Do Insiders Comply with Disclosure Rules? Evidence from Canada, 1996-2011

The disclosure of information on the granting of stock options as part of senior managers’ compensation packages can be a cumbersome and patchy process in terms of both regulatory compliance and public accessibility. Closing the gaps to make the reporting and accessing of data less unwieldy and more timely, efficient and accurate, should be a priority for securities regulators Firms are required to disclose the issuing of stock options to their highestlevel executives in their annual information circulars. Slight additions made to the information provided in the circulars, such as stock option grant dates, would greatly improve corporate transparency. Insiders also need to be educated on their duty to file, as they bear a fair amount of the responsibility for the problems in the system. Insiders’ lack of awareness about compliance contributes to discrepancies between insider disclosure and company disclosure, and creates information gaps. Misfiling, failure to file, and late filing of data — which can be a chronic problem — further hamper the disclosure process. Add to this the issue of limited accessibility created by a frustrating lack of linkage between databases and a paucity of online searchability capacity. This paper’s research shows that compliance levels are quite high in regards to reporting of information in proxy circulars. However, 12 per cent of stock option awards are not made public outside of the circulars, with 10 per cent of awards to CEOs, nine per cent to CFOs and 15 per cent to VPs going unfiled. The incidence of unfiled reports also includes 22 per cent of insiders for whom stock options are the only award. Equally worrisome is the fact that 26 per cent of insiders have at least one option award that goes unreported and nearly eight per cent of insiders never file. Some 34 per cent of insider awards are filed with information that differs from the data reported in the firm’s information circular. Confusion and procedural ignorance about compliance on the part of insiders contribute to such discrepancies. The System for Electronic Document Analysis and Retrieval (SEDAR), the continuous disclosure database that firms use, cries out for modernization. Not only does its archaic reporting system limit its accessibility, but it functions separately from the database insiders use, the System for Electronic Disclosure by Insiders (SEDI). Linking the two databases would streamline insider filing requirements, increase compliance with insider disclosure, and improve the audit and compliance function of the securities regulators. The financial penalties for non-compliance or irregularities should be an incentive for both insiders and issuers to educate themselves and ensure they are meticulous in producing error-free, timely data and in making those data public. Unfortunately, enforcement is inconsistent. Currently, penalties tend to be applied only if another serious regulatory breach accompanies the misfilings, late filings or chronic nonfilings. Canada’s disclosure system needs fixing and streamlining in order to achieve the highest level of transparency on executive compensation. Some of these fixes are simple, others may be costly, but if improvements are not made, the system’s integrity, along with shareholder and public confidence, risk being seriously compromised.