Skip Navigation
Securities Law

NIN 96/05 - Clarification of Transitional Market-Making Relief for Control Persons [NIN - Rescinded]

Published Date: 1996-01-26
Effective Date: 1996-01-23
In its Weekly Summary of December 15, 1995, the Commission issued a Notice (NIN#95/54) concerning certain resale relief to be provided to control persons for market-making purposes. A Blanket Order (BOR#95/7) was published concurrently setting out the specific relief.

The Notice discussed the rationale for the transitional market-making relief for control persons and pointed out provisions in the Securities Act that prohibit trading on inside information and that govern take over bids. The BOR provided exemptions from the prospectus requirements of the Act for certain trades by a control person through a publicly disclosed, discretionary market-making account established in accordance with Vancouver Stock Exchange rules. The BOR also provided relief from the insider reporting requirements and the accelerated insider reporting requirements for control persons respecting trading in the market-making account, provided the registrant operating the market-making account reports trades on a weekly basis. The BOR will expire on June 30, 1996.

It is apparent from comments and questions received since the publication of the Notice and the BOR, that there is some confusion among market participants as to the rationale for a discretionary account and as to how such an account should be operated.

The Notice discussed the provisions of the Act and Rules dealing with trading on inside information. As stated in the Notice,

"Sections 68 and 119 of the Act prohibit trading by those with knowledge of undisclosed material facts or changes and provide civil liability for such trading. These provisions apply to all trading by persons in a special relationship with an issuer, including most control persons. The activity in a control persons market-making account is therefore subject to those provisions. BOR#95/7 requires the market-making account to be discretionary in order that the control person may be able to invoke the defences to violations of sections 68 and 119 of the Act found in section 161 of the Rules. However, the availability of these defences in any particular case will depend on the facts of each particular situation and will be reviewed on a case-by-case basis.

A discretionary account would typically authorize a registrant to execute trades in a client account, but would not preclude the client from entering orders as well. However, in the case of a market-making account, having the control person (an insider of the issuer) enter orders could create serious concerns about potential insider trading violations. A control person who acquired knowledge of an undisclosed material fact or material change would be obligated to stop entering orders. This might tip the registrant and the market about the existence of undisclosed information and lead to speculation as to its nature.

To avoid these problems, the Commission intended that registrants and control persons would establish these market-making accounts to separate the control person from all of the day-to-day trading decisions in the account. The registrant with discretionary authority over the market-making account would have exclusive responsibility for the trading instructions respecting transactions in that account. The control person would not communicate with the registrant about the issuers affairs. In this way, a "Chinese wall" would be created between the control person with potential access to undisclosed material information and the registrant trading in the market-making account.

The control person would be entitled to receive periodic information on the status of the account and may impose dollar or volume limits on the account. However, the registrant responsible for the market-making account would make all trading decisions on that account without consultation with the control person.

If the control person wishes to engage in trading outside of the market-making account, that trading would have to be done under other statutory exemptions, most of which require advance notice to the market by the filing of a Form 23 and accelerated reporting within 3 days of the distribution.

DATED at Vancouver, British Columbia, on January 23, 1996.

Douglas M. Hyndman