CASE SUMMARY: Re Finkelstein et al. [OSC, March 24, 2015]

The decision in the Ontario Securities Commission’s high-profile Finkelstein case was released on March 25, 2015. The decision deals with a number of issues relating to the prosecution of insider trading cases by the OSC, including the use of the public interest jurisdiction to strengthen the OSC’s ability to police problematic trading activity and the high standard expected of securities dealers and their registrant employees regarding the handling and use of material non-public information ("MNPI") about a reporting issuer.

The respondents in this case included a securities lawyer with a Bay Street law firm and also retail broker registrants employed by two dealers. The brokers were alleged to have engaged in tipping and insider trading contrary to the Securities Act, as well as to have acted contrary to the public interest by recommending that clients purchase securities while the brokers possessed MNPI.

Key Findings on Key Issues

Registrants are held to a higher standard. The Securites Act and the IIROC Dealer Member Rules state that market participants will be held to high standards of fitness and business conduct. This is to ensure honest and responsible conduct, that registrants observe high standards of ethics and conduct and not engage in any practice which is unbecoming or detrimental to the public interest. In particular, registrants ought to understand that they have a duty not to attempt to profit through the use of MNPI. In its Finkelstein decision the OSC held that the brokers "ought reasonably to have known" that the inside information came from a person having a special relationship with the reporting issuers (a requirement for tipping and insider trading) because, in part, of the knowledge they have of the securities industry and the high standards to which they will be held under the Act and IIROC rules.

A broker who has MNPI may not "recommend" that a client trade. The Ontario Securities Act (unlike other provincial statutes) does not make it an offence for a person in a special relationship with an issuer with knowledge of MNPI to "recommend or encourage another…to [trade]" and instead limits tipping to "informing", which has been held to exclude "recommending". However, and following the OSC’s February 15, 2015 decision in Agueci, the OSC found that the brokers in this case acted contrary to the public interest in recommending that clients purchase securities for which they had knowledge of MNPI. The use of the public interest jurisdiction by the OSC to capture trading conduct that falls outside the tipping prohibition under the Ontario Securities Act is a natural evolution of the way it has been used by the OSC in recent years to capture problematic trading activity in connection with takeover bids and other transaction where it falls outside the statutory prohibition. This use by the OSC of the public interest jurisdiction strengthens the regulator’s ability to police problematic trading activity and also exposes market participants, especially registrants, to greater risk of prosecution.