Summary of Comments Received on Proposed Guidance on Insider Order Marking

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1 Rules Notice Request for s UMIR Please distribute internally to: Legal and Compliance Trading Contact: Kevin McCoy Acting Vice-President, Market Regulation Policy Telephone: Fax: kmccoy@iiroc.ca June 24, 2015 Summary of s Received on Proposed Guidance on Insider Order Marking On September 20, 2011, IIROC issued a notice requesting comments on proposed guidance respecting insider order marking ( Proposed Guidance ). 1 IIROC received comments on the Proposed Guidance from: Periscope Capital Inc. ( Periscope ) David Surat, Borden Ladner Gervais LLP ( Surat ) A copy of the comment letters received in response to the Proposed Guidance is publicly available on the IIROC website at UMIR Request for s. Appendix A presents a summary of the comments received together with IIROC s responses to those comments and revisions to the Proposed Guidance made in response to these comments. 1 IIROC Notice Rules Notice Request for s UMIR Proposed Guidance on Insider Order Marking (September 20, 2011).

2 IIROC engaged in additional consultation concerning insider order marking with industry representatives of the Market Rules Advisory Committee and the Institutional sub-committee of the Compliance and Legal Section of IIROC as well as with the Canadian Securities Administrators (CSA). On June 24, 2015, IIROC issued the final guidance on insider order marking 2 ( Guidance ). The Guidance varies from the Proposed Guidance in that it: does not repeal the insider order marking guidance issued in 2010; provides Participants with flexibility to comply with the insider order marking obligation using either the reporting insider standard pursuant to insider order marking guidance issued in 2010, or the statutory insider standard as indicated in the Guidance, provided a consistent method is used; and provides additional clarity on insider order marking requirements for certain orders entered during a normal course issuer bid. 2 IIROC Notice Rules Notice Guidance Note UMIR Alternative Guidance on Insider Order Marking (June 24, 2015). IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 2

3 Appendix A - s Received in Response to Rules Notice Request for s UMIR Proposed Guidance on Insider Order Marking Text of the Guidance (Changes from the Proposed Executive Summary Under UMIR 6.2, an order entered on a marketplace for the account of a person who is an insider of the issuer of the security must be marked as insider. A Participant may comply with the insider marking obligation in one of two ways, by either: following IIROC s insider marking guidance issued in 2010 (the 2010 Guidance ) 3 under which the need to mark an order as insider is tied to the requirements of National Instrument Insider Reporting Requirements and Exemptions ( NI ), such that it applies to orders of reporting insiders 4 not otherwise exempted from reporting obligations under securities legislation in respect of the particular transaction; or marking as insider all orders entered on a marketplace for the account of a person who is a statutory insider 5 of the issuer of the security, irrespective of whether any resulting trade would be subject to insider reporting requirements under applicable securities legislation, as set out in this guidance note (the Alternative Guidance ); provided that the Participant is consistent in its approach to the marking of orders. A Participant whose general practice is to mark based on the statutory insider definition may, however, take direction from institutional clients whose transactions may be exempt from insider reporting obligations under Periscope and Surat request a carve-out or exemption be provided under the proposed insider order marking guidance for eligible institutional investors in relation to orders for securities in respect of which such investors qualify for and comply with the Alternative Monthly Reporting System (AMRS) set out in Part 4 of NI , and are exempt from the insider reporting obligations under Part 9 of NI Periscope and Surat - Eligible institutional investors have generally established a compliance system designed to comply with monthly reporting requirements on an aggregate basis. Requiring real-time and transaction specific order marking would require additional compliance procedures at significant costs although the benefits of such an obligation with respect to monitoring for compliance with UMIR requirements or detection of possible violations of securities legislation related to insider trading, would be minimal given the passive and institutional nature of such investors. The benefits which the Canadian Securities Administrators (CSA) sought to achieve through the adoption of AMRS would be eliminated though such onerous order-marking obligations. The same policy considerations should apply to the order marking requirements. IIROC Response to ator and Additional IIROC ary IIROC agrees that the insider order marking policy should facilitate compliance for eligible institutional investors that have a passive intent with respect to their ownership or control of securities of reporting issuers and are exempt from insider reporting obligations under NI As a result, IIROC is not repealing the insider order marking guidance issued in 2010 (2010 Insider Order Marking Guidance) that only requires insider order marking for reporting insiders that are not otherwise exempted from insider reporting obligations under applicable securities legislation in respect of the particular transaction. The 2010 Insider Order Marking Guidance includes reference to eligible institutional investors that are exempt from insider reporting requirements under securities legislation. IIROC continues to permit compliance with order marking obligations by Participants in accordance with the 2010 Insider Order Marking Guidance if applied in a consistent manner. The amendments to the Proposed Guidance will confirm IIROC s intention to allow adoption of either the reporting insider or statutory insider method to comply with insider order marking. 3 See IIROC Notice Rules Notice Guidance Note UMIR Guidance on Insider and Significant Shareholder Markers (April 28, 2010). This guidance repealed and replaced earlier guidance set out in Market Integrity Notice Guidance Insider and Significant Shareholder Markers (June 16, 2006) and Market Integrity Notice Guidance Specific Questions Related to Insider Marking Requirements (August 10, 2007). 4 Reporting Insider is defined in NI A statutory insider is a person who is an insider of an issuer for the purpose of applicable securities legislation. IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 3

