NIN 95/05 - Principles of Fair Trading [NIN - Rescinded]

This Notice provides general guidance about activities that the British Columbia Securities Commission considers to be contrary to the principles of fair trading.

Public participation in any securities marketplace depends, to a great degree, on the confidence of investors and potential investors in the fairness and integrity of the system of securities trading. Some of the most fundamental principles of fair trading are set out in the following:

"When investors and potential investors see activity they are entitled to assume that it is real activity. They are entitled to assume that the prices they pay and receive are determined by the unimpeded interaction of real supply and real demand so that those prices are the collective marketplace judgments that they purport to be."¹

¹ re: Edward J. Mawod & Co., 46 S.E.C. 865, 871-872 (1977), aff'd, 591 F.2d 588 (10th Cir. 1979)

Clearly, any attempt to interfere with the normal forces of supply and demand in the marketplace, or any attempt to create a misleading appearance with respect to the price of a security or its trading volume, is contrary to these fundamental principles and undermines public confidence in the market.

To ensure that trading practices are fair and equitable, stock exchanges in every major jurisdiction, including British Columbia, have developed comprehensive rules and policies to prohibit their members from engaging in practices or schemes that might create misleading appearances of trading activity or artificial prices for securities.

The securities legislation in British Columbia contains a number of provisions that require that the principles of fair trading be observed by all market participants - registrants, insiders, issuers and public investors. Section 41.1(a) of the Securities Act, for example, prohibits transactions or schemes that create or result in a misleading appearance of trading activity in, or an artificial price for, any security listed on a stock exchange. In addition, the Criminal Code of Canada contains provisions relating to fraudulent manipulation of stock exchange transactions and fraud affecting the public markets.

Those who are active in the securities markets, particularly insiders, control persons, promoters and market makers, and those who are in the business of trading or advising others with respect to trading, must be aware of the legislation and the exchange rules, by-laws and policies governing trading practices. Those who engage in abusive, manipulative or deceptive trading practices expose themselves to serious administrative and criminal sanctions.

Abusive Trading Practices

Without limiting the generality of section 41.1 of the Act, the following activities could reasonably be expected to create or result in a misleading appearance of trading activity in, or an artificial price for, securities listed on a stock exchange:

(a) executing any transaction in a security, through the facilities of a stock exchange, where the transaction does not involve a change in beneficial ownership;

(b) effecting, alone or with others, a transaction or series of transactions in a security for the purpose of inducing others to purchase or sell the same, or a related security;

(c) effecting, alone or with others, a transaction or series of transactions that has the effect of artificially raising, lowering or maintaining the price of a security;

(d) entering one or more orders for the purchase or sale of a security that have the effect of artificially raising, lowering or maintaining the bid or offering prices of the security;

(e) entering one or more orders that could reasonably be expected to create an artificial appearance of investor participation in the market;

(f) executing, through the facilities of an exchange, a prearranged transaction in a security that has the effect of creating a misleading appearance of active public trading or that has the effect of improperly excluding other market participants from the transaction;

(g) purchasing or making offers to purchase a security at successively higher prices, or selling or making offers to sell a security at successively lower prices, if the transactions or offers create a misleading appearance of trading or an artificial market price for the security;

(h) effecting, alone or with others, one or a series of transactions through the facilities of an exchange where the purpose of the transaction is to defer payment for the security traded;

(i) entering an order to purchase a security without the ability and the bona fide intention to make the payments necessary to properly settle the transaction;

(j) entering an order to sell a security, except for a security sold short in accordance with the provisions of section 41 of the Act, without the ability and the bona fide intention to deliver the security necessary to properly settle the transaction; and

(k) engaging, alone or with others, in any transaction, practice or scheme that unduly interferes with the normal forces of demand for or supply of a security or that artificially restricts or reduces the public float of a security in a way that could reasonably be expected to result in an artificial price for the security.

Over the past few years, Commission staff have initiated a substantial number of enforcement proceedings based on manipulative and deceptive trading practices. Too often, the respondents in these cases have sought to defend their trading practices as "market making", despite the fact that their activities included a number of the abusive practices referred to above. Those who intend to engage in market making activities are expected to be fully aware of the principles of fair trading and should seriously consider conducting their trading through a single brokerage account and with the ongoing advice and guidance of a registrant.

The Role of Registrants

Registrants have a responsibility to stock exchanges, to their clients and to the market place generally to ensure that their activities are carried out responsibly and in compliance with the letter and spirit of the legislation and exchange rules and by-laws. The following are examples of some of the activities that are expressly prohibited by exchanges and do not comply with the principles of fair trading:

(a) making a fictitious transaction;

(b) giving or accepting an order which a person knows or ought to know does not involve a change of ownership of the securities in question;

(c) purchasing, selling, or offering to purchase or sell securities where the person knows or ought to know that the effect of such a purchase or sale would be to unduly disturb the normal position of the market or to create an abnormal market condition in which market prices do not fairly reflect current market values, or being a party to any plan or scheme to do so;

(d) confirming a transaction when no trade has been executed;

(e) indiscriminate or improper solicitation of orders either by telephone or otherwise;

(f) high pressure or other trading tactics of a character considered undesirable;

(g) using or participating in the use of any manipulative or deceptive method of trading where the person knows or ought to know the nature of the method; and

(h) violation of any statute applicable to trading in securities.

Even if a registrant is not directly involved in an unfair or inequitable activity, the registrant is expected to be inquisitive and pro-active in dealing with such activities that are carried on by others and of which the registrant is or should be aware. Registrants should refuse to accept instructions from clients who, in the registrants' judgment, are engaged in illegal, unfair or abusive trading activities. All such instructions or orders should be reported immediately to the registrant's senior management. Senior management are expected to bring matters concerning serious misconduct in the markets to the attention of the stock exchange or the Compliance and Enforcement Division of the Commission.

DATED at Vancouver, British Columbia, on January 4, 1995.

Dean E. Holley
Superintendent of Brokers