CAN ONTARIO IMPROVE ITS INSIDER TRADING REGULATION AND ENFORCEMENT BY ADOPTING POLICIES USED IN THE USA?

Prepared by Muhammad Bilal Amjad 2B Accounting and Financial Management ID 20429857

AFM 231: Business Law School of Accounting and Finance University of Waterloo

Friday, August 9, 2013

Abstract The purpose of this paper is to present potential suggestions on how Canada (more specifically, Ontario) can improve its insider trading regulation and enforcement. In order to do so, this paper will compare the insider trading regulation and enforcement in Canada and the USA. It will examine whether or not Ontario should take from the methods used in the USA in order to strengthen its regulation and enforcement of insider trading. Ontario was chosen in particular because securities regulation in Canada falls under the jurisdiction of provincial governments, with Ontario being home to Canada’s largest securities market.

Introduction Insider trading is a subject of great significance in security markets all across the globe. Not only does it violate securities law in Canada and many other countries, it is also seen as highly unethical. It applies not only to equity, but also to bond and option markets. Insider trading is deemed illegal primarily because it is contrary to the public trusts upon which security markets operates; it undermines investor confidence, and as a result, discourages investment (Dessaulles, 2013, p. 9). In addition, it is viewed as being immoral because it is akin to cheating and theft of information. It is not fair for some market participants to gain an advantage by having information that is not available to all investors (Dessaulles, p. 9). Insider trading regulation and enforcement in Canada has come under serious scrutiny for being too lax. Canada is viewed as a “haven” (Langton, 2003) for insider traders, allowing them to flourish without facing appropriate consequences. In a 2003 paper, Yale University professor Arturo Bris examined over 4,500 cases of takeovers in 52 countries in an attempt to “pin down the insider trading profits generated in the wake of corporate acquisitions” (Langton, 2003). Bris

found that by far, the highest insider trading profits occurred in Canada, where insider traders captured an estimated 35.18% of takeover-related trading profits (Bris, 2003, p. 13). In a distant second place was Hong Kong, at just 3.44%, and in the USA, insiders captured only 0.86% of profits (Bris, 2003, p. 13). In an effort to assess the strength of both the regulation and enforcement of insider trading in Ontario, this paper will compare Ontario’s insider trading laws and enforcement methods with those used in the USA. As already noted, the USA had a substantially lower profit percentage for insiders than Canada (0.86% versus 35.18%, respectively). With such a large gap, it seems logical to conclude that, compared to the USA, there must be some deficiencies in the way Ontario confronts insider trading. These deficiencies may either exist in the actual laws and regulation, or in the enforcement of those laws. This paper will argue that Ontario’s insider trading regulation and laws are as strong, if not stronger, than those of the USA. At the same time however, this paper will also argue that Ontario can greatly strengthen its enforcement of insider trading regulation by learning from the enforcement policies and methods used in the USA. Part I of this paper will examine the insider trading laws and regulations in Ontario. Part II will then explore the insider trading laws and regulations in the USA. Part III will identify and explain some weaknesses of insider trading regulations in the USA. Based on this, it will recommend that Ontario not adopt any of the US’ insider trading regulations. Part IV will compare the enforcement methods of USA and Ontario. Based on this, it will make recommendations on how Ontario can improve its enforcement methods.

Part I: Insider Trading Regulation in Ontario In Ontario, insider trading is defined and restricted explicitly by Sections 76(1), 76(3) and 76(5) of the Ontario Securities Act (OSA). A related offence known as tipping, is regulated under Section 76(2). Section 76(1) of the OSA states that: No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed. (Ontario Securities Act, R.S.O. 1990.) This section identifies several factors that could lead to insider trading liability if the person or company is a “special relationship person” or a “tippee.” In particular, it makes reference to: undisclosed material facts or changes, lack of general disclosure and dissemination, and knowledge (Lau, 2011, p. 2). With respect to undisclosed material facts or changes (i.e. materiality), a material fact or material change has been defined in National Instrument 51-102 (2004) as a fact or change in the issuer’s “business operations, or capital that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the reporting issuer” (p. 5). In Donnini (2002), the Ontario Securities Commission (OSC) went into further detail with regards to the meaning of “materiality,” defining it as “it can be expected that a reasonable investor would consider the disclosure [of the material fact or change] a factor in making an investment decision” (p. 20). In the same case, the OSC also created a probability test for forward-looking material facts or changes that have the potential of affecting the likely future of a company. In the test, the materiality of a fact or change was decided to be dependent on both the possibility of

