National Policy 51-201 Disclosure Standards

Part III Overview of the Statutory Prohibitions Against Selective Disclosure

(1) Securities legislation prohibits a reporting issuer and any person or company in a special relationship with a reporting issuer from informing, other than in the necessary course of business [FN 5], anyone of a “material fact” [FN 6] or a “material change” (or “privileged information” in the case of Québec) [FN 7] before that material information [FN 8] has been generally disclosed. [FN 9] This prohibited activity is commonly known as “tipping”

(2) Securities legislation also prohibits anyone in a special relationship with a reporting issuer from purchasing or selling securities of the reporting issuer [FN 10] with knowledge of a material fact or material change about the issuer that has not been generally disclosed. [FN 11]

This prohibited activity is commonly known as “insider trading”.

(3) Securities legislation prohibits any person or company who is proposing:

• to make a take-over bid;
• to become a party to a reorganization, amalgamation, merger, arrangement or similar business combination; or
• to acquire a substantial portion of a company’s property

from informing anyone of material information that has not been generally disclosed. An exception to this disclosure prohibition is provided where the material information is given in the “necessary course of business” to effect the take-over bid, business combination or acquisition.

(4) It is important to remember that the tipping and insider trading provisions apply to both material facts and material changes. A company’s timely disclosure obligations generally only apply to material changes. This means that a company does not have to disclose all material facts on a continuous basis. However, if a company chooses to selectively disclose a material fact, other than in the necessary course of business, this would be in breach of securities legislation.

FN 5 The Alberta and British Columbia Securities Acts use the phrase “is necessary in the course of business”. The Québec Securities Act uses the phrase in the “course of business”.

FN 6 Securities legislation defines a “material fact” as follows: “material fact, where used in relation to securities issued or proposed to be issued means a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of such securities”.

FN 7 “Privileged information” is defined under the Québec Securities Act as “any information that has not been disclosed to the public and that could affect the decision of a reasonable investor”.

FN 8 Material facts and material changes are collectively referred to as “material information”. When used in the Policy, material information means both “material facts” and “material changes.”

FN 9 The Québec Securities Act uses the term “generally known”.

FN 10 For the purposes of the prohibition against illegal insider trading, a “security of the reporting issuer” is deemed to include a security, the market price of which varies materially with the market price of the securities of the issuer (see subsection 76(6)(b) of the Ontario Securities Act).

FN 11 Section 187 of the Québec Securities Act provides that “no insider of a reporting issuer having privileged information relating to securities of the issuer may trade in such securities except in the following cases: (i) he is justified in believing that the information is generally known or known to the other party; (ii) he avails himself of an automatic dividend reinvestment plan, automatic subscription plan or any other automatic plan established by a reporting issuer, according to conditions set down in writing, before he learned the information”. Section 189 further expands the number of persons who are subject to the prohibition in section 187.

(1) The tipping provisions generally apply to anyone in a “special relationship” with a reporting issuer. [FN 12] Persons in a special relationship include, but are not limited to

(a) insiders as defined under securities legislation;

(b) directors, officers and employees;

(c) persons engaging in professional or business activities for or on behalf of the company; and

(d) anyone (a “tippee”) who learns of material information from someone that the tippee knows or should know is a person in a special relationship with the company.

(2) The “special relationship” definition is broad. The tipping prohibition is not limited to communications made by senior management, investor relations professionals and others who regularly communicate with analysts, institutional investors and market professionals. The tipping prohibition applies, for example, to unauthorized disclosures by non-management employees.

(3) There is a potentially infinite chain of tippees who are caught by the prohibitions against tipping and insider trading. Because tippees are themselves considered to be in a special relationship with a reporting issuer, material information may be third or fourth hand and still be subject to the prohibitions.

(4) Because the “special relationship” definition is so broad, it is important that companies establish corporate disclosure policies and clearly define who within the company has responsibility for corporate communications.

FN 12 The tipping prohibition in Québec applies to insiders and persons listed in section 189 of the Québec Securities Act. Québec securities legislation extends the prohibition to communications by persons having privileged information that, to their knowledge, was disclosed by an insider, affiliate, associate or by any other person having acquired privileged information in the course of his relations with the reporting issuer and by persons having acquired privileged information that these persons know to be such.