4 securities legislation and adopt the approach to insider marking under the 2010 Guidance for such institutional clients. This Rules Notice provides guidance on compliance with insider order marking under the method of designating as insider all orders entered on a marketplace for the account of a person who is a statutory insider of the issuer of the security which is the subject of the order. Participants that mark orders based on the reporting insider definition should continue to reference the 2010 Guidance. 1. Background 1.1 Purpose of Insider Order Marking UMIR 6.2 requires that an order entered on a marketplace for the account of a person who is an insider of the issuer of the security which is the subject of the order be marked as insider 6 or significant shareholder 7. These order designations, IA for insiders and SS for significant shareholders, are referred to as the Regulation ID Order Markers. The Regulation ID Order Markers were implemented to enable IIROC to monitor the trading activity on Canadian marketplaces of insiders and significant shareholders in respect of UMIR requirements and for the purpose of assisting the securities regulatory authorities by providing initial detection of possible violations of securities legislation principally related to insider trading. 1.2 Evolution of Insider Order Marking Guidance Since the introduction of the Regulation ID Order Markers, the guidance issued to assist Participants in complying with the insider order marking obligation has evolved. The Regulation ID Order Marker was initially interpreted to apply to all insider orders. Subsequent guidance 8 narrowed the application of the insider marker to orders of insiders not otherwise exempted from reporting obligations under securities legislation in respect of IIROC Response to ator and Additional IIROC ary Rule 1.1 of UMIR defines the term insider as a person who is an insider of an issuer for the purpose of applicable securities legislation. For further clarification, reference must be made to the securities legislation of every jurisdiction in which the issuer is a reporting issuer or equivalent. Rule 1.1 of UMIR defines the term significant shareholder as a person who holds separately, or in combination with any other persons, more than 20 per cent of the outstanding voting securities of an issuer. As part of a separate initiative on order marking requirements, IIROC expects to propose an amendment to UMIR to change the term significant shareholder to designated shareholder. The purpose of this proposed change is to avoid confusion given the adoption by the Canadian Securities Administrators ( CSA ) of the term significant shareholder to refer to the holder of 10% or more of the voting securities of an issuer in relation to the insider reporting regime in NI See Market Integrity Notice and Market Integrity Notice , op.cit., which were repealed by IIROC Notice IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 4

5 the particular transaction. The 2010 Guidance tied the use of the IA order marker to the requirements of NI , applying only to orders of reporting insiders not otherwise exempted from reporting obligations under securities legislation in respect of the particular transaction 9. Certain Participants did not follow the 2010 Guidance; instead marking all orders by statutory insiders irrespective of whether any resulting trade would be subject to insider reporting requirements under applicable securities legislation. IIROC consulted with the CSA which confirmed that insider order marking may be broader in scope than the insider reporting requirements, to enable IIROC to assist the securities regulatory authorities with initial detection of possible violations of securities legislation principally related to insider trading 10. IIROC further proposed guidance in , to permit the marking of orders by statutory insiders irrespective of whether any resulting trade would be subject to insider reporting requirements under applicable securities legislation, and permitted a Participant to follow either the proposed guidance (i.e. all statutory insiders ) or the 2010 Guidance (i.e. only reporting insiders ), provided the Participant was consistent in its approach to the marking of orders. The coexistence of these alternative approaches to insider order marking has since worked well without requiring Participants to implement systems changes or incur additional costs. As a result, IIROC has implemented the proposed guidance as the Alternative Guidance. This Alternative Guidance serves to confirm the ability to mark orders of statutory insiders irrespective of whether any resulting trade would be subject to insider reporting requirements under applicable securities legislation. 1.3 Compliance with Insider Order Marking Requirement IIROC Response to ator and Additional IIROC ary 9 The 2010 Insider Order Marking Guidance was also intended to align with the production of publicly disseminated daily reports of insider trades for the accounts of insiders of each listed issuer on the TSX and TSXV, consolidated on a per-security basis, (as ordered by the Ontario, Alberta and British Columbia Securities Commissions in September, 2006). These reports were designed to provide public disclosure in a timely manner of the views of an issuer s core group of insiders (having insider reporting obligations), with information publicly available on the System for Electronic Disclosure by Insiders ( SEDI ) IIROC also acknowledged that any potential over-marking of trades with the IA designation will not compromise IIROC s ability to effectively monitor insider trading and is consistent with the broad supervision obligations and liability provisions imposed with respect to trading by statutory insiders and not just reporting insiders. See IIROC Notice Rules Notice Request for s UMIR Proposed Guidance on Insider Order Marking (September 20, 2011). IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 5

