Insider reporting obligations and options backdating

In April 2010, new rules governing the reporting of securities trades by insiders of reporting issuers came into effect in Canada. These new rules were embodied in National Instrument 55-104, and in contemporaneous harmonized changes to Ontario’s Securities Act. Under the new regime, the deadline for filing insider reports has been shortened, from ten calendar days to five calendar days following a purchase or sale. When a draft of National Instrument 55-104 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. The suggestion that insider reporting obligations might deter the practice of options backdating is intriguing. Insider reporting rules have historically been regarded primarily as a regulatory tool to detect or prevent the improper use of inside information by insiders of reporting issuers. For these requirements to perform an effective secondary role in combating improper options backdating, clear rules on the timing of reporting obligations and rigorous enforcement would be required. 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. 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.