OSC decision leaves ‘serious gap’ in insider-trading rules

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A recent Ontario Securities Commission decision in the case of a former Research In Motion Ltd. executive has blown a hole in the regulator's insider-trading rules, according to prominent Toronto securities lawyer Philip Anisman.

In a document submitted to the OSC last week, Mr. Anisman argues that an OSC panel's decision last year in the case of former RIM vice-president Paul Donald is "incoherent" and takes a narrow approach that undermines the deterrent effect of insider-trading rules.

"I think it creates in my view a serious gap," said Mr. Anisman, a member of the 2008 expert panel on securities regulation that recommended a single national regulator.

The criticism comes after the Ontario Securities Commission has made illegal insider trading a major focus, launching a handful of high-profile cases against Bay Street figures.

Mr. Anisman acknowledges that the OSC, unlike a court, is not strictly bound by its previous rulings, although it does tend to follow them in the interests of consistency and fairness. Mr. Anisman also argues that the OSC's enforcement staff are guided by the commission's rulings in choosing which cases to pursue.

The OSC ordered Mr. Donald to pay $150,000 and gave him a five-year trading ban after finding he acted against the public interest when he bought shares in Certicom Corp., a company RIM was considering acquiring, which he heard about at a RIM golf tournament. (He later sold them for a $295,000 profit when RIM ended up buying Certicom.) But the OSC panel declined to find that he had actually violated the more serious insider-trading provisions of the Ontario Securities Act.

The panel concluded that RIM had not actually finalized a decision to acquire Certicom before the golf tournament, meaning that Mr. Donald was not in a "special relationship" with the company when he bought his shares.

Mr. Anisman argues that the commission panel hearing the case was wrong to come to this conclusion based on its interpretation of the words "proposing to make a takeover bid" in the insider-trading provisions in the Securities Act. He said the phrase should be read more broadly to include a "spectrum of activity" including the investigating or researching of a possible acquisition before a formal decision by senior management is made.

In his letter to the OSC, which he says he wrote as a member of the public, he calls on the commission to leave the decision in Mr. Donald's case in place, but to pass a special policy resolution to correct the problem. OSC enforcement staff cannot appeal decisions of the commission's panels themselves.

Joe Groia, a lawyer for Mr. Donald, declined to comment. Jill Homenuk, a spokeswoman for the OSC, said the regulator was reviewing the Mr. Anisman's complaint: "The OSC welcomes input and will review the submission with interest."

Paul Le Vay, a securities lawyer with Stockwoods LLP, said he believed Mr. Anisman has raised a valid issue, but that the OSC's options for addressing it properly are limited.

Instead of a passing a new policy, which would not trump the Securities Act, the OSC could simply continue to enforce insider trading as it has in the past, in effect disregarding the Donald decision, he said. Or it could try to have the Ontario Legislature reword the Ontario Securities Act to clarify how broad the insider-trading provisions are meant to be – a more tedious process.

"If there's a real problem with this decision, the best option to fix it may be the slowest," Mr. Le Vay said.