ASC enters into Settlement Agreement with CEO Following Tipping Violations

On May 16, 2023, the Alberta Securities Commission (ASC) entered into a Settlement Agreement (the Settlement Agreement) with the President and Chief Executive Officer (CEO) of a Toronto Stock Exchange listed oil and gas company (the Company) following an ASC investigation into the CEO's conduct to determine whether he had breached selective disclosure/tipping restrictions under applicable securities laws.

Background

On six occasions over the course of a year and half, the CEO emailed the Company's draft news releases to a registered retail sales broker of a registered investment firm (the Registrant) in advance of the news releases being made public. The Registrant also happened to be responsible for the administration of the Company's Employee Share Ownership Plan. The CEO sent the draft news releases to the Registrant when the markets were closed, and the final versions were distributed to the public before the markets opened for trading. The Company advises that the CEO did this in what he believed was permitted in the course of business, in order to obtain feedback from the Registrant regarding whether the news releases were framed in such a way that they would be properly and fully understood by the public. The ASC noted that "[d]ue to the timing of the emails, it was not possible for the Registrant, or any person with whom the Registrant might share the emails or the contents thereof, to trade in or purchase [the Company's] securities with knowledge of the [material undisclosed information] before the news releases were issued publicly".[1] The ASC and the CEO entered into the Settlement Agreement with agreed-upon sanctions.

What is Tipping?

Tipping, which is "selective disclosure of confidential material information [which] confers unfair informational advantages to particular investors and creates opportunities for insider trading",[2] is prohibited by section 147(4) of the Securities Act (the Act):[3]

No issuer and no person or company in a special relationship with an issuer shall, other than when it is necessary in the course of business, inform another person or company of a material fact or material change with respect to the issuer before the material fact or material change has been generally disclosed.

How the CEO violated section 147(4) of the Act

The circumstances of the violations included the following facts as agreed to in the Settlement Agreement:

• The CEO was in a special relationship with the Company, within the meaning of the Act;
• The CEO emailed the Company's draft news releases, which contained material non-public information, to the Registrant; and
• It was not necessary in the course of business for the CEO to send the draft news releases to the Registrant.  

The ASC and the CEO agreed that the CEO's actions were contrary to section 147(4) of the Act.

Agreed-Upon Sanctions

The ASC considered several mitigating factors in agreeing on an appropriate sanction, including:

• The exemplary cooperation of the CEO;
• The fact that no trading had occurred on the material non-public information disclosed;
• The fact that the CEO had had no intention of benefitting from disclosing the information or having the disclosed information acted upon in any way;
• The CEO's acceptance of responsibility as soon as he had learned that his actions constituted tipping;
• The fact that the CEO had never been sanctioned by the ASC previously;
• The unique circumstances of the case, the absence of harm to the capital markets, and the acceptance of responsibility of the CEO, which determined that market bans would not be necessary; and
• The CEO's willingness to enter into the Settlement Agreement, thereby saving the ASC the time and expense of going through a contested hearing.

The ASC concluded, and the CEO agreed, that an appropriate sanction would be for the CEO to pay a monetary settlement of $40,000 to the ASC as well as to pursue and complete training in best practices for public company governance in the next 12 months.

Takeaways

While the Settlement Agreement was between staff of the ASC and the CEO (and not considered by the Commission itself), there are several key takeaways from the Settlement Agreement:

• Officers and directors of publicly traded companies are expected to uphold a high standard of conduct in relation to applicable securities laws;
• It is a fundamental principle of securities regulation that all investors have equal access to information necessary to make informed investment decisions. Selective disclosure of non-public material information (or tipping) confers an unfair informational advantage to particular investors, violating this fundamental principle;
• While an exception is provided in the insider trading restrictions if disclosure is 'necessary in the course of business', use of this exception must be determined in light of the policy reasons for the tipping provisions. As discussed in National Policy 51-201 – Disclosure Standards (NP 51-201), the exception would not generally permit selective disclosure to an analyst, institution, investor or other market professional. It is noted in NP 51-201 that while there may be instances when an advisor in a specific transaction is 'brought over the wall', such an advisor would then be in a special relationship with the issuer and steps should be taken to ensure that the non-public material information remains confidential and not traded upon; and
• While the fact that the tipping occurred when the markets were closed and the information was released publicly before the Registrant (or anyone he might have informed of the information) could trade on the information was noted in the Settlement Agreement, the actions were still considered a breach of the tipping restrictions.

If you have any questions on this decision or any insider trading rules generally, contact any member of our Business Law group.

[1] Settlement Agreement, para 14.
[2] "Tipping" as described by the ASC in the Regulatory Message section of the Settlement Agreement.
[3] Securities Act, RSA 2000, c S-4, s 147(4).