Preventing backdating of

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Tedds, “Options Backdating: A Canadian Perspective” (2009) 47 Can. This five day requirement is, however, less stringent than the current U. NI 55-104, supra n 1, s 3.3; Securities Act, supra n 3, s 107(2). Walker, “Unpacking Backdating: Economic Analysis and Observations on the Stock Option Scandal” (2007) 87 B. The reporting obligation is triggered by a change in the reporting insider’s CSA Notice - National Instrument 55-104, Insider Reporting Requirements and Exemptions and Related Companion Policy 55-104CP and Repeal of Related Predecessor Instruments, (2010) 33 OSCB 645 [Notice of NI 55-104] at 662. Options backdating has now emerged as a significant problem, and regulators have identified insider reporting rules as a potential tool for combating such backdating.35 Page 11 (a) beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer, or (b) interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer. Accordingly, it would be useful for Canadian legislators and regulators to consider measures that would enhance the effectiveness of insider reporting rules in detecting and deterring options backdating. Heron and Lie80 in a 2007 study demonstrate that most U. executives in their sample choose to delay reporting until the second day and that for these grants there still exists evidence of backdating.It is not clear that the administration and enforcement of current Canadian insider reporting rules, crafted with very different objectives in mind, provide an effective deterrent to improper options backdating. 3 NI 55-104, supra n 1 at s 3.3, 2.2; Securities Act, R. 5 Deterring options backdating is also mentioned as a policy rationale for insider reporting requirements in the companion national policy statement, 55-104 CP. 426, s 109(2)(b): “the acquisition or disposition of an insider of a put, call or other transferable option with respect to a capital security shall be deemed a change in the beneficial ownership of the capital security to which such transferable option relates.” 18 Yontef, supra n 16 at 641. In 1993, the SEC imposed a cease and desist order as well as a penalty of ,000 on an insider who was a repeat late filer, having filed 221 late reports over a 13-year period.67 In 1996, the SEC fined a chief executive officer ,000 for failing to file twelve reports, noting that if the reports had been properly filed, some would have revealed opposite-way transactions. They found “a relatively high degree of compliance in reporting.” 72 There are also indications that securities commissions may cross-reference insider reports with other financial documents after an enforcement investigation commences.This paper reviews the current rules and the mechanisms for their enforcement, offers a comparison with insider reporting regimes in other selected jurisdictions, reveals weaknesses in the Canadian approach and provides recommendations to enhance the Canadian regime so that it may effectively deter or detect options backdating. 6 The suggestion that insider reporting obligations might deter the practice of options backdating 7 is intriguing. 13 The second part of the regime was the specific legislative prohibition against the use by insiders of confidential information. 8 9 Page 5 In 1979, as part of the extensive review of Canadian securities legislation undertaken in connection with the publication of Proposals for a Securities Market Law for Canada, 15 a background paper on insider trading written by Marvin Yontef suggested that the insider reporting requirements performed “several independent functions.” These functions included providing potential evidence in legal proceedings based on improper insider trading and functioning as a public revelation of the insider’s assessment or evaluation of the reporting issuer’s securities. Yontef also notes that federal corporate law at the time would require insiders of such corporations to file an insider report at the time of the grant of the stock option itself. insider reporting rules applicable to officers and directors were based on similar concerns about the improper use of confidential information. 16, s 155); by federal corporate law (Canada Business Corporations Act, R. 68 That same year, the SEC also imposed a cease and desist order against Robert D. For example, in Workum and Hennig (Re),73 Alberta Securities Commission staff argued that certain insider defendants who had failed to report impugned trades made through specific accounts were clearly aware of Notice and Request for Comment, Proposed National Instrument 55-104 Insider Reporting Requirements and Exemptions, Companion Policy 55-104CP Insider Reporting Requirements and Exemptions and Related Consequential Amendments (2008) 31 OSCB 12117 at 12150, Proposed Item 17, Form 51-102F5. 72 British Columbia Securities Commission, ‘08/’09 Annual Report, (Vancouver: BCSC, 2009), online: British Columbia Securities Commission at 17.Most stock options backdating is alleged to have occurred prior to the enactment of Sarbanes-Oxley, which requires that stock options grants for top executives be reported to the SEC within two days.A new accounting rule, Cox said, has eliminated the incentive to grant "at-the-money" options—options that are immediately profitable because they are granted below the stock's current price.