6 IIROC Response to ator and Additional IIROC ary A Participant may comply with the insider marking obligation in one of two ways, by following either: the 2010 Guidance under which the need to mark an order as insider is tied to the requirements of NI , such that it applies to orders of reporting insiders not otherwise exempted from reporting obligations under securities legislation in respect of the particular transaction; or this Alternative Guidance under which all orders entered on a marketplace for the account of a person who is a statutory insider of the issuer of the security which is the subject of the order, are marked insider, irrespective of whether any resulting trade would be subject to insider reporting requirements or exemptions under applicable securities legislation; provided that the Participant is consistent in its approach to the marking of orders. A Participant that follows the approach under this Alternative Guidance consistently may nonetheless take direction from its institutional clients whose transactions may be exempt from insider reporting obligations under securities legislation, to adopt the approach under the 2010 Guidance. This Rules Notice provides guidance on compliance with the insider order marking requirement using the method of designating as insider all orders entered on a marketplace for the account of a person who is a statutory insider of the issuer of the security which is the subject of the order. Participants that mark orders based on the reporting insider definition should continue to reference the 2010 Guidance. Questions and Answers The following is a list of the most frequently asked questions regarding the UMIR obligations relating to the use of Regulation ID Order Markers to designate as insider all orders entered on a marketplace for the account of a person who is a statutory insider of the security which is the subject of the order, and the response of IIROC to each question: 1. Must every order entered on a marketplace for an insider of the particular security contain a Regulation ID Order Marker? Yes. All insider orders are required to be marked with the Regulation ID IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 6

7 Order Marker notwithstanding the availability of any exemption from insider reporting under securities regulations in regard to a particular transaction 12 For the purposes of the Regulation ID Order Marker, a person will be an insider of an issuer if the securities legislation of the jurisdiction in which the person resides or the securities legislation governing the marketplace on which the order is entered considers such person to be an insider of an issuer. 2. May a Participant rely on know your client information when establishing whether an order must contain a Regulation ID Order Marker? Yes. In completing the Regulation ID Order Marker field, a Participant may rely on the know your client information which has been collected from the account holder, provided such information is current in accordance with IIROC s rules relating to the periodic review and update of client information. A Participant will not be expected to inquire, prior to accepting or executing an order, whether the client owns or has direction or control over more than 10 per cent or 20 per cent of the voting rights in an issuer s securities. However, if the Participant has actual knowledge that a client, including an institutional client, does exceed these levels of ownership or control of an issuer (for example, through the monitoring of news releases required under early warning requirements), the Participant will be under an obligation to ensure the proper marking of any order by that client in the securities of that issuer. 3. Does it matter how an order is marked if the client fits into more than one of the categories requiring a Regulation ID Order Marker? Yes. For the purposes of the Regulation ID Order Marker, a person who is an insider will be a significant shareholder of an issuer if the person beneficially owns, directly or indirectly, individually or in combination with other persons, more than 20% of the voting securities of the issuer. While a person who is a significant shareholder will also be an insider, the most restrictive accurate applicable Regulation ID Order Marker should be employed, which would be the significant shareholder or SS designation. IIROC Response to ator and Additional IIROC ary 12 National Instrument Insider Reporting Requirements and Exemptions (NI ) governs the substantive legal insider reporting requirements and exemptions which clients are responsible to comply with. A number of other CSA instruments also contain exemptions from the insider reporting requirements including: National Instrument Continuous Disclosure Obligations (NI ); National Instrument The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI ); National Instrument The Multijurisdictional Disclosure System (NI ); and National Instrument Continuous Disclosure and Other Exemptions Relating to Foreign Issuers (NI ). IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 7

