11.6.2 Insider Trading

INSIDER TRADING

Definition of Insiders

For the purposes of disclosure, insiders generally include any of the following entities:

• Directors of the Issuer
• Senior Officers of the Issuer: This includes the chair or vice-chair of the board of directors, the president, any vice-president, the secretary, the treasurer, or the general manager of the issuer. It also extends to any other individual performing functions akin to those normally conducted by an individual occupying any such office and includes the five highest-paid employees of the issuer.
• Significant Shareholders: Any person or company (excluding underwriters in the course of public distribution) beneficially owning, directly or indirectly, or controlling or directing more than 10% of the voting rights attached to all voting securities.
• Directors or Senior Officers of Subsidiaries: This applies to any director or senior officer of a company that is a subsidiary of the issuer or is itself an insider due to ownership, control, or direction over more than 10% of the voting rights attached to all voting securities of the issuer.

In some cases, if a corporation becomes an insider of a second corporation, an insider of the first corporation may be deemed to be an insider of the second corporation as well. Special care should be taken in transactions to ascertain if the relevant personnel are deemed insiders under applicable legislation.

The securities acts and the Canada Business Corporations Act also possess provisions that may deem certain individuals or corporations to have been insiders for up to six months before an event.

Insider Reporting

Insiders must inform relevant securities commissions when they become insiders and when they transact in the securities of the company in which they hold insider status. Reports should include the extent of the insider’s direct or indirect beneficial ownership of, or control or direction over, the company’s securities. Most acts require insiders transferring securities of a reporting issuer into the name of an agent, nominee, or custodian to file a report with the administrator—this does not apply if securities are transferred as collateral for a debt.

All reports filed are available for public inspection and sometimes summarized in the administrator’s regular publications. Failure to file an insider report, or providing false or misleading information, is an offense and is usually punishable by a fine.

Financial Statements Review

Case Study: NFR Inc.

In this case study, you’ll review NFR Inc., a hypothetical Canadian retail company. You’ll practice categorizing and calculating specific financial statement items, deciding on which financial statement they belong. This activity enhances your ability to interpret a company’s financial statements and understand its financial position.

Key Takeaways

1. Insider Disclosure: Regulations demand explicit reporting requirements for insiders regarding ownership and transactions in company securities.
2. Legal Repercussions: Non-compliance and dissemination of false information can result in legal penalties.
3. Practical Understanding: Case studies such as NFR Inc. and key term activities supplement theoretical comprehension with practical insight.

Frequently Asked Questions (FAQs)

Q1: What entities are commonly considered insiders?

A1: Directors, senior officers, substantial shareholders controlling more than 10% of voting securities, and senior officers or directors of subsidiaries.

Q2: What are the repercussions for failing to file insider reports?

A2: It can result in fines and other penalties under securities acts.

Q3: What are the requirements for insider ownership and transactions disclosure?

A3: Insiders must disclose their direct or indirect beneficial ownership of, or control over, the company’s securities to relevant securities commissions promptly.

Glossary

• Beneficial Ownership: Actual view of who enjoys the benefits of ownership even though the title of ownership remains with another entity.
• Securities Commission: Regulatory body that oversees the enforcement of securities laws.
• Senior Officer: High-ranking individual(s) designated to execute key tasks akin to executive roles (e.g., President, Vice-President).
• Reporting Issuer: An issuer required to adhere to continuous disclosure obligations under securities laws.

Chapter Summary

Understanding insider trading ensures compliance with strict regulations and promotes transparency within public companies. As invested figures or shareholders may possess material non-public information, proper reporting is crucial—fostering ethical and legal compliance. Tools such as the case study of NFR Inc. offer practical insight into analyzing financial statements, cementing theoretical understanding with pragmatic exercises.