features in the following passage in the judgment of Wilson J in Mibanga v Secretary of State Jan 18, 2012 - define the characteristics of an insider-researcher, the issues and challenges experienced ... Tedds*** Abstract Insider reporting rules have historically been regarded primarily as a regulatory tool to detect or prevent the improper use of undisclosed information by insiders of reporting issuers. ** Page 2 was first published for comment, the Canadian Securities Administrators linked this proposed timing change, among other things, to the practice of improper stock options backdating: We are proposing to accelerate the deadline for filing insider reports from 10 calendar days to five calendar days after a trade because we think the market would benefit from more timely dissemination of information relating to insider transactions. In 2007, the Ontario Securities Commission (“OSC”) reported that it had collected some 0,000 in fines for late insider reports, 55 an amount suggesting a considerable number of delinquent filers. 63 Financial Services and Markets Act (UK), 2000, c 8, s 91(1). Not surprisingly, regulators are reticent about publicly disclosing their methods of monitoring compliance with securities laws.A review of the current rules and the mechanisms for their enforcement, together with a comparison with insider reporting regimes in other selected jurisdictions, reveals weaknesses in the Canadian approach and suggests ways in which the Canadian regime could be enhanced to deter or detect options backdating. Page 4 Certain insiders of Canadian reporting issuers are required to file public reports when they buy or sell securities of that reporting issuer. Skeptics suggest that the “explosion in grants of stock options was already underway in the 1980s” but admit the amended tax rule “constituted an implicit government ‘blessing’ of stock options as appropriate performance-based pay” that may have further fueled the trend. Throughout the fiscal year, the Corporate Finance division reviews issuer disclosure for non-compliance. Those issuers that receive letters are audited at the end of the fiscal year by Ibid. Ontario Securities Commission, Annual Report 2009, (Toronto: OSC, 2009) at 37, online: Ontario Securities Commission at 37.Part II of this article briefly reviews the origin and traditional rationale for Canadian insider reporting rules. Chambers, “Last Ditch Options: An Assessment of Independent Director Liability and a Proposal For Congressional Action in Light of the Employee Stock Option Back-Dating Scandal” (2008) 42 Ga. That requirement was originally contained in the securities statutes of most Canadian provinces and territories. Canadian corporate statutes had previously included trade reporting requirements applicable only to corporate directors. See Brian Hall and Kevin Murphy, “The Trouble with Stock Options” (2003) 17:3 Journal of Economic Perspectives 49 at 62. 74 75 Page 23 an independent auditor.76 However, since it is the issuer’s documents that are the focus of the audit, the review is unlikely to extend to insider reports.Part V analyses the efficacy of insider reporting rules as a tool for deterring improper options backdating. 8 The insider reporting filing requirement was introduced into Ontario securities legislation in 1966 9 following a 1965 recommendation of the Kimber Committee.10 The primary concern of the Kimber Committee was the improper use of confidential information by insiders to make trading profits.11 The insider reporting regime was part of a “two fold” 12 remedy proposed by the Kimber Committee to combat such improper use of inside information.13 Insider reporting, in the Committee’s view, would be an effective instrument because, “The insider who knows that his trading will become public knowledge will be less likely to engage in improper trading.” 14 NI 55-104, supra n 1, s 2.1. However, this earlier work suggested that the abnormal 23 24 Page 8 least two earlier Securities and Exchange Commission (“SEC”) enforcement actions, in 20, the SEC targeted practices that would today be labeled options backdating.28 (III) Options Backdating and the Mechanics of the Canadian Insider Reporting Rules Current Canadian insider reporting rules require reporting insiders29 of a reporting price patterns implied that insiders’ ability to time option purchases reflected their exploitation of undisclosed inside information which subsequently led to price increases. Lie who drew the link between these abnormal returns and the possibility of backdating. Page 9 issuer to file an insider report in prescribed form30 within five days of the sale or purchase of a security of the reporting issuer. 271 at 273 [Heron & Lie, “Does Backdating Explain”]; Randall A. 853, suggesting that option backdating is still prevalent after SOX, and suggesting that the 2002 changes did not go far enough; Lucian Bebchuk & Jesse M. See also John Shipman, “The Future of Backdating Equity Options in the Wake of SEC Executive Compensation Disclosure Rules” (2007) 85 N. A key shortcoming of the current Canadian reporting regime is that the obligation to file insider reports rests solely on the individual receiving a grant of options; yet in many cases it is possible that the insider may not immediately be aware that options have been granted to him or her. The Australia Securities and Investments Commission can then readily cross reference the corporation’s documents to insider reports.77 In a 2005 media release, Eric Mayne explained, “When a director does not comply with a simple requirement, it raises the perception of potential market misconduct, and we will ask why the notice was not lodged, and if there is evidence of misconduct then we will intervene accordingly.” 78 (VI) Conclusion and Recommendations The insider reporting requirements were not originally designed to deter or detect options backdating, and appear to have been traditionally regarded by securities regulators chiefly as an administrative filing requirement that has not been the subject of vigorous 76 British Columbia Securities Commission, Annual Report 2007/08, (Vancouver: BCSC, 2008), online: British Columbia Securities Commission at 19.Part VI offers concluding remarks and some tentative recommendations for reform. For a discussion of the specific securities law issues raised by options backdating in the United States, where the practice was first identified, see M. 28 See Securities and Exchange Commission, Litigation Release No. 31 Reports are filed electronically on the System for Electronic Disclosure by Insiders (“SEDI”) system.32 Failure to file these reports as required constitutes an offence under securities law. Heron & Erik Lie, “What Fraction of Stock Option Grants to Top Executives Have Been Backdated or Manipulated? Nejat Seyhun, “Effect of Sarbanes-Oxley Act on the Influencing of Executive Compensation” (2005), online: SSRN [Narayanan & Seyhun, “Effect of SOX”]; But cf., Jesse Fried, “Option Backdating and its Implications” (2008) 65 Wash. Fried, “Paying for Long Term Performance”(2010) 158 U. Where there is a lag between the actual grant date (the “Grant Date”), and the date on which the insider is notified of the options granted to him or her (the “Notification Date”), robust application of the insider reporting rules becomes problematic. 77 Australian Securities Exchange Listing Rules: Chapter 3 Continuous Disclosure, rr 3.19 and 3.19A, online: Australian Securities Exchange .

