Notice and Final Policy (effective January 27, 1998): OSCP - 33-601 - Guidelines for Policies and Procedures Concerning Inside Information

 

NOTICE OF POLICY AND RESCISSION OF POLICY OF THE
ONTARIO SECURITIES COMMISSION UNDER THE SECURITIES ACT
POLICY 33-601
GUIDELINES FOR POLICIES AND PROCEDURES
CONCERNING INSIDE INFORMATION

Notice of Policy

The Commission has adopted Policy 33-601 Guidelines for Policies and Procedures Concerning Inside Information and rescinded Ontario Securities CommissionPolicy Statement 10.2 Guidelines for Establishment of Procedures in Relation to Confidential Information. Policy 33-601 comes into force and Policy Statement10.2 is rescinded on January 27, 1998.

Purpose of Policy and Rescission of Policy

The purpose of the Policy is to provide general guidelines to registrants for policies and procedures concerning undisclosed material information ("insideinformation"). The Policy replaces Ontario Securities Commission Policy Statement No. 10.2 Guidelines for Establishment of Procedures in Relation toConfidential 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 Policy sets out general guidelines for such policies andprocedures. The Commission recognizes that the circumstances of each registrant will differ and accordingly does not consider it appropriate or feasible tomandate particular policies or procedures.

The selection and implementation of appropriate policies and procedures is the responsibility of each registrant. The purpose of this Policy is to assist registrantsby setting out a range of possible policies and procedures which they may wish to adopt. Failure to adopt the specific policies and procedures set out in thisPolicy will not, of itself, indicate that the registrant has failed to take reasonable precautions to prevent contraventions of section 76 of the Act or acted in amanner inconsistent with continued registration. Conversely, adoption of all policies and procedures referred to in this Policy will not provide assurance thatreasonable precautions have been taken. Whether a registrant has implemented appropriate and sufficient policies and procedures to satisfy its obligations and tosustain the burden of proof will depend upon the circumstances of each case and of each registrant.

Terms used in the Policy that are defined or interpreted in the definition instruments in force in Ontario should be read in accordance with those definitioninstruments, unless the context otherwise requires.

Summary of Policy and Rescission of Policy

The Policy sets out guidelines related to the policies and procedures which a registrant should consider to contain inside information, to restrict transactionswhen in receipt of inside information and to ensure compliance with insider trading restrictions. The Policy also reminds registrants that, in the view of theCommission, the responsibility for ensuring that appropriate policies and procedures are adopted, maintained and enforced rests with the board of directors andsenior officers of each registrant. In addition, the Policy sets forth specific policies and procedures which a registrant should consider in relation to the educationof employees.

In addition the Commission is rescinding OSC Policy 10.2 effective January 27, 1998.

Summary of Written Comments Received by the Commission

The Commission received one comment letter from Osler, Hoskin & Harcourt on the Policy. The Commentator suggested a number of drafting changes most ofwhich have been reflected in the Policy as adopted.

In addition, the Commentator suggested that the Commission recognize the practice of registrants including names on lists in respect of which the registrant maynot have inside information. However, the Commission does not believe that it is appropriate to comment on that practice. The Commentator also suggestedthat the words "following completion of a distribution or a merger or acquisition" as concluding words in subsection 2.6(3) of the Policy were unduly narrow.The Commission does not agree with this position but has clarified its position in the Policy as adopted by clarifying its position in subsection 2.6(1).

Test of Policy

The text of the Policy follows.

Text of Rescission of Policy

The text of the rescission of Ontario Securities Commission Policy Statement No. 10.2 Guidelines for Establishment of Procedures in Relation to ConfidentialInformation is as follows:

"Ontario Securities Commission Policy Statement No. 10.2 Guidelines for Establishment of Procedures in Relation to Confidential Information is rescinded."

DATED: January 30, 1998.

ONTARIO SECURITIES COMMISSION POLICY 33-601
GUIDELINES FOR POLICIES AND PROCEDURES CONCERNING
INSIDE INFORMATION

 

TABLE OF CONTENTS

 

PART TITLE PAGE

PART 1 DEFINITIONS AND INTERPRETATION 1

1.1 Definitions 1

1.2 Purpose 1

PART 2 POLICIES AND PROCEDURES 1

2.1 General 1

2.2 Education of Employees 2

2.3 Policies and Procedures to Contain Inside Information 2

2.4 Policies and Procedures to Restrict Transactions 3

2.5 Use of Grey Lists 3

2.6 Use of Restricted Lists 4

2.7 Compliance Policies and Procedures 4

ONTARIO SECURITIES COMMISSION POLICY 33-601

GUIDELINES FOR POLICIES AND PROCEDURES CONCERNING

INSIDE INFORMATION

PART 1 DEFINITIONS AND INTERPRETATION

1.1 Definitions - In this Policy

"employees" includes employees, 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 with respect to a reporting issuer that has not been generally disclosed; and

"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 satisfying the requirements of the exemption contained insubsection 175(1) of the Regulation. Subsection 175(1) of the Regulation provides an exemption from the insider trading provisions of subsection 76(1) of theAct. These guidelines are not exhaustive, nor would following them necessarily result in the registrant having implemented and maintained reasonable policiesand procedures necessary to sustain the burden of proof required by the exemption in subsection 175(1) of the Regulation. Registrants should consider whichpractices and procedures would be appropriate for their business.

PART 2 POLICIES AND PROCEDURES

2.1 General

(1) While the selection and implementation of policies and procedures by a registrant to prevent contravention of subsection 76(1) of the Act must be determinedby the registrant having regard to its business activities, 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 for the business activities of the registrant 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) When the registrant is, or may be, in receipt of inside information about an issuer a registrant should consider whether to monitor, restrict or discontinuecertain activities of the registrant and its employees related to securities of that issuer, including trading, advising and dissemination of research material.

(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 an issuer on the grey list when it has received inside information about the issuer; for example, when the registrant hasbeen invited to manage or participate in a possible 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 but the registrant is still in possession of or may gain access to inside information during the course of the transaction.

(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.