(1) The “tipping” provision allows a company to make a selective disclosure if doing so is in the “necessary course of business”. The question of whether a particular disclosure is being made in the necessary course of business is a mixed question of law and fact that must be determined in each case and in light of the policy reasons for the tipping provisions. Tipping is prohibited so that everyone in the market has equal access to, and opportunity to act upon, material information. Insider trading and tipping prohibitions are designed to ensure that anyone who has access to material undisclosed information does not trade or assist others in trading to the disadvantage of investors generally.

(2) Different interpretations are being applied, in practice, to the phrase “necessary course of business”.[FN 13] As a result, we believe interpretive guidance in this regard is necessary. The “necessary course of business” exception exists so as not to unduly interfere with a company’s ordinary business activities. For example, the “necessary course of business” exception would generally cover communications with:

(a) vendors, suppliers, or strategic partners on issues such as research and development, sales and marketing, and supply contracts;

(b) employees, officers, and board members;

(c) lenders, legal counsel, auditors, underwriters, and financial and other professional advisors to the company;

(d) parties to negotiations;

(e) labour unions and industry associations;

(f) government agencies and non-governmental regulators; and

(g) credit rating agencies (provided that the information is disclosed for the purpose of assisting the agency to formulate a credit rating and the agency’s ratings generally are or will be publicly available).

(3) Securities legislation prohibits any person or company that is proposing to make a take-over bid, become a party to a reorganization, amalgamation, merger, arrangement or similar business combination or acquire a substantial portion of a company’s property from informing anyone of material information that has not been generally disclosed. An exception to this prohibition is provided where the material information is given in the “necessary course of business” to effect the take-over bid, business combination or acquisition.

(4) Disclosures by a company in connection with a private placement may be in the “necessary course of business” for companies to raise financing. The ability to raise financing is important. We recognize that select communications between the parties to a private placement of material information may be necessary to effect the private placement. [FN 14] Communications to controlling shareholders may also, in certain circumstances, be considered in the “necessary course of business.” [FN 15] Nevertheless, we believe that in these situations, material information that is provided to private placees and controlling shareholders should be generally disclosed at the earliest opportunity.

(5) The “necessary course of business” exception would not generally permit a company to make a selective disclosure of material corporate information to an analyst, institutional investor or other market professional. [FN 16]

(6) There may be situations where an analyst will be “brought over the wall” to act as an advisor in a specific transaction involving a reporting issuer they would normally issue research about. In these situations, the analyst becomes a “person in a special relationship” with the reporting issuer and is subject to the prohibitions against tipping and insider trading. This means that the analyst is prohibited from further informing anyone of material undisclosed information they learn in this advisory capacity, including issuing any research recommendations or reports. [FN 17]

(7) We draw a distinction between disclosures to credit rating agencies, which would generally be regarded as being in the “necessary course of business,” and disclosures to analysts, which would not be. This distinction is based on differences in the nature of the business they are engaged in and in how they use the information. The credit ratings generated by rating agencies are either confidential (disclosed only to the company seeking the rating) or directed at a wide public audience. Generally, the objective of the rating process is a widely available publication of the rating. [FN 18] The reports generated by analysts are targeted, first and foremost, to an analyst’s firm’s clients. Also, rating agencies are not in the business of trading in the securities they rate. Sell-side analysts are typically employed by investment dealers that are in the business of buying and selling, underwriting, and advising with respect to securities. Further, securities legislation requires specified ratings from designated rating organizations in certain circumstances. [FN 19] Consequently, ratings form part of the statutory framework of provincial securities legislation in a way that analysts’ reports do not.

(8) When companies communicate with the media, they should be mindful not to selectively disclose material information that has not been generally disclosed. The “necessary course of business” exception would not generally permit a company to make a selective disclosure of material undisclosed information to the media. However, we are not suggesting that companies should stop speaking to the media. We recognize that the media can play an important role in informing and educating the marketplace.

FN 13 See Re Royal Trustco Ltd. et al. and Ontario Securities Commission (1983), 42 O.R. (2d) 147 (Div. Ct.) affirming (1981), 2 O.S.C.B. 322C. In Royal Trustco, it was alleged that two officers had revealed to a major shareholder, other than in the “necessary course of business” certain material facts in relation to the affairs of Royal Trustco that had not been generally disclosed including: (i) that approximately 60% of the shares of Royal Trustco were owned by persons or companies who the officers knew or had reason to believe would not tender pursuant to a bid; and (ii) that Royal Trustco management was considering recommending to the board that the dividends payable on the Royal Trustco shares be increased. The Court held that the information disclosed fell within the category of material facts and that such material facts had been made available to such shareholder not “in the necessary course of business” from Royal Trustco’s perspective.