features in the following passage in the judgment of Wilson J in Mibanga v Secretary of State Jan 18, 2012 - define the characteristics of an insider-researcher, the issues and challenges experienced ... Tedds*** Abstract Insider reporting rules have historically been regarded primarily as a regulatory tool to detect or prevent the improper use of undisclosed information by insiders of reporting issuers. ** Page 2 was first published for comment, the Canadian Securities Administrators linked this proposed timing change, among other things, to the practice of improper stock options backdating: We are proposing to accelerate the deadline for filing insider reports from 10 calendar days to five calendar days after a trade because we think the market would benefit from more timely dissemination of information relating to insider transactions. In 2007, the Ontario Securities Commission (“OSC”) reported that it had collected some 0,000 in fines for late insider reports, 55 an amount suggesting a considerable number of delinquent filers. 63 Financial Services and Markets Act (UK), 2000, c 8, s 91(1). Not surprisingly, regulators are reticent about publicly disclosing their methods of monitoring compliance with securities laws.

A review of the current rules and the mechanisms for their enforcement, together with a comparison with insider reporting regimes in other selected jurisdictions, reveals weaknesses in the Canadian approach and suggests ways in which the Canadian regime could be enhanced to deter or detect options backdating. Page 4 Certain insiders of Canadian reporting issuers are required to file public reports when they buy or sell securities of that reporting issuer. Skeptics suggest that the “explosion in grants of stock options was already underway in the 1980s” but admit the amended tax rule “constituted an implicit government ‘blessing’ of stock options as appropriate performance-based pay” that may have further fueled the trend. Throughout the fiscal year, the Corporate Finance division reviews issuer disclosure for non-compliance. Those issuers that receive letters are audited at the end of the fiscal year by Ibid. Ontario Securities Commission, Annual Report 2009, (Toronto: OSC, 2009) at 37, online: Ontario Securities Commission at 37.

Part II of this article briefly reviews the origin and traditional rationale for Canadian insider reporting rules. Chambers, “Last Ditch Options: An Assessment of Independent Director Liability and a Proposal For Congressional Action in Light of the Employee Stock Option Back-Dating Scandal” (2008) 42 Ga. That requirement was originally contained in the securities statutes of most Canadian provinces and territories. Canadian corporate statutes had previously included trade reporting requirements applicable only to corporate directors. See Brian Hall and Kevin Murphy, “The Trouble with Stock Options” (2003) 17:3 Journal of Economic Perspectives 49 at 62. 74 75 Page 23 an independent auditor.76 However, since it is the issuer’s documents that are the focus of the audit, the review is unlikely to extend to insider reports.