the event actually occurring, as well as the expected magnitude of the event “in light of the totality of the company activity” (Donnini, 2002, p. 20). With regards to the general disclosure and dissemination, National Policy 51-201 “stipulates that information has been generally disclosed and effectively disseminated if the information has been disseminated in a manner calculated to effectively reach the marketplace and that public investors have been given a reasonable amount of time to analyze the information” (Lau, 2011, p. 2). If an insider decides to trade before the preceding two conditions have been met, he/she may very well trigger insider trading liability. The OSC has suggested that insiders should wait one full trading after the release of the material information before trading (Lau, 2011, p. 3). With regards to knowledge, originally, an insider trader would be liable only if he/she possessed undisclosed, material, non-public information, and then knowingly used this information to trade. However, it has since then been argued that a proof of “use” formed an almost impossible burden of proof upon the OSC, prompting its elimination from the OSA (Lau, 2011, p. 3). As a result, current provincial insider trading laws only require the possession of knowledge of material non-public information in order to impose insider trading liability; the OSC no longer has to prove that the information was actually used to trade (Lau, 2011). Another important aspect of Section 76(1) was the presence of a “special relationship person,” or a “tippee.” The OSA defines an insider in Section 1(1) as “a director or officer of a reporting issuer, a director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer,” or “a person or company that has beneficial ownership of, or control or direction over, directly or indirectly, securities of a reporting issuer carrying more than 10% of the voting rights attached to all the reporting issuer’s outstanding securities” (Ontario Securities

Act, R.S.O. 1990.). Section 76(5)(a) to (d) extends this by defining a person in a “special relationship” with an issuer as an “insider, affiliate, or associate of: the issuer, any party proposing to make a take-over bid, reorganization, amalgamation, or merger with the issuer, who learned of the material fact or change whilst being in a prior ‘special relationship’ with an issuer” (Lau, 2011, p. 3). Meanwhile, the definition of “tippee” is found in Section 75(5)(e) of the OSA as: A person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship. (Ontario Securities Act, R.S.O. 1990.) The last part of the clause: “knows or ought…such a relationship” tackles a major point of concern in insider trading law. It states that one cannot trade if one receives material non-public information from a person or company that one knows or ought reasonably to have known to be in a special relationship with a reporting issuer. Furthermore, a person that receives information from a tippee as defined in Section (75)(5)(e) is also classified as a tippee and must not trade on the acquired insider information. As such, this definition of a tippee could potentially include anyone, “even a bystander who becomes privy to inside information given he/she is aware or ought to be aware that the source of information is in a special relationship with the issuer” (Lau, 2011, p. 3). Section 76(2) of the OSA defines what constitutes a tipping offence. It stipulates that all reporting issuers or any person or company that is in a special relationship with a reporting issuer cannot disclose inside information to another person or company before the information has been

generally disclosed. The only exception allowed under this clause is if the disclosure of the inside information is absolutely necessary in the course of business (Ontario Securities Act, R.S.O. 1990.). It can be understood from this that a tippee may also be a tipper if he/she is in a special relationship with a reporting issuer, and he/she chooses to relay inside information to another person or company. Further, the tipping offence would apply even if the tippee is unaware of the special relationship that the tipper has with the reporting issuer. Lastly, regardless of what the tippee does, or intends to do, with the information, the tipper is still liable for disclosing inside information. Whether the tippee actually trades on the information or not, is irrelevant in establishing liability (Lau, 2011, p. 3).

Part II: Insider Trading Regulation in the USA Contrary to Canada, where securities regulation falls under the jurisdiction of provincial governments, US securities regulation is primarily the duty of the federal government, embodied in the nation-wide governing body: the Securities and Exchange Commission (SEC) (Steinberg, 2001, p. 3). Additionally, unlike Canada, the USA did not have any statutes or rules that codified the details of the insider trading prohibition until the creation of SEC Rule 10b5-1 in 2000. Rather, the USA relied much more heavily on the SEC and the federal courts (Steinberg, p. 4). Despite this, Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which do not deal with insider trading explicitly, were, and still are, used regularly by the Department of Justice, the SEC, and private plaintiffs in charges of insider trading (Lau, 2011, p. 5). They are found below:

Section 10 - Manipulative and Deceptive Devices It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange b. To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. (Securities Exchange Act, 15 U.S.C. § 78j, 2012) Rule 10b-5 - Employment of Manipulative and Deceptive Devices It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, a. To employ any device, scheme, or artifice to defraud, b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. (SEC, 15 U.S.C. 78j, 2013) These two are the “principal statutory weapons against fraud,” but they have been employed against all kinds of illegal and deceitful behaviour, including insider trading (Sarkar, n.d.).

