On December 4, 2009, Quebec’s National Assembly sanctioned An Act to amend various legislative provisions principally to tighten the regulation of the financial sector (“Bill 74”). The legislation was adopted in the context of the recent financial crisis and its goal is the reinforcement of investor confidence in Quebec. The amendments deal largely with changes to the Quebec Code of Penal Procedure in matters of sentencing, regulation of credit agencies through the Securities Act and amendments to the Derivatives Act.
Changes to penal provisions
In reviewing perceived loopholes in the regulation of financial institutions, and in response to recent high profile fraud cases, the authorities were of the view that penalties were not severe enough in order to dissuade white collar crime.
The primary measure taken in Bill 74, with respect to increasing the severity of sentences for penal infractions in Quebec, took the form of a modification to the Quebec Code of Penal Procedure. Henceforth, judges are given the power by the legislature to hand out consecutive sentences. Prior to Bill 74, Quebec legislation only explicitly permitted consecutive sentences to be handed out where the defendant was already serving a sentence for another infraction. As a result of this new legislation, prison sentences currently foreseen in laws, such as the Securities Act and the Derivatives Act, can be given consecutively. Recently, the Supreme Court refused to hear an appeal from the Quebec Court of Appeal, which decided that the current legislation did not permit judges to hand out concurrent sentences in the context of the case of the Autorité des marchés financiers (“AMF”) against Vincent Lacroix. As such, the new legislation creates a major change in the state of sentencing for penal matters in Quebec as it relates to securities matters.
In the aftermath of the asset-backed commercial paper meltdown and amid growing concerns that credit rating organizations may find themselves in positions of conflict of interest, the National Assembly legislated additional powers in favour of the AMF allowing it to designate credit rating organizations as being subject to the Securities Act. When the modifications to the law come into force, credit rating organizations will have to abide by regulations set out for them by the AMF. In particular, the AMF will been given the power to regulate issues pertaining to the adoption of codes of conduct, the prohibition or maintaining of credit ratings, procedures to follow where a conflict of interest exists, the keeping of books and registers necessary for the conduct of business, the disclosure of information to the AMF, to the public as well as to persons whose securities are being traded, and finally the appointment of compliance officers.
In order to ensure fair trading practices in the derivatives market, an additional disposition was added to the Derivatives Act outlining the right of a person who has insider information to trade or recommend the trading of derivative instruments. The provision pertains to persons who have any information relating to an order (either a projected or unexecuted) to purchase or trade a standardized derivative or underlying interest, or even an intention to place such an order, that is likely to have a significant effect on the market price of the standardized derivative.
Essentially, a person with the aforementioned information may not trade, recommend the trading of or communicate the information pertaining to derivatives unless the person is justified in believing that the other party also has the information.
The information may, however be communicated where it is done so in the normal course of business and where there are no grounds to believe that the information passed on would be used or disclosed contrary to the provision. In addition, a person with the information mentioned above may enter into a transaction made under a written automatic standardized derivatives purchase plan and to which the person adhered to prior to obtaining the privileged information.
A person may fulfill the obligations of a contract that would otherwise be in contravention of the new article as long as the contract was entered into prior to the obtaining of the information. Finally, a person may enter into a transaction as agent under the specific unsolicited instructions of the principal, or under instructions that the agent solicited from the principal before obtaining knowledge of the material order information.
In effect, the legislator has brought, to a large degree, the same regime relating to trading of securities based on undisclosed and material information currently in the Securities Act to the market activities governed by the Derivatives Act.