FN 14 Securities legislation provides an exemption from the insider trading and selective disclosure prohibition where the person or company who trades with material undisclosed information or tips it proves that they reasonably believed that the other party to the trade or the tippee had knowledge of the information. Under the Québec Securities Act, the person or company must be justified in believing that the information is known to the other party.

FN 15 For example, a company may need to share sensitive strategic information with a controlling shareholder when preparing consolidated financial statements.

FN 16 See In the Matter of Gary George (1999), 22 OSCB 717, where the Ontario Securities Commission addressed in obiter the issue of a selective disclosure made by an issuer’s chief executive officer to an analyst and the subsequent disclosure by the analyst to other members of his firm. We agree with the principles expressed by the Ontario Securities Commission:

It would appear that some corporate officers see the maintenance of good relations with analysts as being more important than ensuring equality of material information among shareholders. The fact that it was thought that [the analyst] was about to come out with a report as to [the issuer] which would overvalue its shares would in no way justify [the President] giving the information to [the analyst] rather than publicly disseminating it. If the information was material enough to cause [the analyst] to change his projections, it should have been publicly disseminated. In general, we view one-on-one discussions between an officer of a reporting issuer and an analyst as being fraught with difficulties.

Also see In the Matter of Air Canada, where employees of the company disclosed information about third quarter earnings per share results and a revised forecast for the next quarter to 13 analysts who covered the company but not to the marketplace generally. In the Excerpt from the Settlement Hearing Containing the Oral Reasons for Decision, the Ontario Securities Commission said:

Communication by a corporation with analysts is not covered under some exception; so what is disclosed to analysts, if it is material and will significantly affect the market price, or reasonably may be expected to significantly affect the market price of the shares of the issuer, should not be selectively disclosed.

FN 17 Parties to a transaction in which an analyst is “brought over the wall” should be mindful that bringing an analyst over the wall can be a risky practice and may in itself be a signal to others of a significant development involving a reporting issuer.

FN 18 This is consistent with the reasoning of the SEC in excluding ratings organizations from Regulation FD. As the SEC indicated in paragraph II.B.1.a., of the implementing release, “[r]atings organizations…have a mission of public disclosure; the objective and result of the ratings process is a widely available publication of the rating when it is completed.” 

FN 19 For example, under National Instrument 44-101 – Short Form Prospectus Distributions, alternative eligibility requirements allow companies without the requisite public float to issue “designated rating” non-convertible debt, preferred shares or cash-settled derivatives under a short form prospectus.

(1) If a company discloses material information under the “necessary course of business” exception, it should make sure those receiving the information understand that they cannot pass the information onto anyone else (other than in the necessary course of business), or trade on the information, until it has been generally disclosed.

(2) We understand that companies sometimes disclose material information pursuant to a confidentiality agreement with the recipient, so that the recipient is prevented from further informing anyone of the material information. Obtaining a confidentiality agreement in these circumstances can be a good practice and may help to safeguard the confidentiality of the information. However, there is no exception to the prohibition against “tipping” for disclosures made pursuant to a confidentiality agreement. The only exception is for disclosures made in the “necessary course of business.” Consequently, there must still be a determination, prior to disclosure supported by a confidentiality agreement, that such disclosure is in the “necessary course of business.”

(1) The tipping prohibition does not require a company to release all material information to the marketplace. [FN 20] Instead, it prohibits a company from disclosing nonpublic material information to anyone (other than in the “necessary course of business”) before the company generally discloses the information to the marketplace.

(2) Securities legislation does not define the term “generally disclosed”. Insider trading court decisions state that information has been generally disclosed if:

(a) the information has been disseminated in a manner calculated to effectively reach the marketplace; and

(b) public investors have been given a reasonable amount of time to analyze the information. [FN 21]

(3) Except for “material changes,” which must be disclosed by news release, securities legislation does not generally require a particular method of disclosure to satisfy the “generally disclosed” requirement. In determining whether material information has been generally disclosed, we will consider all of the relevant facts and circumstances, including the company’s traditional practices for publicly disclosing information and how broadly investors and the investment community follow the company. We recognize that the effectiveness of disclosure methods varies between companies. Whatever disclosure method is used to release information, we encourage consistency in a company’s disclosure practices. [FN 22]

(4) Companies may satisfy the “generally disclosed” requirement by using one or a combination of the following disclosure methods:

(a) News releases distributed through a widely circulated news or wire service. [FN 23]

(b) Announcements made through press conferences or conference calls that interested members of the public may attend or listen to either in person, by telephone, or by other electronic transmission (including the Internet). A company needs to provide the public with appropriate notice of the conference or call by news release.[FN 24] The notice should include the date and time of the conference or call, a general description of what is to be discussed, and the means of accessing the conference or call. [FN 25] The notice should also indicate for how long the company will make a transcript or replay of the call available over its Web site.

