Securities Law Update
August 2001
Selective disclosure attacked by CSA
On May 25, 2001, the Canadian Securities Administrators (CSA) released proposed National
Policy 51-201: Disclosure Standards (Proposed NP 51-201) for comment. The draft policy addresses
the issue of selective disclosure and proposes the recission of National Policy 40: Timely Disclosure.
Through Proposed NP 51-201, the CSA aim to improve access to investment information by
clarifying the rules surrounding disclosure practices by companies and providing guidance on “best
disclosure” practices. The recommendations are not intended to be prescriptive, rather the CSA hope
that companies apply the measures in a flexible and sensible manner to suit the circumstances of
individual companies.
Selective disclosure occurs when a company discloses material non-public information to a
select group of individuals or companies such as analysts, institutional investors, investment dealers
or other market professionals, and not broadly to the investing public. Selective disclosure is seen to
create unequal access to information that may affect investment decisions. The CSA indicate that, as
a result of selective disclosure, insider trading opportunities may be created and the overall
confidence of the investing public in the capital market may become eroded.
Another recent development involving selective disclosure rules is the Ontario Securities
Commission and the Commission des valeurs mobilières du Québec settlement with Air Canada in
late July. A $1 million fine was levied in connection with an alleged incident of selective disclosure
which Air Canada admitted was not in the public interest.
This Securities Law Update provides a brief summary of Proposed NP 51-201.
Best Disclosure Practices
The adoption of a number of certain corporate disclosure practices, which the CSA suggest
may improve a company’s credibility and enhance investor confidence and shareholder value, is
recommended by the CSA, including:

adopting a written corporate disclosure policy;

establishing a committee to oversee and co-ordinate disclosure;

limiting the number of authorized company spokespersons;
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
providing the public with access to conference calls between the company and analysts;

adopting a policy to review analysts’ reports;

observing a “quiet period” around the disclosure of financial results and halting all
communications with analysts during the quiet period;

establishing a written insider trading policy that requires monitoring and pre-clearance
by a selected company official of all insider trading in the company’s securities;

ensuring that material information is posted on the company website and that such
information is current, complete and accurate;

ensuring that employees do not discuss company matters in chat rooms or bulletin
boards on the Internet; and

adopting and consistently applying a “no comment” policy concerning market rumours.
Timely Disclosure
The CSA have affirmed the timely disclosure obligations of a company under most Canadian
securities legislation. When a “material change”1 occurs in a company’s business, the company must
generally disclose the material change by issuing and filing a press release describing the change. In
addition, the company must file a material change report as soon as possible but in any circumstance
no later than 10 days after the change occurs. The CSA recommend that the press release issued by
the company should contain sufficient detail to enable the investing public to understand the
substance and importance of the change.
The confidential material change provisions of most Canadian securities legislation are also
affirmed by the CSA. Under such provisions, a company may generally delay disclosure of a material
change and keep it temporarily confidential either pending board approval where senior management
believes that no improper trading has occured or, more commonly, when the harm expected to its
business by immediate release would outweigh the general benefit to investors and the market,
resulting in undue detriment to the company’s interests. In such cases, the company must make a
confidential filing with the securities commission of the material change. In certain jurisdictions,
companies are required to renew the confidential filing every 10 days in order to continue to keep the
information confidential.
Where a material change is being kept confidential, the CSA suggest that a company is under a
duty to ensure that persons with knowledge of the material change maintain complete confidentiality.
1 This generally means a change in the business, operations or capital of the issuer that would reasonably be expected to have a
significant effect on the market price or value of any of the securities of the issuer, and includes a decision to implement such a change
made by the board of directors of the issuer or by senior management of the issuer who believe that confirmation of the decision by the
board of directors is probable.
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Accordingly, such information should not be disclosed to any person or company except in the
necessary course of business.
Statutory Prohibitions
The CSA has commented on existing legislation relating to tipping and insider trading, which
apply to both material facts and material changes. Under Canadian securities legislation, tipping
generally occurs when a reporting issuer or any person or company in a special relationship with the
reporting issuer informs, other than in the necessary course of business, anyone of a “material fact”2
or a “material change” (collectively “material information”) before that material information has been
generally disclosed. Such activity is generally prohibited under Canadian securities legislation.
The scope of tipping provisions under Canadian securities legislation is broad. The provisions
apply to anyone in a special relationship with a reporting issuer, including, but not limited to:

insiders, as defined under Canadian securities legislation;

