Part 7 - Trading in a Marketplace
Provisions prohibiting manipulative or deceptive activities, including activities that may create misleading pricing or trading activity that is detrimental to investors and the integrity of the markets, are contained in Rule 2.2. Rule 7.7 generally prohibits purchases of or bids for restricted securities in circumstances where there is heightened concern over the possibility of manipulation by those with an interest in the outcome of the distribution or transaction. Rule 7.7 also provides certain exemptions to permit purchases and bids in situations where there is no, or a very low possibility of manipulation. However, the Market Regulator is of the view that notwithstanding that certain trading activities are permitted under Rule 7.7, these activities continue to be subject to the general provisions relating to manipulative or deceptive activities in Rule 2.2 and the provisions on manipulation and fraud found in applicable securities legislation such that any activities carried out in accordance with Rule 7.7 must still meet the spirit of the general anti-manipulation provisions.
Rule 7.7(4)(a) provides a dealer-restricted person with an exemption from the prohibitions in subsection (1) for market stabilization and market balancing activities subject to price limitations. Market stabilization and market balancing activities should be engaged in for the purpose of maintaining a fair and orderly market in the offered security by reducing the price volatility of or addressing imbalances in buying and selling interests for the restricted security.
The Market Regulator considers it to be inappropriate for a dealer to engage in market stabilization activities in circumstances where dealer knows or should reasonably know that the market price is not fairly and properly determined by supply and demand. This might exist where, for example, the dealer is aware that the market price is a result of inappropriate activity by a market participant or that there is undisclosed material information regarding the issuer.
Market balancing activities should contribute to a fair and orderly market by contributing to price continuity and depth and by minimizing supply-demand disparity. Market balancing does not seek to prevent or unduly retard any price movements, but merely to prevent erratic or disorderly changes in price.
Rule 7.7(4)(h) provides an exemption from the prohibitions in subsection (1) for a dealer-restricted person in connection with a bid for or purchase to cover a short position provided that short position was entered into before the commencement of the restricted period. Short positions entered into during the restricted period may be covered by purchases made in reliance upon the market stabilization exemption in Rule 7.7(4)(a), subject to the price limits set out in that exemption. (See “Part 5 – Trading Pursuant to Marketplace Trading Obligations” for a discussion of the ability of persons with Marketplace Trading Obligations to cover short positions arising during the restricted period pursuant to their Marketplace Trading Obligations.)
The Market Regulator is of the view that although sections 4.1 and 4.2 of OSC Rule 48-501 do permit a dealer-restricted person to disseminate research reports, this dissemination continues to be subject to the usual restrictions that are applicable to a dealer-restricted person in possession of material information regarding the issuer that has not been generally disclosed.
Rule 7.7(6) provides circumstances where a dealer-restricted person may publish or disseminate information, an opinion, or a recommendation relating to the issuer of a restricted security. The Rule requires that the information, opinion or recommendation is contained in a publication which is disseminated with reasonable regularity in the normal course of business of the dealer-restricted person. The Market Regulator considers that it is a question of fact whether a publication was disseminated “with reasonable regularity” and whether it was in the “normal course of business”. A research publication would not likely be considered to have been published with reasonable regularity if it had not been published within the previous twelve month period or there had been no coverage of the issuer within the previous twelve month period. The nature and extent of the published information should also be consistent with prior publications and the dealer should not undertake new initiatives in the context of the distribution. For example, the inclusion of projections of issuers’ earnings and revenues would likely only be permitted if they had previously been included on a regular basis. The Market Regulator may consider the distribution channels for the dissemination of the publication when considering whether a publication was “in the normal course of business”. The research should be distributed through the dealer-restricted person’s usual research distribution channels and should not be targeted or distributed specifically to prospective investors in the distribution as part of a marketing effort. However, the research may be distributed to a prospective investor if that investor was previously on the mailing list for the research publication.
Rule 7.7(6)(b) requires that the information, opinion or recommendation includes similar coverage in the form of information, opinions or recommendations with respect to a substantial number of issuers in the issuer’s industry. In this context, reference should be made to the relevant industry when determining what constitutes a “substantial number of issuers”. Generally, the Market Regulator would consider a minimum of six issuers to be a sufficient number. However, where there are less than six issuers in an industry, then all issuers should be included in the research report, and in any event the number of issuers should not be less than three.
Under Rule 7.7(7)(b), a dealer-restricted person with Marketplace Trading Obligations for a restricted security may, for their trading account in connection with such Marketplace Trading Obligations, purchase a restricted security pursuant to their Marketplace Trading Obligations. Not every purchase of a restricted security by a person with Marketplace Trading Obligations will be considered to be undertaken pursuant to their Marketplace Trading Obligations. For example, if a market making system of an Exchange or QTRS permits a market maker to voluntarily participate in trades that participation may only result in purchases that are:
Use of a voluntary participation feature in other circumstances, may result in the market maker not complying with the prohibitions or restrictions on trading under Rule 7.7.
