CFA Society Toronto’s recent seminar—Insider Trading: Extraterritoriality, Expert Networks, Evolution—proved to be very timely in light of high profile cases such as the Ontario Securities Commission’s case against Andrew Rankin and a recent spate of insider trading cases in the U.S. Held in Toronto on September 19, 2012, the event featured a panel of leading Canadian and U.S. experts, including Lindi Beaudreault, Counsel, Sherman & Sterling LLP; Joseph Groia, Principal, Groia & Company; Michael Prior, VP, Surveillance,  the Investment Industry Regulatory Organization of Canada (IIROC); and Adam J. Reback, Chief Compliance Officer, J. Goldman & Co. L.P. The two-hour expert panel, moderated by Poonam Puri, Associate Dean, Research, Graduate Studies, and Institutional Relations, Osgoode Hall Law School, explored aspects of insider trading, including surveillance, extraterritorial reach, the implications for users of expert networks, legal and compliance evolutions for investors, and differences between the Canadian and the U.S. legal systems.

IIROC has the best system on a global basis because it performs real-time market surveillance for all Canadian marketplaces.

IS IT MATERIAL?

The heated panel discussions reminded us that it isn’t just traditional insiders who are involved in the insider trading problem. Rather, there is a much larger group of individuals potentially facing liability for insider trading via trading of material insider information. Correspondingly, the Canadian definition of material information focuses more on the effect on market price and value, while the U.S. definition of materiality includes information that investors would consider important in making investment decisions to buy, sell, or hold securities. It is important to understand that there could be situations where the act of trading is lawful (i.e., did not violate the Securities Act) but is nonetheless contrary to the public interest and thus should not occurred. Panelists also noted that, according to the U.S. Federal Securities law, insider trading also encompasses “misuse of information for trading purposes to obtain personal benefit instead of benefit of the company.”

In Canada, according to panel members, IIROC has the best system on a global basis because it performs real-time market surveillance for all Canadian marketplaces, using timely market data to detect unexplained price movements and the use of insider markers.

Suggested internal compliance changes that investment firms are making include: eliminating a large number of expert networks, integrating policy and procedures in the front-end systems, screening and pre-approval requests, as well as board directorship or special relationship disclosures.

Lastly, the panel addressed the question Should we regulate insider trading at all? There have been debates on the pros and cons of insider trading regulation both historically and currently. However, in light of the many decades it has taken to bring about and enforce insider trading regulation globally and the affront to market fairness and equitable disclosure that allowing insiders to trade on material, non-public inside information would represent , the prospect of abandoning insider trading regulation remains extremely remote.

SURPRISING FINDINGS

In the end, several panelists shared their thoughts on what surprised them most about the discussion:

Joseph Groia: “For me it was the great care that must now be taken to question the nature and source of all material information. There was a time when the onus was on the regulator to prove that a trader knew, or should have known, the information was confidential and material. Now it seems that the onus is on the trader to prove their innocence.”

Lindi Beaudreault: “Other things to keep in mind are that in recent years the regulators have broadened the nature and scope of the surveillance they conduct, and that U.S. regulators have an expansive view of their jurisdiction that includes transactions in U.S. markets or involving U.S. investors.”

Michael Prior: “Multiple marketplaces in Canada may have increased the challenges for dealers in obtaining best execution, but from a market monitoring point of view, there is one virtual, consolidated Canadian marketplace. Real-time market surveillance is not fragmented—illegal insider trading, as well as other market abuse spread across multiple marketplaces, can still be detected.”

Adam J. Reback: “I would emphasize the importance of the heightened due diligence that must be performed by firms when using sources of information such as expert networks and research consultants, as well as the value of increased involvement by CCOs within the investment process, to evaluate these information sources. In contrast, this has led to a tremendous drain on resources in the legal/compliance departments of many hedge funds.”