“Advantages” to the Purchaser of a Security

1. General principle – All advantages to the purchaser

Unless the exceptions outlined below apply, at the time of a trade execution, all advantages attached to a security pass to the purchaser. For this purpose, an advantage includes:

• a dividend or other distribution, including rights, to which holders of the same class of security as the purchased security become legally entitled after the date of the trade; and
• any security or securities into which the purchased security has been transformed by operation of law after the date of the trade (including as a result of: an amalgamation; an arrangement; a fundamental change; a take-over bid or issuer bid; a corporate reorganization or a similar transaction).

On trade settlement, these advantages must be provided to the purchaser. This is the expectation of the buyer at the time of the trade execution.

2. Exceptions to the general principle

If the seller intends to withhold certain advantages that accrue to the ownership of that security, the seller must conduct the sale either:

• in accordance with the special rules established by the Exchange or QTRS on which the security is listed or quoted; or
• as a Special Terms Order, where the seller discloses these conditions to prospective purchasers and the purchaser has agreed to the conditions.

For example, an issuer may publicly disclose that it is considering the payment of a special dividend or asking security holders to approve a stock split. If the issuer has not established a record date the Exchange or QTRS on which the security is listed or quoted will not have set any special trading rules for the security, and the purchaser will expect to receive the advantages.

In these circumstances, if the seller intends to withhold the advantage, the seller must enter the order as a Special Terms Order with a specific condition on the trade that discloses this intent to prospective purchasers prior to any purchaser agreeing to execute a trade. It is not sufficient to simply enter a Special Terms Order on a marketplace to sell units of this security with a settlement date which is expected to be after the payment of the special dividend or after giving effect to the stock split. Without the specific condition attached to the trade, the purchaser will expect that the seller has agreed to “sell” the advantage of the special dividend or stock split to the purchaser. A prospective purchaser cannot be taken to have agreed to the seller withholding the advantage simply because the transaction is expected to settle on a date which is after the proposed target date for the dividend or stock split as announced by the issuer.

Alternatively, if the issuer has established a record date to give effect to these actions and the Exchange or QTRS on which the security is listed or quoted has established special trading rules for the security such that purchases of the security made on the marketplace on or after the time specified in the special trading rules will not receive the special dividend or the benefit of the stock split, then all trades on that marketplace will be undertaken in accordance with the special trading rules (unless the seller and the purchaser mutually agree otherwise).

3. Securities trading on multiple marketplaces

In accordance with Rule 6.1(2) of UMIR, a listed security or a quoted security which trades on any marketplace will be subject to any special rule or direction issued by the Exchange on which the security is listed or by the QTRS on which the security is quoted with respect to:

• clearing and settlement; and
• entitlement of the purchaser to receive a dividend, interest or any other distribution made or right given to holders of that security.

This provision is designed to ensure that orders and trades in a particular security are comparable between each marketplace on which that security trades. If a security is listed on an Exchange and also trades on an ATS, the special trading rules established by the Exchange will apply to trades on the ATS.

4. Remedies for failure to provide advantages on settlement

Under Rule 10.9 of UMIR, a Market Integrity Official may cancel any trade which, in the opinion of the Market Integrity Official, is unreasonable. If CIRO concludes that the price of a trade is unreasonable given the failure of the seller to deliver all of the “advantages” of the purchased security that arose after the trade date, CIRO may cancel the trade.

Rule 1400 of IDPC sets out the general standards of conduct that apply to Regulated Persons.1Specifically, IDPC Rule 1402 Standards of Conduct requires that a Regulated Person:

• in the transaction of business must observe high standards of ethics and conduct and must act openly and fairly and in accordance with just and equitable principles of trade, and
• must not engage in any business conduct that is unbecoming or detrimental to the public interest.

If a Participant or Access Person enters into a trade with the intention of not delivering on settlement of the trade all of the advantages that flowed from the security following the execution of the trade, that Participant or Access Person may be in breach of IDPC requirements to conduct business openly and fairly.

5. Applicable Rules

UMIR Rules this Guidance Note relates to:

• IDPC Rule 1402
• UMIR 6.1
• UMIR 10.9

6. Previous Guidance Note(s)

This Guidance Note replaces:

Market Integrity Notice 2005–027 – “Advantages” to the Purchaser of a Security” (July 29, 2005).

• 1See IDPC Rule 1201 Definitions.