Corporate executives are failing to file key reports with Canada's system for reporting insider trading, or are filing disclosures that are filled with errors, a new research study has concluded.
A review of disclosures of stock option grants by insiders shows 12 per cent of awards between 1996 and 2011 were never reported publicly as required under Canadian disclosure rules, while 30 per cent were filed late and 34 per cent had errors.
The study, authored by University of Victoria professor Lindsay Tedds, shows reporting improved after Canada introduced a new electronic system for disclosure in 2003, known as the System for Electronic Disclosure by Insiders (SEDI), replacing the older paper-based reporting system.
Under the older paper system, 30 per cent of insider reports of stock option grants were never reported, although the study says it is possible many were submitted but lost. After SEDI was introduced, only seven per cent were not filed, which the study calls "a remarkable improvement in compliance."
Late filings also dropped sharply after SEDI was introduced even though the filing deadline has been shortened, but the research showed that reports contained more errors than under the older paper system, with 36 per cent of SEDI reports containing errors compared to 25 per cent under the paper system. Most of the mistakes involved information on the expiration or grant dates of the options.
Under current rules, company insiders – typically senior executives and directors – are required to file a SEDI report within five days if they have received grants of securities from their company, or if they have bought or sold securities in the market.
There is no public record to allow researchers to double-check the accuracy of many filings, such as share sales, but insider filings of stock option grants can be verified because companies must report on their grants of options to executives in the compensation report section of their annual proxy circulars. Dr. Tedds compared those disclosures with individuals' insider trading filings to check the accuracy of the insider filing system.
She said she cannot be certain whether conclusions from her study can be generalized to other types of insider trading reporting, but said it is likely there are more errors in the insider reporting system "if something as simple as grants of stock options are not being reported properly."
"This is important because people – shareholders, other boards and investors – are using this information in a variety of different ways to make decisions and to select compensation for their own employees," she said in an interview. "If it's wrong, then all of those decisions based off of that information are wrong."
Dr. Tedds said the system can be improved, but it would require a commitment by securities regulators to spend money on monitoring and enforcement. She said she is unaware of any case where an individual has been charged under securities laws with filing misleading insider reports.
She also recommended steeper penalties to encourage compliance. In Ontario, the fine for late filing is $50 per day to a maximum of $1,000, while Quebec charges a maximum of $5,000. The report said the caps mean insiders have little incentive to file once they're a few weeks late, because the size of the penalty doesn't grow beyond the maximum.
Dr. Tedds also recommended modifying the SEDI system so that incomplete filings cannot be submitted, such as cases where the exercise price or grant date of options is not provided.
The report, published by the School of Public Policy at the University of Calgary, looked at data on 3,955 option awards granted to 981 different executives at 149 companies between 1996 and 2011.
It also concluded reporting is more inaccurate when individuals do their own filings, and more accurate when someone within the company submits insider filings on behalf of executives.
Cases of non-filing are highest when someone receives just one grant of options – although a "concerning minority" of people are regular non-filers – the study said, suggesting education about reporting requirements would help improve compliance for first-time recipients.
"A lot of this is also about communication -- explaining why this is important," Dr. Tedds said.