The Canadian Securities Administrators have issued a staff notice addressing the issue of options backdating, reminding issuers of their governance and disclosure obligations.

The CSA says that revelations about the practice of backdating of options in the United States has led Canadian market participants to express interest in the dating of stock options granted by reporting issuers in Canada. CSA staff say they are publishing this notice to explain their understanding of this issue in Canada.

They note that there are some historically different regulatory requirements in Canada that may reduce the opportunity for Canadian companies to backdate or time option grants, including rules imposed by the TSX and TSX Venture Exchange, and securities legislation that generally requires insiders of reporting issuers to file a report on SEDI within 10 days of any change in their direct or indirect beneficial ownership of or control or direction over securities of the issuer, including options.

In the U.S., it is alleged that some companies granted options to executives and then claimed that they issued them at an earlier date than they actually did. “This enabled them to base the exercise price of the options on a lower market price for the issuer’s shares. There are also broader concerns in the U.S. that issuers may have timed the granting of stock options using their expectations of stock price movements,” it explains.

The CSA point out that the board of directors of an issuer is responsible for ensuring that the issuer prices options appropriately and discloses them properly. It also provides guidance that, “may reduce concerns about the timing of option grants and the risk of non-compliance with securities legislation”.

The guidance includes: establishing a compensation committee that follows the guidance contained in CSA corporate governance guidelines; consider the guidance including adopting a corporate disclosure policy, adopting an insider trading policy, and establishing “blackout periods” around earnings announcements; and, ensuring that, following a grant of options to insiders, the issuer provides them with details of their grants so that they can comply with their legal obligation to file insider reports on SEDI within 10 days.

CSA staff recommend that all issuers assess current policies, procedures and controls for option grants and equity-based awards to ensure that they comply with relevant stock exchange rules and securities legislation.

The CSA says that if its staff become aware, through disclosure reviews, tips, or otherwise, of abuses by reporting issuers, they may take enforcement action against the issuers or their directors and officers.