and procedures is the responsibility of each registrant. The purpose of this proposed Policy is to assistregistrants by setting out a range of possible policies and procedures which they may wish to adopt. Failure to adopt the specific policies and procedures set outin this proposed Policy will not, of itself, indicate that the registrant has failed to take reasonable precautions to prevent contraventions of section 76 of the Actor acted in a manner inconsistent with continued registration. Conversely, adoption of all policies and procedures referred to in this proposed Policy will notprovide assurance that reasonable precautions have been taken. Whether a registrant has implemented appropriate and sufficient policies and procedures tosatisfy its obligations and to sustain the burden of proof will depend upon the circumstances of each case and of each registrant.
Terms used in the proposed Policy that are defined or interpreted in the definition instruments in force in Ontario should be read in accordance with thosedefinition instruments, unless the context otherwise requires.
Summary of Proposed Policy and Rescission of Policy
The proposed Policy sets out guidelines related to the policies and procedures which a registrant should consider to contain inside information, to restricttransactions when in receipt of inside information and to ensure compliance with insider trading restrictions. The proposed Policy also reminds registrants that,in the view of the Commission, the responsibility for ensuring that appropriate policies and procedures are adopted, maintained and enforced rests with the boardof directors and senior officers of each registrant. In addition, the proposed Policy sets forth specific policies and procedures which a registrant should considerin relation to the education of employees.
In addition, OSC Policy 10.2 will be rescinded.
Unpublished Material
In proposing the Policy and the rescission of OSC Policy 10.2, the Commission has not relied on any significant unpublished study, report, decision or otherwritten materials.
Related Provisions
The proposed Policy is related to section 76 of the Act and section 175 of the Regulation.
Comments
Interested parties are invited to make written submissions with respect to the proposed Policy and the rescission of OSC Policy 10.2. Submissions received bySeptember 25, 1997, will be considered.
Submissions should be made in duplicate to:
A diskette containing the submissions (in DOS for Windows format, preferably WordPerfect) should also be submitted. As the Act requires that a summary ofwritten comments received during the comment period be published, confidentiality of submissions cannot be maintained.
Questions may be referred to:
Proposed Policy
The text of the proposed Policy follows, together with footnotes that are not part of the Policy but have been included to provide background and explanation.
Rescission of Policy
The text of the proposed rescission of Ontario Securities Commission Policy Statement No. 10.2 Guidelines for Establishment of Procedures in Relation toConfidential Information is as follows:
"Ontario Securities Commission Policy Statement No. 10.2 Guidelines for Establishment of Procedures in Relation to Confidential Information is revoked."
DATED: June 27, 1997.
33-601
GUIDELINES FOR POLICIES AND PROCEDURES CONCERNING
INSIDE INFORMATION(1)
PART 1 DEFINITIONS AND INTERPRETATION2
1.1 Definitions - In this Policy
"employees" includes directors, officers, partners, independent contractors and agents;
"grey list" means a highly confidential list, compiled by a registrant, of issuers about which the registrant has inside information;
"inside information" means a material fact or a material change about a reporting issuer that has not been generally disclosed; and(2)
"restricted list" means a list, compiled by a registrant, of issuers about which the registrant may have inside information.
1.2 Purpose - This Policy provides general guidelines that registrants may wish to consider in determining how to prevent contraventions of subsection 76(1) ofthe Act. These guidelines are not exhaustive, nor would following them necessarily result in the registrant having implemented and maintained reasonablepolicies and procedures necessary to sustain the burden of proof required by the exemption in subsection 175(1) of the Regulation.
PART 2 POLICIES AND PROCEDURES
2.1 General
(1) While the nature of policies and procedures to be adopted by a registrant(3) to prevent contravention of subsection 76(1) of the Act must be determined by theregistrant, a registrant should consider establishing written policies and procedures in the following areas
(a) education of employees;
(b) containment of inside information;
(c) restriction of transactions; and
(d) compliance.
(2) In the view of the Commission, the board of directors and senior officers of a registrant should be responsible for ensuring that appropriate policies andprocedures are adopted, maintained and enforced.
2.2 Education of Employees - To educate employees about insider trading and ethical standards, a registrant should consider advising employees as to
(a) what constitutes inside information and the legal restrictions on its transmission and use;
(b) the legal consequences to the registrant and its employees for breaches of the restrictions on the transmission and use of inside information, including civil andquasi-criminal liability, self-regulatory organization and securities commission disciplinary proceedings and internal disciplinary action, including dismissal, by theregistrant against its offending employees; and
(c) their ethical responsibilities as members of the securities industry and, if applicable, as registrants under the Act.
