CSA exemption for Insider Trading and Reporting of Trading undermines insider trading rules and confidence in Canadian markets.
"Fool me once, shame on you. Fool me twice, shame on me."
The President and CEO of Bombardier, sold 52% of the shares he put into a 24-month automatic share disposition plan (ASDP) during the first 2 months of trading. If the trades had been evenly spaced over time, closer to 8% of the shares should have sold during that same period. Considering that he sold his shares at an average price of $4.55, when Bombardier's share price traded as low as $1.67, after negative material non-public information was publicly disclosed, there is an appearance of prejudice to the balance of the shareholders as a result of the insider trading. Further it is not apparent what was "automatic" about the Bombardier automatic share disposition plan. We believe that the case of Bombardier has shed a harsh light on the ASDP exemptions regime adopted by the members of the Canadian Securities Administrators (CSA).
Bombardier "voluntarily" suspended the ASDP,
which started trading on September 17, 2018, less than two months after it started. The insider trading was not reported until March 2019. Why did the board not require immediate insider reporting of the trading? Why instead choose to delay insider reporting until March 2019 and even then, the reporting disclosed minimal information?
Autorité des marchés financiers ("AMF") has stated that it conducted a review of these transactions and Bombardier Inc. voluntarily suspended all sales of securities under the ASDP at the beginning of the review. The AMF
also announced
that no "offence or failure under securities legislation by participating senior executives or Bombardier Inc. during the implementation of the ASDP" was identified. Why did the AMF not commence a formal investigation?
Why did the AMF not require immediate and full insider trading reporting?
CSA Exemption Orders for ASDPs
In C
anada, insider trading is illegal when insiders (or other persons or corporations having privileged access to information about a reporting issuer) acquire or dispose of a security knowing material non-public information about the reporting issuer ("insider information"). Illegal insider trading does not require the insiders to use insider information, or to exercise discretion at the time of trading. Trading while in possession of insider information is sufficient to trigger liability.
To ensure transparency and foster investor confidence in the fairness and integrity of the securities markets and also to enable securities regulators to detect and deter illegal insider trading, all insider trades must be reported within 5 calendar days.
Several exemptive relief orders, granted by various provincial securities regulators, have exempted reporting insiders from filing insider trading reports for trades made pursuant to so-called automatic share disposition plans. These exemptive relief orders are granted on a case-by-case basis, taking into account the specific risks of each request and assuming good faith of the reporting insiders.
There have been instances of fraud in connection with automatic trading plans. Reporting issuers and insiders have created so-called automatic trading plans as a scheme to trade based on insider information without being subject to the prescriptions of the insider trading laws. For instance, by implementing plans while in possession of insider information, or by terminating and restructuring plans when aware of insider information, insiders are able to lock-in trade profits or avoid losses.
Recommendations
FAIR Canada recommends that the Bombardier exemptive relief order should be revoked, the insiders should be required to report the details of the trades made pursuant to the ASDP that would ordinarily be reported in insider trading reports, and a formal investigation should be conducted by regulators into the trades by Bombardier insiders.
FAIR Canada also recommends that securities regulators revoke all existing ASDP exemptions and require new applications to be made if the parties wish to continue with an exemption. Any new exemptions should require the application of consistent objective criteria and controls on any automatic trading plan, such as (i) timely reporting of insider trades, (ii) using a fixed automatic trading formula or algorithm and (iii) imposing waiting and cooling off periods applicable to the implementation, amendment, suspension or termination of such plans.
Correspondence with CSA