employees;

persons engaging in professional or business activities for or on behalf of the company;
and

anyone (a “tippee”) who learns of material information from someone that the tippee
knows or should know is a person in a special relationship with the company.
Necessary Course of Business
Under Canadian securities legislation, the tipping prohibitions generally do not apply when a
company makes selective disclosure in the “necessary course of business.” Whether or not a
company is making selective disclosure in the necessary course of business can be difficult to
determine. The CSA provide interpretative guidance in Proposed NP 51-201. For example, in the
CSA’s view, the “necessary course of business” exception will generally cover communications with:

vendors, suppliers or strategic partners on issues such as research and development,
sales and marketing and supply contracts;

employees, officers and board members;

lenders, legal counsel, auditors, financial advisors and underwriters; and

parties to negotiations.
The “necessary course of business” exception, however, would not generally apply to selective
disclosure of material information to the media, analysts, institutional investors or other market
2 Where used in relation to securities issued or proposed to be issued, this is generally defined to mean a fact that significantly
affects, or would reasonably be expected to have a significant effect on, the market price or value of such securities.
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professionals, in the CSA’s view. The CSA have requested comments regarding their approach to
the necessary course of business exception.
Generally Disclosed
The tipping provisions prohibit a company from disclosing non-public material information to
anyone (other than in the necessary course of business) before the company “generally discloses” the
information to the market place. The term “generally disclosed” is not defined in Canadian securities
legislation. Case law has held that information has been generally disclosed if: (a) the information has
been disseminated in a manner that will effectively reach the market place; and (b) public investors
have been given a reasonable amount of time to analyze the information.
The CSA state that when determining if material information has been generally disclosed, they
will consider all of the relevant facts and circumstances, including the company’s traditional practices
for public disclosure and how broadly investors and the investment community follow the company.
A company will likely satisfy the “generally disclosed” requirements under the tipping
provisions, for example, by issuing a news release distributed through a widely circulated news or
wire service, or making an announcement through a press conference or conference call which
interested members of the public may attend or listen to. However, posting information on the
Internet would not be enough to satisfy the requirements.
The CSA have requested comments on their approach for determining how a company may
satisfy the generally disclosed requirement under the tipping provisions.
Materiality
The definitions of a material fact and a material change under Canadian securities legislation
are generally based on a market impact test.
Timely disclosure policy statements of The Toronto Stock Exchange, the Canadian Venture
Exchange and the Bourse de Montreal include examples of events or information that may be
material, such as:

capital reorganizations, mergers or amalgamations;

significant acquisitions or dispositions of assets, property or joint venture interests;

the entering into or loss of a significant contract or other developments relating to a
major customer or supplier; and

events regarding a company’s securities.
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When deciding if information is material or not under this test, the CSA recommend that a
company avoid taking an overly technical approach. Instead, a company should consider a number
of factors including the nature of the information itself, the volatility of its securities and prevailing
market conditions. If there is any doubt as to whether certain information is material, the CSA
encourage a company to err on the side of caution and publicly release the information.
Risks Associated with Certain Practices
The CSA have also emphasized that a company should be sensitive to the risks involved in
private meetings with analysts. The CSA suggest the establishment of a formal company policy of
providing only non-material information and publicly disclosed information to analysts during private
meetings. It is recommended that significant data, such as sales, profit figures and earning forecasts,
should not be disclosed during any private meetings with analysts.
Since analysts often ask corporate officers to review earnings estimates that they are preparing,
a company should not selectively confirm that an analyst’s estimate is “on target,” “too high,” or
“too low,” whether directly or indirectly. The practice of selectively confirming with analysts certain
information previously made public is also discouraged.
Analysts, institutional investors, investment dealers and other market professionals who
receive material undisclosed information are likely to be “tippees”, and consequently cannot inform
anyone of the information other than in the necessary course of business.
Forward-Looking Guidance Encouraged
The CSA encourage companies to be open about forward-looking financial information,
provided that they have a reasonable basis for making such statements.
However, when a company chooses to disclose voluntary forward-looking statements in a
press release or on its web site, the CSA recommend that the disclosure also contain:

a statement that the information is forward-looking;

the factors that could cause actual results to differ materially from the forward-looking
statement; and

a statement of the material factors or assumptions that were used in making the
forward-looking statement.
Once a company discloses forward-looking information, the CSA believe that timely
disclosure requirements may require that the company update the information by issuing a news
release and filing a material change report.