(5) We recognize that many companies prefer news release disclosure as the safest means of satisfying the “generally disclosed” requirement. In section 6.6 of the Policy, we recommend as a “best practice” a disclosure model centred around news release disclosure of material information, followed by an open and accessible conference call to discuss the information contained in the news release. However, we believe that alternative methods may also be appropriate. We believe it is important to preserve for companies the flexibility to develop a disclosure model that suits their circumstances and disseminates material information in the manner best calculated to effectively reach the marketplace.

(6) Posting information to a company’s Web site will not, by itself, be likely to satisfy the “generally disclosed” requirement. Investors’ access to the Internet is not yet sufficiently widespread such that a Web site posting alone would be a means of dissemination “calculated to effectively reach the marketplace.” Further, effective dissemination involves the “pushing out” of information into the marketplace. Notwithstanding the ability of some issuers’ Web sites to alert interested parties to new postings, Web sites by and large do not push information out into the marketplace. Instead, investors would be required to seek out this information from a company’s Web site. Active and effective dissemination of information is central to satisfying the “generally disclosed” requirement.

(7) We support the use of technology in the disclosure process and believe that companies’ Web sites can be an important and useful tool in improving communications to the marketplace. As technology evolves and as more investors gain access to the Internet, it may be that postings to certain companies’ Web sites alone could satisfy the “generally disclosed” requirement. At such time, we will revisit this policy statement and reconsider the guidance provided on this issue. In the meantime, we strongly encourage companies to utilize their Web sites to improve investor access to corporate information. [FN 26]

FN 20 See, however, section 2.1 regarding an issuer’s timely disclosure obligations.

FN 21 Green v. Charterhouse Group Can. Ltd. (1976), 12 O.R. (2d) 280. In the Matter of Harold P. Connor et al. (1976) Volume II OSCB 149. Existing case law does not establish a firm rule as to what would be a reasonable amount of time for investors to be given to analyze information. The time period will depend on a number of factors including the circumstances in which the event arises, the nature and complexity of the information, the nature of the market for the company’s securities, and the manner used to release the information. We recognize that the case law is dated in this respect and that, if the courts were to revisit these decisions today, they may not find the time parameters set out in the decisions appropriate for modern technology.

FN 22 A sudden change from the usual method of generally disclosing material information may attract regulatory attention in certain circumstances; for example, a last minute webcast of poor quarterly results without advance notice when positive quarterly results are generally released in advance of a subsequently scheduled discussion of the results.

FN 23 We encourage companies to file their news releases on SEDAR. Filing a news release on SEDAR alone will not constitute “general disclosure”.

FN 24 This is based on guidance provided by the U.S. Securities and Exchange Commission (the “SEC”) in the adopting release to Regulation FD.

FN 25 This might include a Web site link to any software that is necessary to access the webcast.

FN 26 See also The Toronto Stock Exchange’s Electronic Communications Disclosure Guidelines.

Securities legislation does not provide a safe harbour which allows companies to correct an unintentional selective disclosure of material information. If a company makes an unintentional selective disclosure it should take immediate steps to ensure that a full public announcement is made. This includes contacting the relevant stock exchange and requesting that trading be halted pending the issuance of a news release. Pending the public release of the material information, the company should also tell those parties who have knowledge of the information that the information is material and that it has not been generally disclosed.

(1) We may consider any number of mitigating factors in a selective disclosure enforcement proceeding including:

(a) whether and to what extent a company has implemented, maintained and followed reasonable policies and procedures to prevent contraventions of the tipping provisions;

(b) whether any selective disclosure was unintentional; and

(c) what steps were taken to disseminate information that had been unintentionally disclosed (including how quickly the information was disclosed)

If a company’s disclosure record shows a pattern of “unintentional selective disclosures”, it will be harder to show that a particular selective disclosure was truly unintentional.

(2) Nothing in this policy statement limits our discretion to request information relating to a possible selective disclosure violation or to take enforcement proceedings within our jurisdiction where there has been a breach of the tipping provisions.