Proposed Guidance on Insider Order Marking

Transcription

1 Rules Notice Request for Comments UMIR Please distribute internally to: Legal and Compliance Trading Contact: Naomi Solomon Senior Policy Counsel, Market Regulation Policy Telephone: Fax: September 20, 2011 Proposed Guidance on Insider Order Marking Summary The Investment Industry Regulatory Organization of Canada ( IIROC ) previously has issued guidance relating to the requirement under the Universal Market Integrity Rules ( UMIR ) to mark an order entered on a marketplace to purchase or sell a security for the account of a person who is an insider or significant shareholder of that security (the Prior Guidance ). 1 Under the Prior Guidance, the need to mark an order as insider had been interpreted generally to exclude any order that would not have been subject to insider reporting requirements under applicable securities legislation. IIROC is proposing to vary the guidance to require the marking of orders by insiders irrespective of whether any resulting trade would be subject to insider reporting requirements under applicable securities legislation. This IIROC Notice requests comments on the draft revised guidance ( Proposed Guidance ). Pending issuance by IIROC of the final Guidance Note on Insider Order Marking, a Participant may follow EITHER the Proposed Guidance OR the Prior Guidance issued on April 28, 2010, provided the Participant is consistent in their approach to the marking of orders. 1 IIROC Notice Rules Notice Guidance Note UMIR Guidance on Insider and Significant Shareholder Markers (April 28, 2010). As a result of changes in insider reporting requirements under applicable securities legislation that became effective on April 30, 2010, this guidance repealed and replaced earlier guidance set out in Market Integrity Notice Guidance Insider and Significant Shareholder Markers (June 16, 2006) and Market Integrity Notice Guidance Specific Questions Related to Insider Marking Requirements (August 10, 2007).

2 Policy Development Process IIROC has been recognized as a self-regulatory organization by each of the Canadian provincial securities regulatory authorities (the Recognizing Regulators ) and, as such, is authorized to be a regulation services provider for the purposes of National Instrument ( Marketplace Operation Instrument ) and National Instrument As a regulation services provider, IIROC administers and enforces trading rules for the marketplaces that retain the services of IIROC. 2 IIROC has adopted, and the Recognizing Regulators have approved, UMIR as the integrity trading rules that will apply in any marketplace that retains IIROC as its regulation services provider. The Market Rules Advisory Committee of IIROC reviewed the Proposed Guidance. MRAC is an advisory committee comprised of representatives of each of: the marketplaces for which IIROC acts as a regulation services provider; Participants; institutional investors and subscribers; and the legal and compliance community. The text of the Proposed Guidance is set out in Appendix A. Comments are requested on all aspects of the Proposed Guidance, including any matter not addressed in the Proposed Guidance. Comments should be in writing and delivered by November 21, 2011 to: Naomi Solomon, Senior Policy Counsel, Market Regulation Policy, Investment Industry Regulatory Organization of Canada, Suite 900, 145 King Street West, Toronto, Ontario. M5H 1J8 Fax: [email protected] Commentators should be aware that a copy of their comment letter will be made publicly available on the IIROC website ( under the heading Policy and sub-heading Market Proposals/Comments ) upon receipt. A summary of the comments contained in each submission will also be included in a future IIROC Notice. After considering the comments on the Proposed Guidance received in response to this Request for Comments together with any comments of the Recognizing Regulators, IIROC may make revisions to the Proposed Guidance prior to the issuance of the final Guidance Note. 2 Presently, IIROC has been retained to be the regulation services provider for: the Toronto Stock Exchange ( TSX ), TSX Venture Exchange ( TSXV ) and Canadian National Stock Exchange ( CNSX ), each as an exchange for the purposes of the Marketplace Operation Instrument ( Exchange ); and for Alpha Trading Systems ( Alpha ), Bloomberg Tradebook Canada Company, Chi-X Canada ATS Limited ( Chi-X ), Liquidnet Canada Inc. ( Liquidnet ), Omega ATS Limited ( Omega ) TriAct Canada Marketplace LP (the operator of MATCH Now ), Instinet Canada Cross Limited ( ICX ) and TMX Select, each as an alternative trading system ( ATS ). CNSX presently operates an alternative market known as Pure Trading that is entitled to trade securities that are listed on other Exchanges and that presently trades securities listed on the TSX and TSXV. IIROC Notice Rules Notice Request for Comments UMIR Proposed Guidance on Insider Order Marking 2