Defined Terms:
NI 14-101 section 1.1(3) – “issuer bid”, “securities legislation” and “take-over bid”
NI 21-101 section 1.4 – Interpretation -- “security”
UMIR section 1.1 – “arbitrage account”, “basket trade”, “best independent sale price”, “client order”, “connected security”, “dealer-restricted person”, “derivatives market marker”, “Exchange”, “Exempt Exchange-traded Fund”, ‘foreign organized regulated market”, “hedge”, “highly-liquid security”, “issuer-restricted person”, “listed security”, “Market Integrity Official”, “marketplace”, “Marketplace Trading Obligations”, “Marketplace Rules”, “Market Regulator”, “Program Trade”, “offered security”, “restricted period”, “restricted private placement”, “restricted security”, “securities exchange take-over bid” and “QTRS”
UMIR section 1.2(2) – “person” and “trade”
Related Provisions:
UMIR section 1.2(6) – Interpretation of “restricted period” and UMIR section 2.2
Partially Repealed Guidance: See Market Integrity Notice 2006-017 – “Guidance – Securities Trading on Multiple Marketplaces” (September 1, 2006). Section respecting Rule 5.1 – Best Execution of Client Orders of MIN 2006-017 was repealed and replaced effective January 2, 2018 by IIROC Notice 17-0138 – “Guidance on Best Execution” (July 6, 2017).
Regulatory History:
Effective February 25, 2005, the applicable securities commissions approved amendments effective May 9, 2005 to repeal and replace section 7.7 and to add Parts 1, 2, 3, 4 and 5 of Policy 7.7. See Market Integrity Notice 2005‑007 – “Amendments Respecting Trading During Certain Securities Transactions” (March 4, 2005).
Effective May 16, 2008, the applicable securities commissions approved an amendment to Rule 7.7 to replace the phrase “an organized regulated market outside of Canada that publicly disseminates details of trades executed on that market” with “foreign organized regulated market or other market”. See Market Integrity Notice 2008‑008 – “Provisions Respecting “Off‑Marketplace” Trades” (May 16, 2008).
Effective January 8, 2010, the applicable securities commissions approved amendments to subsection (4) of section 7.7 to delete the words “the lesser of” in clause (a); amendments to subsection (4) of section 7.7 to repeal and replace subclause (a)(i), to add the words “the lesser of” after the word “security” in subclause (a)(ii), to replace the “last independent sale price” by “best independent sale price” in paragraphs (A) and (B) of subclause (a)(ii), to replace the words “Exchange‑traded Fund” by “Exempt Exchange‑traded Fund” in subclause (b)(ii), and to replace the word “market” by “marketplace or foreign organized regulated market” in clause (c). See IIROC Notice 10‑0006 – “Provisions Respecting Trading During Certain Securities Transactions” (January 8, 2010).
Effective August 26, 2011, the applicable securities regulatory authorities approved amendments to section 7.7 and Policy 7.7 principally to replace the definition of “Market Maker Obligations” with a definition of “Marketplace Trading Obligations”. See IIROC Notice 11‑0251 – “Provisions Respecting Market Maker, Odd Lot and Other Marketplace Trading Obligations” (August 26, 2011).
Effective December 9, 2013, the applicable securities commissions approved amendments to the French version of UMIR. See IIROC Notice 13‑0294 – “Amendments to the French version of UMIR” (December 9, 2013).
Disciplinary Proceedings: In the Matter of David William Trim (“Trim”) (October 30, 2002) OOS 2002-005
Facts – On January 16, 2001, Trim, a trader employed by BMO Nesbitt Burns Inc. (“BMO”), entered into a trade for shares of a company at a price in excess of the maximum permitted stabilization price during a restricted period which the security was subject to. In a separate transaction, on September 6, 2001, Trim, entered into a trade to cover an outstanding short position in a security that, at the time of the trade, was on BMO’s restricted list. Trim was advised by BMO’s Corporate Compliance Department that he could cover his outstanding short position so long as the bid or purchase price was not higher than the maximum permitted stabilization price, in this case $4.50. Trim subsequently entered into a trade for the shares at $4.54.
Disposition – Trim executed prohibited trades in two securities at a time when BMO was involved in a distribution of these securities and had restricted trading of the securities.
Requirements Considered – TSX Rules 7-106(b) and 4-303. Comparable UMIR Provision - Rule 7.7
Sanction - $10,000 fine and costs of $3,500
Disciplinary Proceedings: Rule 7.7(5) (pre-May 2005 version) was considered In the Matter of Scotia Capital Inc. (“Scotia”) (February 26, 2007) DN 2007-001. See Disciplinary Proceedings under Rule 6.4.
Disciplinary Proceedings: In the Matter of Global Securities Corporation (“Global”) (December 3, 2007) DN 2007-005
Facts – Between October 6, 2005, and November 16, 2005, Global, while acting as an underwriter for a private placement of securities for Jasper Mining Corporation (“Jasper”), entered twenty-five orders to buy shares of Jasper (resulting in forty-three trades) for non-client, inventory and client accounts (on a solicited or discretionary basis).
Disposition – Subject to certain exemptions, UMIR imposes trading restrictions on a dealer with an interest in the outcome of the distribution of securities or other transactions (“Dealer-Restricted Person”). During the relevant period, Global was a Dealer-Restricted Person, and as such, was prohibited from bidding for or purchasing shares of Jasper for its own account, for an account over which Global exercised direction or control or soliciting the purchase of shares of Jasper. By purchasing shares of Jasper for non-client, inventory and client accounts over which Global had discretion or solicited such purchase, Global did harm to the reputation of the marketplace and the public’s perception of the capital markets.
Requirements Considered – Rule 7.7
Sanction – $65,000 fine and costs of $25,000
Disciplinary Proceedings: Rule 7.7(5) [as it existed prior to May, 2005] was considered In the Matter of David Berry (“Berry”) (January 17, 2013) DN 13-0018. See Disciplinary Proceeding under Rule 6.4.