2.3 Policies and Procedures to Contain Inside Information - To limit the unauthorized transmission of inside information, a registrant should consider
(a) restricting access to those areas of the registrant that typically are in receipt of inside information, including the corporate finance and mergers andacquisitions departments, by
(i) designating departments as sensitive areas and separating those departments from others within the registrant, or
(ii) if restricting access to departments is impractical or impossible, as in the case of a smaller registrant, treating all of its departments as being "behind the wall"so that if the registrant is in receipt of inside information, all trading and advisory activities of the registrant are subject to any restrictions imposed; and
(b) assuring the security of confidential information within the registrant by, among other things,
(i) restricting access to inside information,
(ii) using code names in place of the names of issuers for confidential projects being worked on,
(iii) keeping information in sensitive areas secured when not immediately supervised by persons working on the project, and
(iv) ensuring electronic transmission of inside information takes place only when there are adequate controls for sending and receiving the transmissions.
2.4 Policies and Procedures to Restrict Transactions
(1) A registrant should consider whether to monitor, restrict or discontinue certain activities of the registrant and its employees related to securities of an issuer,including trading, advising and dissemination of research material, when the registrant is, or may be, in receipt of inside information about that issuer.
(2) Policies and procedures commonly used by a registrant to restrict transactions include the use of grey lists and restricted lists.
2.5 Use of Grey Lists
(1) A registrant should normally place issuers on the grey list when it has received inside information; for example, when the registrant has been invited tomanage or participate in an offering or to act concerning a possible merger or acquisition or other corporate assignment.
(2) A registrant should normally disseminate grey lists only to those employees who require the list to monitor unusual principal or agent trading in the securitiesby the registrant or its employees and, if necessary, to inquire about or restrict trading.
(3) A registrant should seek legal or other advice before new research materials and opinions concerning securities on the grey list are published or disseminatedby it or its employees.
(4) A registrant should normally remove an issuer's name from the grey list when the registrant no longer has inside information regarding the issuer.
2.6 Use of Restricted Lists
(1) A registrant should normally move an issuer's name from the registrant's grey list to the registrant's restricted list when the registrant has agreed to act as anunderwriter, or banking group member, or to represent the issuer in a merger or acquisition and the transaction in which the registrant is acting has beengenerally disclosed.
(2) Trading by the registrant as principal, except for normal market-making or other permitted activities, should cease and the dissemination of research materialsshould be restricted or stopped for securities of issuers on the restricted list.
(3) A registrant should normally remove an issuer's name from the restricted list when the registrant is no longer in possession of inside information, for example,when that information has been disclosed following completion of a distribution or a merger or acquisition.
2.7 Compliance Policies and Procedures
(1) To promote compliance with requirements related to insider trading under securities laws, self-regulatory organizations' regulations and the registrant'spolicies and procedures, a registrant should consider
(a) developing, implementing, maintaining and enforcing written policies and procedures, approved by the registrant's board, appropriate to the type of businessbeing carried on by the registrant;
(b) monitoring and reviewing trading for the registrant's account;
(c) monitoring and/or restricting trading in securities of issuers about which the registrant or the registrant's employees possess or may possess insideinformation;
(d) monitoring, reviewing and/or restricting trading of all employees and, in particular, employees who in the normal course might be in receipt of insideinformation; for example senior management, merger and acquisition employees, corporate finance employees and professional traders;
(e) unless a recognized self-regulatory organization or stock exchange has provided otherwise in a by-law, rule, regulation or policy that has been approved bythe Commission, requiring all employees and associates to maintain accounts with the employer-registrant only;
(f) requiring a senior officer of the registrant to be responsible for the implementation and enforcement of the policies and procedures; and
(g) instituting a periodic review of the adequacy of its policies and procedures, including a written report on their effectiveness to senior officers or the board ofdirectors of the registrant, which report should normally be kept on file.(4)
(5)Footnoes
This proposed Policy is based on OSC Policy Statement No. 10.2 ("Policy 10.2"), which it replaces.
Policy 10.2 defined "Inside Information" as "material undisclosed information". This definition has been revised to adopt the language of s.76 of the Act, as this proposed Policy is aimed at procedures to prevent insider trading. While the procedures in this proposed Policy may alsobe helpful in connection with satisfying the duty of confidentiality a registrant owes to its clients, that duty is not the focus of this Policy.
Policy 10.2 applied to "Dealers" which was defined as "investment dealers, brokers and securities dealers, and other registrants whosebusiness activities may involve access to inside information". The defined term "Dealer" has been replaced by "registrant" which is defined inthe Act to mean a person or company registered or required to be registered under the Act.
The requirement to maintain a report for a specified period contained in paragraph 3(d)(vii) of Policy 10.2 has been deleted and left to thegeneral requirements relating to business records.
The provisions relating to compliance checks by the TSE and IDA contained in section 4 of Policy 10.2 have been deleted as Staff hasadvised that the requirement to ensure that registrants have established written procedures relating to inside information is already contained inthe TSE and IDA rules.