3 Background to the Proposed Guidance Rule 6.2 of UMIR requires that each order for the purchase or sale of a particular security entered on a marketplace for the account of an insider 3 or significant shareholder 4 of the issuer of that security shall contain a designation acceptable to IIROC. These order designations, IA for insiders and SS for significant shareholders, have been referred to as the Regulation ID Order Markers. 5 The Regulation ID Order Markers were implemented to enable IIROC to monitor the trading activity on Canadian marketplaces of insiders and significant shareholders. In addition to supporting surveillance of UMIR requirements, this monitoring assists the securities regulatory authorities by providing initial detection of possible violations of securities legislation related to insider trading. Since the introduction of the Regulation ID Order Markers, IIROC and its predecessor, Market Regulation Services Inc. ( RS ), issued the Prior Guidance through which the scope of application of the IA marker was interpreted to correspond with developments respecting insider trading reporting requirements. In particular, under the Prior Guidance, the need to mark an order as insider had been interpreted generally to exclude any order that would not have been subject to insider reporting requirements under applicable securities legislation. Insider Trading Task Force In 2002, a task force was established by the Ontario, British Columbia and Alberta Securities Commissions, the Commission des valeurs mobilières du Québec, the Investment Dealers Association (IDA), the Bourse de Montréal and RS which sought to evaluate how best to address illegal insider trading in the Canadian capital markets (the Insider Trading Task Force ). The Insider Trading Task Force released its report 6 which, among other things, recommended the public disclosure of all trades on a marketplace that are marked insider. This disclosure was intended to provide transparency to the industry and the public regarding the trading of insiders with the objective of increasing trading efficiency. To give effect to this recommendation, the Ontario, Alberta and British Columbia Securities Commissions approved orders in September, 2006 requiring the TSX and the TSXV to consolidate on a Rule 1.1 of UMIR defines the term insider as a person who is an insider of an issuer for the purpose of applicable securities legislation. For further clarification, reference must be made to the securities legislation of every jurisdiction in which the issuer is a reporting issuer or equivalent. Rule 1.1 of UMIR defines the term significant shareholder as a person who holds separately, or in combination with any other persons, more than 20 per cent of the outstanding voting securities of an issuer. As part of a separate initiative on order marking requirements, IIROC expects to propose an amendment to UMIR to change the term significant shareholder to designated shareholder. The purpose of this proposed change is to avoid confusion given the adoption in National Instrument Insider Reporting Requirements and Exemptions of the term significant shareholder to refer to the holder of 10% or more of the voting securities of an issuer in relation to the insider reporting regime as of April 30, Any proposed amendment to UMIR to change the term significant shareholder to designated shareholder would not impact the application of the SS marker. Market Integrity Notice Regulation ID Order Markers (July 9, 2002). IIROC may separately propose amendment to Rule 6.2 of UMIR to include new order designations that would add new values to the Regulation ID Order Marker. IIROC Notice Rules Notice Request for Comments UMIR Proposed Guidance on Insider Order Marking 3