As mentioned in Part I, Canada’s focus on insider trading regulation has to do with special relationship persons. On the other hand, the USA concentrates more on the concepts of breach of fiduciary duty, as well as misappropriation and deception in determining liability for insider trading. Both the concepts of fiduciary duty and misappropriation came about as a result of major US Supreme Court decisions (Steinberg, 2001, p. 5). The first of these court decisions was Chiarella v. United States (1980), in which the US Supreme Court created a model of insider trading liability grounded on the concept of a fiduciary relationship (or a similar relation of trust and confidence) between the insider and the shareholders of the corporation. The US Supreme Court maintained that “one who fails to disclose material information prior to the consummation of a transaction commits fraud only when he is under a duty to do so,” and that this duty to disclose arises when “the other [party] is entitled to know [the information] because of a fiduciary or other similar relation of trust and confidence between them” (Chiarella v. United States, 1980). In addition, the US Supreme Court justified this new model by reasoning that, by preventing the breach of fiduciary duty, it “guarantees that corporate insiders, who have an obligation to place the shareholders’ welfare before their own, will not benefit personally through fraudulent use of material, non-public information” (Chiarella v. United States, 1980). The concepts of tipping offence and tippee status are also formulated by a US Supreme Court decision, namely in Dirks v. SEC (1983). In this case, the US Supreme Court defined a new tippee liability theory, under the framework that “a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material non-public information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been breach” (Dirks v. SEC, 1983).

An additional condition established by the Supreme Court for determining liability was that the insider (tipper) who tipped the tippee must have done so in order to benefit, directly or indirectly, from disclosing the information. If a personal gain to the tipper is absent, there has been no breach of duty to stockholders, and as such, there is no derivative breach by the tippee (Dirks v. SEC, 1983). It is here that the US understanding of tipping differs from Ontario’s definition; the USA employs a personal benefit test, whereas Section 76(2) of the OSA has no such stipulation. In response to the decisions made in Chiarella and Dirks, the SEC has implemented Rule 14e-3 and Regulation FD (Fair Disclosure), “in effect, to reverse the two Supreme Court decisions in selected circumstances” (Lau, 2011, p. 7). Rule 14e-3, which was enacted six months after the Chiarella decision, applies only in a tender offer setting. Under this rule, “a person who obtains material confidential information regarding a tender offer directly or indirectly from the offeror (bidder), target corporation, or an intermediary neither can trade nor tip prior to adequate public disclosure (and absorption) of such information” (Steinberg, 2001, p. 8). Furthermore, a tippee of material confidential information relating to a tender offer who knows or should show that the subject information comes directly or indirectly from an offeror, target corporation or intermediary similarly cannot trade or tip prior to adequate public disclosure (and absorption) of this information (Steinberg, p. 8). Regulation FD was enacted in 2000 by the SEC in an attempt to “outflank” the decision made in Dirks regarding the personal benefit test (Lau, 2011, p. 7). It aimed to establish liability for selective disclosure by insiders without having to prove a motivation of personal benefit (Steinberg, 2001, p. 14). The SEC adopted Regulation FD in response to the “perceived unfairness when companies selectively disclose material non-public information to analysts, institutional investors, and other securities market insiders” (Steinberg, p. 15). The Regulation’s

basic proposition states that “whenever an issuer, or any person acting on its behalf, discloses any material non-public information regarding that issuer or its securities to [selective] persons…, the issuer shall make public disclosure of that information” (SEC, 17 C.F.R 243.100, Regulation FD, 2000). Another case that played a large role in contributing to US’s insider trading regulation was that of United States v. O’Hagan (1997), which is viewed by most commentators as a cornerstone of insider trading regulation in the USA (Lau, 2011, p. 8). This case was vital in establishing the misappropriation theory as a means for determining insider trading liability for persons outside the issuing corporation (Nagy, 2009, p. 4). When an outside fiduciary profits from a securities transaction through undisclosed use of a principal’s material non-public information, he/she has in effect deceived the principal, and as such, has become in violation of Section 10(b) and Rule 10b-5 (Nagy, p. 4-5). The Court in O’Hagan explained that whereas the classical insider trading theory “premises liability on a fiduciary relationship between company insider and purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciary-turnedtrader’s deception of those who entrusted him with access of confidential information” (United States v. O’Hagan, 1997, p. 11). The Court further put emphasis on the fact that the misappropriation theory “serves the important policy goals of promoting market integrity and investor confidence” (Nagy, p. 5) because “investors likely would hesitate to venture their capital in a market where trading based on misappropriated non-public information is unchecked by the law” (United States v. O’Hagan, 1997, p. 17). At the same time however, the Court was very clear in stating that the outsiders potentially liable under the misappropriation theory were limited to those who were in actual breach of a “recognized duty owed to the source of non-

