RS clarifies off-marketplace trades

Market Regulation Services Inc. has issued a notice that confirms the type of trades of trades that it says do not constitute a change in the beneficial or economic ownership of shares.

The notice was issued following discussions with traders and compliance staff of brokerage firms. It is intended to assist traders and firms in complying with the Universal Market Integrity Rules.

Historically, the TSX Venture Exchange required trades between spouses to be executed off-marketplace. The Toronto Stock Exchange, however, viewed these trades as changes in beneficial ownership and required such trades to be executed on a marketplace. It is RS’ position that, under the new rules, trades that involve a change in beneficial and economic ownership must be traded upon a marketplace on which the brokerage firm is a member, participating organization, user or subscriber.

Trades that do not constitute either a change in beneficial ownership or a change in economic ownership should not take place on a marketplace as such trades constitute a deceptive and manipulative method of trading. For example, a transfer of stock between an individual and a wholly owned corporation, although constituting a change in beneficial ownership, does not constitute a change in economic ownership and therefore must be done off-marketplace.

Firms receive many requests each year to facilitate large volume or value trade transactions between spouses, for income tax or RRSP purposes, off-marketplace. A trade for tax purposes may only be executed off-marketplace without prior consultation with RS provided the trade:

• does not constitute a legal or beneficial change in ownership of the security;
• is not an action to evade tax or securities laws and does not contravene UMIR, or the rules of the exchange; and
• is executed at a price that is within the context of the market for that particular security at the time of the trade.

Trades between spouses that are executed for tax reasons are viewed by RS to constitute a change in both beneficial and economic ownership and therefore would have to be executed on a marketplace. This requirement applies where a person sells securities to the RRSP of their spouse. However, the contribution of securities to a spousal RRSP does not constitute a trade (as there is no valuable consideration) and must be executed off-marketplace.