4 per security basis, all trades on the TSX and TSXV marked for the accounts of insiders of each listed issuer and to publicly disseminate such information in summary form at the end of each trading day (the Marketplace Insider Trading Reports ). 7 IIROC introduced a web-based Regulatory Marker Correction Report 8 for the purpose of facilitating the preparation of automated updates necessary for the production of the Marketplace Insider Trading Reports. To date, however, the TSX and TSXV have remained the only Canadian marketplaces mandated to produce the Marketplace Insider Trading Reports. As such, the Marketplace Insider Trading Reports do not reflect trading by insiders of listed securities: on Canadian marketplaces other than the TSX and TSXV; when the securities are not listed or traded on the TSX and TSXV; and when executed on a foreign organized regulated market. CSA Insider Reporting Regime Prior to April 30, 2010, Canadian securities legislation generally required all insiders as defined in securities legislation, to file insider reports unless they had an exemption from the insider reporting requirement. 9 Effective April 30, 2010, the Canadian Securities Administrators introduced a consolidated insider reporting regime under National Instrument Insider Reporting Requirements and Exemptions ( NI ) and its Companion Policy CP, generally limiting the reporting obligation to reporting insiders as defined in NI that are not otherwise exempt IIROC Notice Rules Notice Guidance Note UMIR - New Procedures for Order Marking Corrections (July 15, 2008). Exemptions from insider reporting were principally provided under National Instrument Insider Reporting Exemptions (NI ), which was repealed on April 30, See s. 1.1 of NI Generally, a person or company would be considered to be a reporting insider under NI if the person or company is: the CEO, CFO, COO and the directors of the reporting issuer, a significant shareholder of the reporting issuer or a major subsidiary of the reporting issuer; a person or company that is responsible for a principal business unit or function of the reporting issuer; a person or company that performs functions similar to those described above; a person or company that has beneficial ownership of, or control or direction over, whether direct or indirect, or any combination of beneficial ownership and control or direction, of more than 10 per cent of the voting rights in an issuer s securities; and any other insider who has both access to undisclosed material information and can exercise significant power or influence over the business, operations, capital or development of the reporting issuer. In the Companion Policy to NI , the CSA states that the determination as to whether a person is a reporting insider by virtue of both access to undisclosed material information and an ability to exercise significant power or influence over the business, operations, capital or development of the reporting issuer requires the exercise of reasonable judgement as to whether the insider exercises, or has the ability to exercise, influence over the reporting issuer which is comparable to the influence exercised by the other categories included within the definition of reporting insider. IIROC Notice Rules Notice Request for Comments UMIR Proposed Guidance on Insider Order Marking 4

5 from insider reporting obligations under the applicable securities legislation in respect of the particular transaction. 11 Notwithstanding the availability of certain exemptions from the insider reporting requirement and the adoption of a new reporting insider definition under the consolidated insider reporting regime, all insiders remain subject to the provisions in Canadian securities legislation imposing liability for improper insider trading. 12 Evolution of Insider Order Marking The Regulation ID Order Marker initially applied to all insider orders. Subsequent guidance narrowed the application of the insider marker to orders of insiders not otherwise exempted from reporting obligations under securities legislation in respect of the particular transaction. With the guidance issued by IIROC in April of 2010, the use of the IA order marking was tied to the requirements of NI , such that it would apply to orders of reporting insiders not otherwise exempted from reporting obligations under securities legislation in respect of the particular transaction. This guidance on insider order marking was also intended to align with the production of the Marketplace Insider Trading Reports, which were designed to provide public disclosure in a timely manner of the views of an issuer s core group of insiders (having insider reporting obligations), with information publicly available on the System for Electronic Disclosure by Insiders ( SEDI ). Policy Considerations for Insider Order Marking Following the issuance of the Prior Guidance, IIROC received feedback from certain industry participants concerning policy and implementation issues associated with insider order marking. Among other things, the correlation of insider order marking to the more tailored insider reporting regime was viewed as arguably inconsistent with the policy objectives advanced by the broad supervision and liability regime in regard to all insider trading as established under securities regulations. It was also asserted that limiting the application of the insider order marker to trades of core insiders of an issuer is not imperative to provide transparency to the market: when not all marketplaces have an obligation to publish insider trading information; and 11 NI governs the substantive legal insider reporting requirements and exemptions. A number of other CSA instruments also contain exemptions from the insider reporting requirements including: National Instrument Continuous Disclosure Obligations (NI ); National Instrument The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI ); National Instrument The Multijurisdictional Disclosure System (NI ); and National Instrument Continuous Disclosure and Other Exemptions Relating to Foreign Issuers (NI ). 12 Securities regulations also require market intermediaries to supervise trading by insiders, including under National Instrument Registration Requirements and Exemptions (NI ), which imposes an obligation on registrants to determine whether the client is an insider of a reporting issuer or any other issuer whose securities are publicly traded. Under Part 5 of Policy 7.1 of UMIR Participants are required to implement compliance procedures including the steps to be undertaken to determine whether or not a person entering an order is an insider. Dealer Member Rules 1300 and 2500 require identification of insider accounts and supervision of retail account activity to detect improper insider trading. IIROC Notice Rules Notice Request for Comments UMIR Proposed Guidance on Insider Order Marking 5