public information” (United States v. O’Hagan, 1997, p. 19). Shortly after the O’Hagan case, the SEC enacted Rule 10b5-1 in October 2000, which was essentially an attempt by the SEC to implement the misappropriation theory into to its rules (Lau, 2011, p. 9).

Part III: Should Ontario Adapt US Regulation Policies? In order to determine whether or not Ontario should adapt the insider trading regulations of the USA, this paper will use the same evaluation criteria that was used by Lau in his 2011 paper: “any new regulation should be fair and unambiguous, but at the same time, it should be flexible enough to reasonably reduce the burden of proof currently faced by the OSC in proving an insider trading violation” (Lau, p. 15). This criteria is very fitting for such an evaluation, and as such, it was decided to be used in this paper. It has already been established in this paper that the insider trading policies in the USA are largely focused on fiduciary duty and the misappropriation theory. Both of these approaches allow the SEC and the courts to be more flexible in adapting their arguments to each specific insider trading situation. Although the flexibility does act as a strength for US regulatory bodies, it is also one of the major weaknesses, as pointed out by Prakash in his 1999 paper titled “Our Dysfunctional Insider Trading Regime.” Prakash argues that the “SEC’s insider trading regulatory strategy is both underinclusive and overinclusive” (Prakash, 1999, p. 1498). Because liability of insider trading depends on the trader’s breach or derivative breach of fiduciary duty to the shareholders (according to Chiarella) or to the information source (according to O’Hagan), there would be no liability on an inside trader that owes no such fiduciary duty or a trader that explicitly makes known his intention to trade on material non-public information (Lau, 2011, p. 15). This shows how the US regulations could potentially be underinclusive in certain situations.

A prime example of this can be found in SEC v. Switzer (1984), in which a bystander, Barry Switzer, inadvertently overheard the conversation of a key corporate executive. From this conversation, he unintentionally received material non-public information relating to an upcoming merger transaction. Switzer knew the source of the information to be reliable because of his relationship with the source. As such, Switzer decided to trade on this information, and he also informed some of his friends and colleagues, who also traded on the same information, making substantial profits in the process. However, Switzer and his partners were all found innocent of insider trading based on the fact that Switzer did not owe any fiduciary duty to the company in consideration. In addition, the source of the information had not intentionally revealed the insider information to Switzer; at the time that the information was revealed, the company executive was unaware that Switzer was anywhere near him, and as such, there was no unlawful tipping involved. Because the tippee’s liability under Section 10(b) of the Securities Exchange Act is derivative in nature, the finding that the insider-tipper did not breach his fiduciary duty signified that Switzer as the tippee traded lawfully, and hence, was entitled to keep his profits (Switzer v. SEC, 1984). In two other cases, namely Jensen v. Kimble (1993) and McCormick v. Fund American Companies Inc. (1994), the insider traders were able to avoid being found liable. This was because before they traded, they openly told the other parties of their failure to disclose material non-public information. Since they made known their failure to disclose the inside information, they were not charged with insider trading under Section 10(b) of the Securities Exchange Act, which is based on the finding of deceptive or manipulative devices. In effect, the traders had not deceived anyone since they had clearly disclosed their intentions.

Contrary to the above, Prakash also noted that US regulation policies can be overinclusive, or “overly expansive in their reach” (Lau, 2011, p. 15). This is possible because a strict interpretation of “deception device” in Section 10(b), along with the argument in O’Hagan that the securities trade “consummates” deception, reveal that only a simple case of deception is needed to establish insider trading liability under the fiduciary duty approach (Lau, p. 15). Accordingly, even if a trader has no knowledge of material non-public information, but the investor has supported his/her trade with some act of deception (regardless of how minor it may be), that trader could potentially be found liable for insider trading. The charge would be based purely on the fact that he/she committed a deceptive activity that breached his/her fiduciary duty to shareholders or company. Prakash provides two possible situations in his paper in which the aforementioned may occur, and he gives an example for each situation: 1) An individual can trade on misappropriated non-material, non-public information and still be found liable if her trade consummates a deception. Example: An accounting firm has a rule that prohibits its staff from trading on any information gleaned from its clients. If a staff secretly trades after becoming aware of some non-material, non-public information, he commits an act of deception against his firm (the information source) and can be charged with insider trading under the misappropriation theory – even if the information was non-material and non-public. 2) One may trade on purely public information and still be liable. Example: A broker violates his firm‘s policy by secretly executing personal trades based on public information using a brokerage service other than that provided by his firm. Since this constitutes an act of deception in connection with a securities transaction, the broker is liable for insider trading under the ruling in O’Hagan. Note that, however, the

