What is insider trading in Canada?

What is insider trading in Canada?

Insider trading is the buying or selling of stocks or other securities by people who have access to non-public, material information about a company. This information could affect the stock price once it becomes known.

It is illegal because it gives those with privileged information an unfair advantage over other investors. It also undermines market integrity and fairness by exploiting confidential information for personal gain.

Insider trading is a criminal offence in Canada and is regulated at both the federal and provincial levels. The Canadian Securities Administrators (an umbrella organization of Canada's provincial and territorial securities regulators) enforce regulations that prohibit insider trading.

Who is considered an insider?

According to Ontario’s Securities Act, an insider of a public company includes:

• A director or officer of a reporting issuer.
• A director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer.
• A person or company that has beneficial ownership, control or direction of securities of a public firm.
• An insider as defined by the provincial Securities Act.

Is this a grey area of the law?

As a federal report notes, “trading by insiders per se is not illegal; most laws governing the issue allow insiders to trade in the securities of corporations with which they have a connection, provided they do not possess material confidential information about the corporation.”

It explains that this trading becomes illegal if that person “possesses material confidential information or uses such information for his or her benefit when trading in the securities of the corporation.”

The report adds that there are several reasons why improper insider trading is regulated. The prime one is that if insiders benefit, “this could damage the corporation’s reputation and, more importantly, reduce confidence in the securities market in general.”

What are the penalties for insider trading?

Section 382.1 (1) of the Criminal Code states that the maximum prison sentence for insider trading is 10 years for charges treated as indictable offences.

According to Ontario’s Securities Act, people or firms violating its terms can face the following penalties:

• A jail term of not more than five years less a day.
• A fine of not more than $5 million for each conviction.
• Both of the above sanctions.

For insider trading convictions, the Act states the “maximum fine is the greater of either $5 million or triple the profit made or loss avoided.”

What is tipping?

Tipping occurs when a person in a “special relationship” with a reporting issuer (a person or company who has outstanding securities, has issued securities or proposes to issue a security) to disclose information that would affect the market value of a security to a third party.

Tipping is allowed, however, if such disclosure is “in the necessary course of business (NCOB),” according to the Securities Act.

A 2023 decision from the Ontario Securities Commission considered what circumstances that can be considered an NCOB exception. The tribunal concluded:

• The party seeking to rely on the NCOB exception has the onus of proving that it applies.
• The NCOB exception must be interpreted and applied “reasonably narrowly.”
• Necessity should be measured on an objective basis, and should not take into account the “subjective belief” of the person selectively disclosing the information, even when it represents that person’s good faith belief.
• The selective disclosure must be tied to a business rationale and a business purpose, but that alone will not be sufficient to meet the requirement of necessity.

According to the Criminal Code, anyone who knowingly conveys inside information … to another person, knowing that there is a risk that the person will use the information to buy or sell, directly or indirectly, a security to which the information relates,” can be found guilty of tipping.

The maximum prison sentence is five years for indictable offences and lesser punishment in the charge is treated as a summary conviction.

Is insider trading difficult to prove?

Proving someone is guilty of insider trading is challenging for regulators and prosecutors. In many cases, the evidence is circumstantial as opposed to direct evidence, such as a recorded conversation or a written communication. Investigators must piece together a series of events, transactions and relationships to show an insider passed along information that benefitted themselves or others.

Financial markets are very complex and the volume of legitimate information available about publicly traded firms makes it difficult to show that insider trading occurred.

How did the charge evolve in Canada?

According to the Department of Justice (DoJ), insider trading was first conceived as an offence involving officers of corporations about to merge who took advantage of that knowledge to speculate for their own profit. It was then extended to “embrace employees of law firms planning mergers and acquisitions, merchant banks involved in financing them, reporters for financial newspapers who got leaks, and even janitors who picked up discarded memos in the trash.”

The DOJ notes that insider trading was originally a civil offence with minor penalties. But in the late 1970s, there was “a big shift in the nature of stock market activity … when mergers and acquisitions began setting the tone … it was in this hot-house atmosphere that insider trading ceased to be a term used by financial industry insiders and became part of the public lexicon,” especially after the “great insider trading scandals that shook Wall Street in the mid-1980s.”

In 2004, insider trading was added to the Criminal Code. As a parliamentary document from that time notes, “Improper insider trading is already prohibited under the Canada Business Corporations Act and under provincial securities law. This new Criminal Code offence is intended to deal with the most egregious cases that merit stiff criminal penalties.”

It adds, “The bill has been put forward as part of Canada’s response to the series of corporate scandals in the United States that have adversely affected investor confidence in capital markets. Those corporate scandals aside, however, there has been a long-standing perception that enforcement and prosecution of capital markets fraud in Canada have been weak and ineffective. Vigorous enforcement and strong penalties, therefore, are seen as important signals to investors.”

Contact me for assistance

I defend clients against criminal offences including white-collar crime and fraud. I regularly appear before the Ontario Court of Justice and the Superior Court of Justice in Ottawa, L’Orignal, Brockville, Perth and Pembroke. Contact me for a free consultation in French or English.