8 4. Must an order contain a Regulation ID Order Marker if it is for the account of a person who is exempt under the applicable securities regulation from aggregating its holdings for the purposes of early warning requirements or control block distributions? Not necessarily. For example, if a person holds securities in separate business units and is therefore granted relief from aggregating securities owned or controlled for the purposes of determining whether a transaction involving those securities constitutes a control block distribution or gives rise to early warning requirements under the applicable securities legislation, the order may not need to contain a Regulation ID Order Marker if the person is not also an insider or significant shareholder of the issuer of the securities. To establish whether a person is granted relief from the aggregation requirement, reference should be made to Part 5 of NI Should an order contain a Regulation ID Order Marker if it is for the account of a spouse or other relative of an insider? Not necessarily. The order should only contain the appropriate Regulation ID Order Maker if the insider has control or direction over the securities in the account of the spouse or related person. Reference should be made to the Companion Policy to NI for guidance as to the meaning of control or direction over securities. 6. Do purchases under a normal course issuer bid need to be marked insider? Yes. Under the definition of insider in securities legislation, a reporting issuer becomes an insider of itself if it has purchased, redeemed or otherwise acquired a security of its own issue, for so long as it continues to hold that security. In certain jurisdictions, a reporting issuer may also become an insider of itself if it acquires and holds securities of its own issue through an affiliate, because in those jurisdictions a person is deemed to beneficially own securities beneficially owned by affiliates. Accordingly, a reporting issuer for whose account orders are entered onto a marketplace under a normal course issuer bid must be marked with the Regulation ID Order Marker for an insider. 13 IIROC Response to ator and Additional IIROC ary 13 Reference should also be made to TSX Rule 4-403(1)(f) which requires Participating Organizations to mark each order entered on the Exchange to contain a designation acceptable to the Exchange if the order is for the account of an issuer that is purchasing pursuant to a normal course issuer bid. Reference should also be made to TSX Rule and TSXV Policy 5.6 for applicable procedures and policies respecting normal course issuer bids, including circumstances when a trustee or other purchasing agent ( Plan Trustee ) for a pension, stock purchase, stock option, dividend reinvestment or other plan in which employees or security holders of a listed issuer may participate, is deemed to be making an offer to acquire securities on behalf of the listed issuer where the trustee is deemed to IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 8

9 7. May an order which must contain a Regulation ID Order Marker be bundled together with orders for persons who are not insiders? Yes. From the perspective of facilitating an accurate audit trail as required by Rule of UMIR, IIROC generally discourages the bundling of such orders. Nonetheless, if a Participant or Access Person enters a bundled order on a marketplace, the entire bundled order must be marked with the most restrictive applicable Regulation ID Order Marker. In the case of orders for an insider or significant shareholder that are bundled with orders that do not require a Regulation ID Order Marker, the entire bundled order is to be marked insider or significant shareholder as appropriate. The obligation to mark a bundled order with the most restrictive applicable designation ensures that orders are not intentionally bundled to avoid marking an order with the applicable Regulation ID Order Marker. A Participant or Access Person that has entered a bundled order that has executed in whole or in part must file with IIROC a Regulatory Marker Correction Form indicating the volume of the trades which were applicable to persons other than insiders and significant shareholders. The Regulatory Marker Correction Form should be filed as soon as practicable after the execution of the trade and, in any case, by the later of 5:00 p.m. and 15 minutes following the close of trading on the marketplace on which the trade was executed. For details on the use of the Regulatory Maker Correction Form in these circumstances, see Specific Guidance on the Reporting of Order Marker Correction Involving Insiders and Significant Shareholders in IIROC Notice Rules Notice Guidance Note UMIR User Guide for the Regulatory Marker Correction Form (July 30, 2008). 3. Impact on Existing Guidance IIROC Response to ator and Additional IIROC ary This Rules Notice repeals and replaces effective June 24, 2015 that portion of Market Integrity Notice Regulation ID Order Markers and Order Inhibition During Regulatory Halts & Suspensions (July 9, 2002), that is under the heading Regulation ID Order Marker. be non-independent and is subject to certain Exchange normal course issuer bid rules. In those circumstances, the orders of the Plan Trustee entered onto a marketplace for the account of the issuer must contain the Regulation ID Order Marker for an insider. See also Aequitas Neo Exchange s normal course issuer bid procedures, which will apply to all purchases of securities listed on Aequitas Neo Exchange by a Plan Trustee in the circumstances described in s. 7.19(1)(b) of the Listing Manual. Orders of a Plan Trustee to which the Aequitas Neo Exchange normal course issuer bid procedures apply that are entered onto a marketplace for the account of the issuer, must contain the Regulation ID Order Marker for an insider. The Canadian Securities Exchange ( CSE ) and does not have rules governing purchases by an issuer of its own securities on the CSE marketplace. IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 9

10 IIROC Notice Rules Notice Request for s UMIR Summary of s on Proposed Guidance on Insider Order Marking 10