broker has not misappropriated any information – he was trading based on public information (Prakash, 1999, p. 1537-1538). Based on the above examples, it is easy to see how stringent interpretations of some regulations could potentially result in seemingly innocent acts being treated as illegal insider trading activities. Another weakness of US’s regulations regarding insider trading can be seen in the application of the misappropriation theory, which can become quite complicated in cases involving multiple layers of tippee trading, and does not have enough common law guidance as of yet (Prakash, 1999, p. 1544). Questions have also arisen as to how the misappropriation theory should apply when misappropriators tip instead of actually trading on the misappropriated information. Furthermore, should the “personal benefit” test that was founded in Dirks be applied to tipping misappropriators? These questions have yet to be answered comprehensively, with courts in the USA being split on them until this point (Lau, 2011, p. 16). In summary, as a result of the weaknesses in USA’s regulation of insider trading, as well as the state of constant change and uncertainty, which have both been described in this section, it is recommended that Ontario not adopt any of the policies used in the USA.

Part IV: Improving Enforcement in Ontario Although Ontario is most likely superior to the USA in terms of its regulation of insider trading, it is comparatively quite poor when it comes to enforcing its insider trading laws. Because of the differences in insider trading laws between Ontario and the USA, some have argued that Canada’s weakness with respect to effectively preventing insider trading is a result of flaws in its statutory regulations dealing with insider trading. However, most legal experts say

that “the Canada-US gap can’t be explained by differences in securities rules” (Mittelstaedt, 2012). It is not the law and regulation itself that is weak in Canada, but rather the enforcement of insider trading laws. As was mentioned earlier in this paper, in Canada, insiders captured 35.18% of takeoverrelated profits, whereas in the USA, the portion was a meagre 0.86%. A major reason for the abnormally high insider profits in Canada is the country’s relatively ineffective enforcement of its insider trading regulations. The USA is much more aggressive in its enforcement methods, whereas Canada, which is a “kinder, gentler place” (Mittelstaedt, 2012) tends to be more lax. The primary objective of enforcement in the USA is to send a message to investors about the severe consequences of insider trading. In the USA, prosecutors “not only want to catch individual criminals, but signal to marker players in general that illegality isn’t tolerated” (Mittelstaedt, 2012). Throughout his paper, Bris (2003) also maintained that tougher enforcement is the best way to prevent insider trading, and the substantial profits that come with it in Canada (p. 25). In a study done by Bhattacharya (2006), the enforcement tactics of Canada and the USA were compared. Bhattacharya found that in the USA, the SEC has been able to initiate 391 insider trading cases from 1995 to 2005, with an average prosecution of 35.5 insider trading cases per year. In stark contrast, the OSC launched only 11 insider trading cases during the same period, with an average prosecution of only 1.2 insider trading cases per year (Bhattacharya, p. 155). Furthermore, the total fines imposed for insider trading cases in the 1997-2000 period in Ontario was US$70,000. In the USA, for the 1995-2000 period, the total amount of fines was substantially larger at US$411,890,000 (Bhattacharya, p. 155-156). Scaled by the number of listed firms, the study found that the SEC prosecuted 20 times more insider trading violations

