Learning to play by the disclosure rules: accuracy of insider reports in Canada, 1996-2010

Tedds, Lindsay M. and Compton, Ryan and Morrison, Caitlin and Nicholls, Christopher and Sandler, Daniel (2012): Learning to play by the disclosure rules: accuracy of insider reports in Canada, 1996-2010.

Abstract

Insiders of Canadian reporting issuers are required to file public reports when they acquire, buy, or sell securities of that reporting issuer. These public reports must be filed using a prescribed form and must be filed within a specific time frame. Failure to file these public reports or filing with inaccurate information constitutes an offence under securities law. The two main objectives served by these reporting rules are: (1) primarily as a regulatory tool to detect or prevent the improper use of undisclosed information by insiders; and (2) to increase market efficiency by providing investors with information concerning the trading activities of an issuer. These objectives are dependent on compliance with the rules, yet no information regarding compliance exists. To investigate compliance a secondary source of information to verify the information provided in public reports must exist. In Canada, the CEO and the top four highest paid executives must report detailed information regarding their compensation, including stock option awards, in the annual report to shareholders. We collect information on stock option grants for these individuals for a sample of Canadian public companies for the period 2003-2011 and compare this information to that provided in the public reports. We find that while the majority of executives properly and accurately file public reports, a significant minority fail to file or file inaccurate information. We consider the consequences of this finding and suggest ways to improve the quality of insider reporting in Canada.

• Item Type: MPRA Paper
• Language: English
• Keywords: Securities Regulation, Compliance, Insider Disclosure, Continuous Disclosure, Employee Stock Options, Insider Trading
• Subjects: K - Law and Economics > K2 - Regulation and Business Law > K22 - Business and Securities Law; G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M12 - Personnel Management ; Executives; Executive Compensation

References

Ai, C. R. and E. C. Norton. 2003. “Interaction Terms and Logit and Probit Models.” Economics Letters 80(1): 123-129.

Armstrong, C. (2001). Moose pastures and mergers: The Ontario Securities Commission and the regulation of share markets in Canada, 1940-1980. Toronto: The University of Toronto Press.

Banbridge, S. M. 2001. “The Law and Economics of Insider Trading: A Comprehensive Primer.” Available at SSRN: http://ssrn.com/abstract=261277.

Bhattacharya, U. and H. Daouk. 2009. “When No Law is Better than Good Law.” Review of Finance 13(4): 577-627.

Bris, A. 2005. “Do Insider Trading Laws Work.” European Financial Management 11(3): 267-312.

Canada. Finance Canada. (2010). The Budget Plan: Canada’s Economic Action Plan: Year 2. Ottawa: Department of Finance.

Canadian Securities Administrators. (n.d.a). Late Filing. Accessed 27 June 2012. https://www.sedi.ca/sedi/new_help/english/public/pdf_en/late_filing_factsheet-sedi_(final).pdf

______. 2010. SEDAR filer manual. Accessed 27 June 2012. http://www.sedar.com/sedarguides/FilerManual_en.pdf

______.1999. Notice of Proposed National Instrument 55-101 and Companion Policy 55-101CP Exemption From Certain Insider Reporting Requirements and Rescission of OSC Policy 10.1 Applications for Exemption from Insider Reporting Obligations for Insiders of Subsidiaries and Affiliated Issuers. Accessed 27 June 2012. http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_19990820_55-101not.jsp

______. (2008). System for electronic disclosure by insiders user guide. Accessed 27 June 2012. http://www.securities-administrators.ca/uploadedFiles/General/pdfs/SEDIUserManualSept08.pdf

Compton, R. A., C. C. Nicholls, D. Sandler, and L. M. Tedds. 2012. “Quantifying the Personal Income Tax Benefits of Backdating: A Canada-US Comparison.” Columbia Journal of Tax Law 3(2): 144-75.

Compton, R. A., C. C. Nicholls, D. Sandler, and L. M. Tedds. 2011. “Insider reporting obligations and options backdating.” Banking and Finance Law Review 26(3): 473-90.

Compton, R. A., D. Sandler, and L. M. Tedds. 2010. “Backdating, Tax Evasion, and the Unintended Consequences of Canadian Tax Reform.” Tax Notes International August 23: 671-84.

Compton, R. A., D. Sandler, and L. M. Tedds. 2009. “Options backdating: A Canadian perspective.” Canadian Business Law Journal 47(3): 363-91.

Davies, B. (1975). “Canadian and American Attitudes on Insider Trading.” University of Toronto Law Journal 25: 215-235.

Fleischer, A. 1965. Securities Trading and Corporate Information Practices: The implication of the Texas Gulf Sulphur Proceeding,” Virgina Law Review 51(7): 1271-1305.

Gillen, M. R. (1998) Securities Regulation in Canada. Toronto: Thomson Canada Limited.

Johnston, D. & K. D. Rockwell. 2006. Canadian Securities Regulation. Vancouver: Butterworths Canada.

Klassen, K. 2002. Options for Compensation. CA Magazine August: 41-4.

MacIntosh, J. G. and C. C. Nicholls. 2002. Securities Law. Toronto: Irwin.

Mackenzie, H. 2012. Canada’s CEO Elite 100. Ottawa: Canada Centre for Policy Alternatives Accessed 27 June 2012. http://www.policyalternatives.ca/sites/default/files/uploads/publications/National percent20Office/2012/01/Canadas percent20CEO percent20Elite