Up in Smoke?

As we reported in our October 2017 bulletin, the Canadian Securities Administrators (CSA) published Staff Notice 51-352, which outlined a disclosure-based approach to highlight risks facing issuers with marijuana-related activities in the United States. The CSA notice took into account the existence of a U.S. federal government forbearance approach (outlined in the Cole Memorandum) to the enforcement of federal laws relating to marijuana.

On January 4, 2018, the U.S. Attorney General rescinded all previous guidance specific to federal law enforcement relating to marijuana. In response to this change in enforcement approach, the CSA announced on January 12, 2018 that it is considering whether its disclosure-based approach for issuers with U.S. marijuanarelated activities remains appropriate. The CSA said that it will provide an update on its position shortly.

This is also a good time to remind TSX-listed issuers (and those investing in TSXlisted issuers) with marijuana-related activities that the TSX believes that issuers with ongoing business activities that violate U.S. federal laws regarding marijuana are not complying with the TSX Company Manual. Read more in our October 2017 bulletin.

Court of Appeal Upholds OSC's Interpretation of "Special Relationship" in Tipping Case

The OSC regards insider tipping as conduct just as serious as insider trading because tipping undermines confidence in the marketplace. It can be challenging, however, to determine whether a person down the line from a reporting issuer in a chain of communications containing material non-public information (MNPI) is in a "special relationship" with that issuer, such that he or she is subject to the prohibitions on insider trading and tipping in the Securities Act. In 2015, the OSC's decision in Finkelstein v. Ontario Securities Commission outlined an approach and list of factors to be considered in deciding such cases. On January 25, 2018, the Ontario Court of Appeal upheld the OSC's Reasons for Decision and confirmed that the factors developed by the OSC panel in assessing whether a person is "in a special relationship" are a reasonable guideline in making such a determination.

The OSC's original Reasons and the Court of Appeal decision are of particular interest to registrants and other professional market participants, since several of the factors applied by the OSC (and accepted by the Court of Appeal) take into account the tipper's and tippee's professional qualifications and relationship to each other. For example, the OSC considered such factors as:

  • Whether the tipper’s professional qualifications and standing put him in a milieu where transactions are discussed;
  • Whether the tippee’s profession or position put him in a position to know that he cannot take advantage of confidential information and therefore a higher standard of alertness is expected of him than from a member of the general public; and
  • The relationship between tipper and tippee (e.g., whether they are close friends, whether they also have a professional relationship and whether the tippee knows of the tipper’s trading patterns, successes and failures).

In its reasons, the Court of Appeal set out a hypothetical fact pattern involving a tipper and tippee who have worked together for some time and are registrants in securities markets. The Court of Appeal noted:

"Such facts could constitute evidence logically relevant not only to the nature of the information conveyed by the tipper non-public material information but to the likelihood that the tipper's source of the information was linked to or related in some fashion with the issuer i.e. that the market registrant tippee ought reasonably to have known the market participant tipper operated in a confidential information loop and was passing on material, non-public information likely sourced from another person in a special relationship."