than the OSC, while exacting 17 times more in fines (Bhattacharya, p. 156). Even though the USA is home to the largest and most complex capital markets in the world, the quantity of insider trading actions in Ontario (which is home to the world’s seventh largest stock exchange) are disproportionately small (Lau, 2011, p. 18). This observation is significant, especially considering the fact that the USA faces many issues in regulating its insider trading, the SEC has still been much stronger in enforcing the regulations than the OSC (Lau, p. 18). The situation in Ontario is made more worrying because the province has, as of late, experienced a flood of merger and acquisition (M&A) transactions involving a variety of firms. These M&A deals result in amplifications of stock price volatility, and therefore, it makes it particularly attractive for insiders to trade ahead of the market using material, non-public information (Lau, p. 18). It is clear from these various observations that Ontario must improve its enforcement policies if it hopes to better regulate insider trading. By examining the enforcement tactics of the SEC and adapting them in Ontario, the OSC can dramatically enhance its enforcement of insider trading regulation, effectively reducing the amount of insider trading that occurs in Ontario. One of the major strengths of the SEC is its massive staff of 1100 in its enforcement division, which allows is it to employ significant resources in the policing of insider trading. As a result, the SEC has developed a wide arsenal of weapons for the detection of suspicious trading and then identification of the corresponding traders (Walter, 2009). Another strong point of the SEC is that it cooperates actively with the exchanges, various other regulatory agencies, the FBI, and the Department of Justice in the detection and prosecution of illegal insider trading. Furthermore, the SEC uses complex computer analysis systems and databases that are dedicated to link up traders with their history of personal networks and connections, which makes is significantly easier to identify those that

traded on insider information, as well as others that were involved in having contact with the source of the information. (Lau, 2011, p. 19). The SEC has also taken significant steps in encouraging whistleblowing. For instance, from 1988 to 2010, the SEC was given authority to reward bounties to anyone who provided information that led to the imposition of a civil penalty on a person for insider trading. During this time, the whistleblower was eligible to receive up to 10% of the penalty collected (Rescission of Rules Pertaining to the Payment of Bounties for Information Leading to the Recovery of Civil Penalties for Insider Trading, 2010). In 2010, the SEC also announced a new cooperation policy, where the SEC, in exchange for information that provides “material assistance” to its law enforcement efforts, will consider lesser sanctions in appropriate cases. As such, the SEC Enforcement Division has been receiving countless complaints and tips from market participants each year (Lau, p. 19). Relative to the SEC, the OSC’s current enforcement administration has been relatively ineffective in upholding Ontario’s insider trading regulations. As of late 2010, the OSC’s insider trading team was comprised of a mere 14 individuals (McFarland, 2012). Furthermore, the OSC’s status as a provincial regulator (unlike the SEC, which is a national regulator) plays a large role in limiting the actions the OSC can take across provincial barriers. There have also been several cases cited where the police have been disinclined in lending a hand to the OSC with respect to enforcing securities laws; their main reason for not being able to cooperate is other priorities (McFarland, 2012). In addition, unlike the SEC, the OSC has been unable to dispatch cases to the courts or administrative tribunals in a timely manner. A former OSC Chairman stated that “Canadian cases are often allowed to drag on to the detriment of all parties” (Mittelstaedt, 2012). Even though the OSC has had a “credit for cooperation” policy similar to that of the SEC in place since 2002 (OSC Staff Notice 15-702 Credit for Cooperation, 2002), it

does not offer any monetary rewards for whistleblowers, which makes it less likely that whistleblowers will alert the authorities of insider trading if they witness it occurring. In order to improve the enforcement situation in Ontario, the OSC must employ additional resources into expanding the OSC’s insider trading unit personnel to include a larger number of individuals, as well as more qualified individuals. The OSC must also pour additional resources into maintaining and enhancing its infrastructure on detecting insider trading to ensure that more insiders are caught with more advanced techniques and technology. Lastly, the OSC should offer potential monetary rewards for whistleblowers so that they are more inclined to report illegal activity to the authorities. In his 2011 paper, Lau also suggests that OSC pay special attention to hedge fund insider trading (p. 20) in the proving. The USA has been known for cracking down on hedge funds. This is exemplified in the recent civil and criminal insider trading charges that the SEC and US federal prosecutors have laid against SAC Capital Advisors LP, one of the largest hedge funds in the world. The firm has been accused of “engaging in illegal insider trading on a scale without known precedent,” and if the firm is found guilty, it could very well be put out of business (Slater, 2013). Ontario should attempt to have similar vigorous regulation and enforcements, particularly for hedge funds.

Conclusion The reduction of insider trading plays a vital role in enabling capital markets to be healthy and fair for all investors that decide to participate in them. Ontario’s regulations and laws with respect to insider trading have historically been shown to be superior to those of the USA. As such, it has been recommended that Ontario not adopt any of the USA’s regulation policies. However, Canada’s track record with respect to enforcement of insider trading regulation has

been very weak compared to that of the USA. Fortunately, the OSC can take several steps in order to strengthen its enforcement of insider trading regulations. By allotting more personnel and resources to enforcement, and by cracking down on large hedge funds in the province, the OSC has a significant opportunity to establish itself as a strong and effective regulator of illegal insider trading in Ontario’s securities markets.

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