Part V analyses the efficacy of insider reporting rules as a tool for deterring improper options backdating. 8 The insider reporting filing requirement was introduced into Ontario securities legislation in 1966 9 following a 1965 recommendation of the Kimber Committee.10 The primary concern of the Kimber Committee was the improper use of confidential information by insiders to make trading profits.11 The insider reporting regime was part of a “two fold” 12 remedy proposed by the Kimber Committee to combat such improper use of inside information.13 Insider reporting, in the Committee’s view, would be an effective instrument because, “The insider who knows that his trading will become public knowledge will be less likely to engage in improper trading.” 14 NI 55-104, supra n 1, s 2.1. However, this earlier work suggested that the abnormal 23 24 Page 8 least two earlier Securities and Exchange Commission (“SEC”) enforcement actions, in 20, the SEC targeted practices that would today be labeled options backdating.28 (III) Options Backdating and the Mechanics of the Canadian Insider Reporting Rules Current Canadian insider reporting rules require reporting insiders29 of a reporting price patterns implied that insiders’ ability to time option purchases reflected their exploitation of undisclosed inside information which subsequently led to price increases. Lie who drew the link between these abnormal returns and the possibility of backdating. Page 9 issuer to file an insider report in prescribed form30 within five days of the sale or purchase of a security of the reporting issuer. 271 at 273 [Heron & Lie, “Does Backdating Explain”]; Randall A. 853, suggesting that option backdating is still prevalent after SOX, and suggesting that the 2002 changes did not go far enough; Lucian Bebchuk & Jesse M. See also John Shipman, “The Future of Backdating Equity Options in the Wake of SEC Executive Compensation Disclosure Rules” (2007) 85 N. A key shortcoming of the current Canadian reporting regime is that the obligation to file insider reports rests solely on the individual receiving a grant of options; yet in many cases it is possible that the insider may not immediately be aware that options have been granted to him or her. The Australia Securities and Investments Commission can then readily cross reference the corporation’s documents to insider reports.77 In a 2005 media release, Eric Mayne explained, “When a director does not comply with a simple requirement, it raises the perception of potential market misconduct, and we will ask why the notice was not lodged, and if there is evidence of misconduct then we will intervene accordingly.” 78 (VI) Conclusion and Recommendations The insider reporting requirements were not originally designed to deter or detect options backdating, and appear to have been traditionally regarded by securities regulators chiefly as an administrative filing requirement that has not been the subject of vigorous 76 British Columbia Securities Commission, Annual Report 2007/08, (Vancouver: BCSC, 2008), online: British Columbia Securities Commission at 19.

Part VI offers concluding remarks and some tentative recommendations for reform. For a discussion of the specific securities law issues raised by options backdating in the United States, where the practice was first identified, see M. 28 See Securities and Exchange Commission, Litigation Release No. 31 Reports are filed electronically on the System for Electronic Disclosure by Insiders (“SEDI”) system.32 Failure to file these reports as required constitutes an offence under securities law. Heron & Erik Lie, “What Fraction of Stock Option Grants to Top Executives Have Been Backdated or Manipulated? Nejat Seyhun, “Effect of Sarbanes-Oxley Act on the Influencing of Executive Compensation” (2005), online: SSRN [Narayanan & Seyhun, “Effect of SOX”]; But cf., Jesse Fried, “Option Backdating and its Implications” (2008) 65 Wash. Fried, “Paying for Long Term Performance”(2010) 158 U. Where there is a lag between the actual grant date (the “Grant Date”), and the date on which the insider is notified of the options granted to him or her (the “Notification Date”), robust application of the insider reporting rules becomes problematic. 77 Australian Securities Exchange Listing Rules: Chapter 3 Continuous Disclosure, rr 3.19 and 3.19A, online: Australian Securities Exchange .

(II) Origin and Rationale of Insider Reporting Rules disguise the fact that the option has not been issued “at the money” (that is, with an exercise price equal to the market price) but is, in fact, already “in the money”. 33 Rigorous compliance with these rules would make opportunistic options backdating virtually impossible. Heron & Erik Lie, “Does Backdating Explain the Stock Price Pattern around Executive Stock Option Grants? ” (2009) 55 Management Science 513 [Heron & Lie, “What Fraction of Option Grants”]. 561 at 617 (suggesting that the new 2002 rule change to two days“all but prevents backdating”) M. This problem does not arise from any deficiency in the insider reporting requirements themselves, but rather from the practical problem that securities regulators may be legitimately reluctant to attempt to discipline insiders for failure to file reports in a timely way when that failure is owing entirely to the issuer’s actions, and not to any fault of the insider. 78 Australian Securities and Investments Commission, Media Release, 05-324, “ASIC and the ASX urge directors to notify market operators of shareholdings” (19 October 2005), online: Australia Securities and Investment Commission .