Securities firms are allowed greater flexibility in flagging orders from insiders, according to new guidance issued Wednesday by the Investment Industry Regulatory Organization of Canada (IIROC).
The self-regulatory organization’s (SRO) guidance formalizes the practice of allowing firms two ways of complying with their obligation to mark orders from insiders — a requirement that’s designed to help detect possible insider trading violations.
Under the new guidance, firms can either mark all orders by an insider as an insider order, regardless of whether the specific trade in question has to be flagged under insider reporting rules; or firms can comply with guidance that was issued back in 2010 in this area, which sets out requirements for particular transactions that trigger insider reporting obligations.
Insider order marking was introduced to enable IIROC to monitor the trading activity of insiders and significant shareholders to ensure compliance with the trading rules and to help detect possible insider trading violations.
In today’s guidance, IIROC indicates that certain firms did not follow the 2010 guidance; and that the firms marked all orders by statutory insiders regardless of whether the resulting trade would be subject to insider reporting requirements.
IIROC consulted with the Canadian Securities Administrators (CSA), the SRO states, “which confirmed that insider order marking may be broader in scope than the insider reporting requirements, to enable IIROC to assist the securities regulatory authorities with initial detection of possible violations of securities legislation principally related to insider trading.”
Today’s guidance aims to help firms comply with insider order marking under the approach of marking all orders that are entered for insiders. This alternative guidance was initially proposed by IIROC back in 2011. Following comments received on those proposals, the SRO engaged in additional consultation concerning insider order marking with industry representatives, and, as a result, made some changes to its proposals.
In particular, IIROC is not repealing the 2010 guidance. Instead, the SRO is giving firms the flexibility to use both approaches. “The coexistence of these alternative approaches to insider order marking has since worked well without requiring [firms] to implement systems changes or incur additional costs,” IIROC states. “As a result, IIROC has implemented the proposed guidance as the alternative guidance.”
Firms are generally expected to adopt one approach or the other, although IIROC notes that a firm whose general practice is to mark based on the statutory insider definition may follow the 2010 guidance for certain institutional clients that may be exempt from insider reporting obligations under securities legislation.
Today’s guidance also provides additional clarity on insider order marking requirements for orders entered during a normal course issuer bid.