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Quebec’s securities watchdog has cleared Bombardier Inc. of wrongdoing in a probe of its executive stock-sale program but said the plane and train maker should consider scrapping the controversial system.

The regulator found no violation of securities law by Bombardier or its senior executives during the implementation of the company’s automatic share-disposal program (ASDP), the Autorité des marchés financiers said in a statement on Friday. But the regulator, known as the AMF, said the company should weigh whether to keep the plan.

“The rapidly evolving situation at Bombardier Inc. shortly after the ASDP was implemented combined with the brief period between its implementation and the start of transactions and the significant volatility in the company’s forecasts and earnings led to a negative perception of the plan,” the regulator said. “In light of this, the AMF has strongly recommended that Bombardier Inc. reconsider the merits of maintaining its ASDP.”

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Bombardier said in a statement it would follow the regulator’s recommendation and ask its board of directors to pass a resolution to end the program at its annual meeting of shareholders next week. Asked whether the decision to end the program could affect Bombardier’s ability to retain executive talent if it becomes harder for those executives to cash out their share-based pay, spokesman Simon Letendre told The Globe and Mail that the leadership team is “heavily invested in the company and fully committed to the success of its turnaround.”

Bombardier shares fell 5.7 per cent to close at $2.34 on the Toronto Stock Exchange on Friday, losing ground for a second day after the company issued a profit and revenue warning on Thursday.

The AMF launched a probe into Bombardier’s executive stock-sale program last November and asked the company to suspend all trades tied to it. The company complied and has co-operated with the review, the regulator said.

The probe came after Bombardier was criticized for launching the share-disposition program last August, prior to the release of bad news that sent its share price sharply lower.

One of the key questions is whether Bombardier management was in possession of potentially market-moving information at the time the company set up the plan for its executives. On Nov. 8, just weeks after the system was set up, the plane maker announced a major restructuring effort that included 5,000 job cuts as well a US$600-million shortfall in cash-flow projections for the year because of delays in delivering trains. The stock dropped 24 per cent that day.

Some observed that the share-sales program was launched before bad news was disclosed, but Bombardier said the program was created at a time when trading was permitted under its internal guidelines and under applicable securities laws.

In an interview published with Quebecor’s Journal de Montréal in November, Bombardier chief executive Alain Bellemare denied setting up the system to sell stock before bad news was disclosed. “We would never do that,” he was quoted as saying. “We are far too professional and ethical for that.”

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Automatic share-sales plans allow senior executives to exercise options and sell stock without running afoul of Canadian insider-trading regulations, which forbid executives from trading shares while they have material information that has not been disclosed to shareholders. The trades are supposed to be made according to pre-arranged instructions given to arms-length brokers.

The optics of ASDPs, even if legally set up, are not consistent with modern governance, especially if companies obtain regulatory exemptions allowing them to defer the disclosure of transactions, as was the case with Bombardier, Michel Magnan, a specialist in corporate compensation management at Montreal’s Concordia University, said in an e-mail. The fact that executives do control the timing of the setting up of a ASDP does leave a cloud around the operation as executives do have a significant informational advantage, he said.

“Fair and level-playing-field capital markets rely on transparency and ASDPs detract us from such an objective,” Mr. Magnan said. “If executives, as insiders, need or want to sell shares, then usual rules and regulations should apply.”

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