6 given that NI has increased transparency by accelerating the time in which reporting insiders must report their trades on SEDI. In IIROC s view, the purpose of the Regulation ID Order Marker has not fundamentally changed. The CSA has confirmed that insider order marking may be broader in scope than the insider reporting requirements, to enable IIROC to assist the securities regulatory authorities with initial detection of possible violations of securities legislation principally related to insider trading. Any potential over-marking of trades with the IA designation will not compromise IIROC s ability to effectively monitor insider trading. Limiting the application of the insider marker may, however, pose such a risk. Monitoring by IIROC of all trading by insiders is consistent with the broad supervision obligations and liability provisions imposed with respect to trading by insiders (and not just reporting insiders ). Alternatives Considered The Proposed Guidance would require all orders of insiders, as defined in UMIR, to be marked insider with the IA order designation. Under the Proposed Guidance, the existence of an exemption from insider reporting obligations would no longer be relevant to determining the appropriate order marking. IIROC has considered the following possible alternatives in regard to the application of the IA designation associated with the Regulation ID Order Marker: to amend the definition of insider in UMIR to accord with the reporting insider definition in NI , and to amend Rule 6.2 of UMIR to restrict the IA designation requirement to orders of reporting insiders that would on execution be subject to reporting obligations under applicable securities legislation; and to create a third category of Regulation ID Order Marker that would be applied as follows: o SS for any insider that is also a significant shareholder as defined in UMIR, o RI for any insider that is also a reporting insider as defined under NI , o IA for any insider that is neither a significant shareholder nor a reporting insider. IIROC is of the view that the Proposed Guidance would affirm the application of a broad insider marking obligation consistent with the Regulation ID Order Marker as originally implemented in 2002 and would have the following advantages: the current definition of insider in UMIR and the order designation requirement in Rule 6.2 of UMIR would require no amendment; Participants will not be required to implement systems changes to accommodate marking of trades by reporting insiders in addition to their marking and supervision of trades by insiders ; and IIROC Notice Rules Notice Request for Comments UMIR Proposed Guidance on Insider Order Marking 6

7 the continued monitoring of all insider trades will be consistent with the broad supervision and liability regime imposed with respect to trading by insiders in Canada. The option of providing a third category of Regulation ID Order Marker specifically for reporting insiders would permit enhanced monitoring by both IIROC and the Participant of trading activity persons who are recognized as having access to undisclosed material information and can exercise significant power or influence over the business, operations, capital or development of the issuer. However, this option would require amendments to UMIR and for the Participants to implement systems changes to accommodate the additional marker and to update client information to identify which of their clients who are insiders are also reporting insiders of an issuer. This option would also relieve the Participant of having to determine whether the particular transaction which is being undertaken by the insider is exempt from reporting obligation before entering the order. Appendix Appendix A sets out the text of the Proposed Guidance on Insider Order Marking. IIROC Notice Rules Notice Request for Comments UMIR Proposed Guidance on Insider Order Marking 7

