Insider Trading

AuthorChristopher C. Nicholls
ProfessionFaculty of Law, Western University
Corporate insiders, such as ocers or directors, regularly buy and sell
shares issued by t heir companies. They are generally permitted by l aw
to do so, provided they comply with two sorts of rule s. First, corporate
insiders must report their t rades to securities regulators in a form that
becomes available as a public record. Second, they must not trade when
they have conf‌idential inside information.
There are few subjects in securities l aw that attract more pub-
lic attention than insider tr ading. Many of the villai ns of the highly
publicized securitie s scandals of the 1980s and more recent f‌inancial
debacles were (or were thought to be) notorious insider traders who
used their inform ational advantages to scoop up hefty (illegal) prof‌its.
Yet, despite the morality-play rhetoric that often accompanies condem-
nation of insider trading, an i nformed view of the issue require s a care-
ful analysis of detailed legislative provisions and ch allenging questions
of economics and public policy.
This chapter will consider some of the threshold issues surrounding
Canadian insider-trading regulation. The questions addressed here include:
What is the precise policy goal of laws restricting in sider trading?
Whom does the law consider to be “insiders”?
What restrictions should be, and are, placed on t he securities-related
activities of such people?
The discussion of insider tr ading in this chapter relates prim arily to the
rules contained in prov incial securities leg islation. It is also important
to remember that the Canadian Criminal Code1 and some Canadian
corporate law statutes als o contain insider-trading provisions.
1) Criminal Code
Section 382.1 of the Criminal Code was added to the statute in 20 04. The
current version of that provision read s as follows:
382.1 (1) Every pers on is guilt y of an indictable oence and liable to
imprisonment for a ter m of not more than 10 years or is guilt y of an
oence punishable on summ ary conviction who, directly or indi rectly,
buys or sells a secur ity, knowingly using inside in formation that they
(a) poss ess by virt ue of being a shareholder of the iss uer of that
securit y;
(b) posses s by virtue of, or obtained i n the course of, their busi ness
or profession al relation ship with th at issuer;
(c) poss ess by virt ue of, or obtained in the course of, a propose d
takeover or reorgani zation of, or amalgamation, merger or sim ilar
busines s combination with, t hat issuer;
(d) possess by virt ue of, or obtained in the course of, thei r employ-
ment, oce, duties or occupation wit h that issuer or wit h a per-
son referred to in par agraphs (a) to (c); or
(e) obtained from a per son who possesse s or obtained the inform a-
tion in a manner refer red to in paragraphs (a) to (d).
(2) Except when nece ssary in t he course of business, a per son
who knowingly conveys in side information th at they possess or
obtained in a ma nner referred to in subsection (1) to another person,
knowing th at there is a ri sk that the person will use t he informat ion
to buy or sell, directly or i ndirectly, a security to which t he infor-
mation relates, or th at they may convey the inform ation to another
person who may buy or sell such a s ecurity, is guilty of
(a) an indictable oence and li able to imprisonment for a term not
exceeding f‌ive year s; or
(b) an oence pu nishable on sum mary convic tion.
1 RSC 1985, c C-46.
Insider Trading 307
(3) For gre ater certainty, an act is not an oence under t his sec-
tion if it is authoriz ed or required, or is not prohibited, by any federal
or provincial Act or reg ulation applicable to it.
(4) In t his section, inside informa tion means infor mation relatin g
to or aecting the is suer of a security or a sec urity that they h ave
issued, or are about to is sue, that
(a) h as not been generally disclosed; and
(b) could reasonably be expected to sig nif‌icantly aect t he market
price or value of a securit y of the issuer.
There are at least three features of th is Criminal Code provi sion
worth noting here. First, a key element of the oence is that the culp-
able insider bought or sold securities “knowingly u sing” inside informa-
tion. Before 1988, the insider-trading provisions in Ontario’s Securities
Act included a defence in cases where a person accused of unlawful
insider trading proved th at they did not “make use of ” the undisclosed
information. After th at defence was removed from the statute, Ontario
courts conf‌irmed t hat the “essence” of an insider-trading oence under
Ontario secur ities law, as discussed below, is “not a question of using
insider information but of buying or selling securities of a company
while possessed of insider information.”2 The Criminal Code provision,
however, is dierent. Proof that the accused “knowingly used” the
undisclosed inform ation when they bought or sold securities conti nues
to be an element of the Criminal Code oence. Accordingly, one would
anticipate that successfully prosecuting insider trading under the crim-
inal statute would be more dicult than obtaining a “quasi-cr iminal”
conviction under the insider-trading provi sions of provincial securities
law, discussed later in th is chapter.
Second, the “tipping” oence prescribed in sect ion 382.1(2) is also
considerably narrower than the comparable provision in provincial
securities laws. Unlawful tipping, for securities l aw purposes,3 occurs
whenever an issuer or a person in a special relationship with an issuer
discloses a mater ial fact or material change other than in the neces-
sary course of busine ss. There is no reference in the typical provincial
securities stat utes to “knowingly” conveying inside inform ation. More
signif‌icantly, there is also no qualif‌ication in securities statutes that
limits unlaw ful tipping only to those cases in which t he “tipper” knows
that “there is a risk” t hat the tippee will use the information to buy or
sell securitie s, or will convey the inform ation to someone else who will
use it for that purpose.
2 R v Woods, [1994] OJ No 392 at para 15 (Gen Div).
3 See, for example, OSA, s 76(2).

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