8 Appendix A Rules Notice Guidance Note UMIR Please distribute internally to: Legal and Compliance Trading Contact: Naomi Solomon Senior Policy Counsel, Market Regulation Policy Telephone: Fax: [email protected] 11-00** **, 2011 Guidance on Insider Order Marking Summary This Rules Notice provides guidance on specific questions related to the requirement under the Universal Market Integrity Rules ( UMIR ) to mark an order entered on a marketplace to purchase or sell as security for the account of a person who is an insider or significant shareholder 1 of that security. This Rules Notice repeals and replaces effective as of [the date of this Rules Notice* *, 2011], the guidance previously issued by the Investment Industry Regulatory Organization of Canada ( IIROC ) as: IIROC Notice Rules Notice Guidance Note UMIR - Guidance on Insider and Significant Shareholder Markers (April 28, 2010); and 1 As part of a separate initiative on order marking requirements, IIROC expects to propose an amendment to UMIR to change the term significant shareholder to designated shareholder. The purpose of this proposed change is to avoid confusion given the adoption by the Canadian Securities Administrators ( CSA ) of the term significant shareholder to refer to the holder of 10% or more of the voting securities of an issuer in relation to the insider reporting regime as of April 30, 2010.

9 that portion of Market Integrity Notice Regulation ID Order Markers and Order Inhibition During Regulatory Halts & Suspensions (July 9, 2002) under the heading Regulation ID Order Marker. Background Rule 6.2 of UMIR requires that a designation acceptable to IIROC be included for each of the following orders: the purchase or sale of a particular security entered on a marketplace for the account of an insider 2 or significant shareholder 3 of the issuer of that security. These order designations, IA for insiders and SS for significant shareholders, are referred to as the Regulation ID Order Markers. The Regulation ID Order Markers were implemented to enable IIROC to monitor the trading activity on Canadian marketplaces of insiders and significant shareholders for the purpose of assisting the securities regulatory authorities by providing initial detection of possible violations of securities legislation principally related to insider trading. Questions and Answers The following is a list of the most frequently asked questions regarding the UMIR obligations relating to the use of Regulation ID Order Markers and the response of IIROC to each question: 1. Must every order entered on a marketplace for an insider of the particular security contain a Regulation ID Order Marker? Yes. All insider orders are required to be marked with the Regulation ID Order Marker notwithstanding the availability of any exemption from insider reporting under securities regulations in regard to a particular transaction. 4 For the purposes of the Regulation ID Order Marker, a person will be an insider of an issuer if the securities legislation of the jurisdiction in which the person resides or the securities legislation governing the marketplace on which the order is entered considers such person to be an insider of an issuer Rule 1.1 of UMIR defines the term insider as a person who is an insider of an issuer for the purpose of applicable securities legislation. For further clarification, reference must be made to the securities legislation of every jurisdiction in which the issuer is a reporting issuer or equivalent. Rule 1.1 of UMIR defines the term significant shareholder as a person who holds separately, or in combination with any other persons, more than 20 per cent of the outstanding voting securities of an issuer. National Instrument Insider Reporting Requirements and Exemptions (NI ) governs the substantive legal insider reporting requirements and exemptions which clients are responsible to comply with. A number of other CSA instruments also contain exemptions from the insider reporting requirements including: National Instrument Continuous Disclosure Obligations (NI ); National Instrument The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI ); National Instrument The Multijurisdictional Disclosure System (NI ); and National Instrument Continuous Disclosure and Other Exemptions Relating to Foreign Issuers (NI ). IIROC Notice 11-0*** Rules Notice - Guidance Note UMIR Guidance on Insider Order Marking 2

10 2. May a Participant rely on know your client information when establishing whether an order must contain a Regulation ID Order Marker? Yes. In completing the Regulation ID Order Marker field, a Participant may rely on the know your client information which has been collected from the account holder, provided such information is current in accordance with IIROC s rules relating to the periodic review and update of client information. A Participant will not be expected to inquire, prior to accepting or executing an order, whether the client owns or has direction or control over more than 10 per cent or 20 per cent of the voting rights in an issuer s securities. However, if the Participant has actual knowledge that a client, including an institutional client, does exceed these levels of ownership or control of an issuer (for example, through the monitoring of news releases required under early warning requirements), the Participant will be under an obligation to ensure the proper marking of any order by that client in the securities of that issuer. 3. Does it matter how an order is marked if the client fits into more than one of the categories requiring a Regulation ID Order Marker? Yes. For the purposes of the Regulation ID Order Marker, a person who is an insider will be a significant shareholder of an issuer if the person beneficially owns, directly or indirectly, individually or in combination with other persons, more than 20% of the voting securities of the issuer. While a person who is a significant shareholder will also be an insider, the most restrictive applicable Regulation ID Order Marker should be employed, which would be the significant shareholder or SS designation. 4. Must an order contain a Regulation ID Order Marker if it is for the account of a person who is exempt under the applicable securities regulation from aggregating its holdings for the purposes of early warning requirements or control block distributions? Not necessarily. For example, if a person holds securities in separate business units and is, therefore, granted relief from aggregating securities owned or controlled for the purposes of determining whether a transaction involving those securities constitute a control block distribution or give rise to early warning requirements under the applicable securities legislation, the order may not need to contain a Regulation ID Order Marker if the person is not also an insider or significant shareholder of the issuer of the securities. To establish whether a person is granted relief from the aggregation requirement, reference should be made to Part 5 of NI Should an order contain a Regulation ID Order Marker if it is for the account of a spouse or other relative of an insider? Not necessarily. The order should only contain the appropriate Regulation ID Order Maker if the insider has control or direction over the securities in the account of the spouse or related person. IIROC Notice 11-0*** Rules Notice - Guidance Note UMIR Guidance on Insider Order Marking 3

11 Reference should be made to the Companion Policy to NI for guidance as to the meaning of control or direction over securities. 6. Do purchases under a normal course issuer bid need to be marked insider? Yes. Under the definition of insider in securities legislation, a reporting issuer becomes an insider of itself if it has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security. In certain jurisdictions, a reporting issuer may also become an insider of itself if it acquires and holds securities of its own issue through an affiliate, because in certain jurisdictions a person is deemed to beneficially own securities beneficially owned by affiliates. Accordingly, a reporting issuer for whose account orders are entered onto a marketplace under a normal course issuer bid must be marked with the Regulation ID Order Marker for an insider May an order which must contain a Regulation ID Order Marker be bundled together with orders for persons who are not insiders? Yes. From the perspective of facilitating an accurate audit trail as required by Rule of UMIR, IIROC generally discourages the bundling of such orders. Nonetheless, if a Participant or Access Person enters a bundled order on a marketplace, the entire bundled order must be marked with the most restrictive applicable Regulation ID Order Marker. In the case of orders for an insider or significant shareholder that are bundled with orders that do not require a Regulation ID Order Marker, the entire bundled order is to be marked insider or significant shareholder as appropriate. The obligation to mark a bundled order with the most restrictive applicable designation ensures that orders are not intentionally bundled to avoid marking an order with the applicable Regulation ID Order Marker. A Participant or Access Person that has entered a bundled order that has executed in whole or in part must file with IIROC a Regulatory Marker Correction Form indicating the volume of the trades which were applicable to persons other than insiders and significant shareholders. The Regulatory Marker Correction Form should be filed as soon as practicable after the execution of the trade and, in any case, by the later of 5:00 p.m. and 15 minutes following the close of trading on the marketplace on which the trade was executed. For details on the use of the Regulatory Maker Correction Form in these circumstances, see Specific Guidance on the Reporting of Order Marker Correction Involving Insiders and Significant Shareholders in IIROC Notice Rules Notice Guidance Note UMIR User Guide for the Regulatory Marker Correction Form (July 30, 2008). 5 Reference should also be made to TSX Rule 4-403(1)(f) which requires Participating Organizations to mark each order entered on the Exchange to contain a designation acceptable to the Exchange if the order is for the account of an issuer that is purchasing pursuant to a normal course issuer bid. IIROC Notice 11-0*** Rules Notice - Guidance Note UMIR Guidance on Insider Order Marking 4