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CSA STAFF NOTICE 51-320 - OPTIONS BACKDATING As a result of recent media attention about the apparent backdating of options in the US, Canadian market participants have expressed interest in the dating of stock options granted by reporting issuers in Canada.Staff in the jurisdictions represented by the Canadian Securities Administrators (CSA), are publishing this notice to communicate our understanding of this issue in the Canadian context.The board of directors of an issuer is responsible for ensuring that the issuer prices options appropriately and discloses them properly.The following guidance may reduce concerns about the timing of option grants and the risk of non-compliance with securities legislation: • establish a compensation committee that follows the guidance contained in National Policy 58-201 - Corporate Governance Guidelines; • consider the guidance in National Policy 51-201 -- Disclosure Standards including adopting a corporate disclosure policy, adopting an insider trading policy, and establishing "blackout periods" around earnings announcements; and • ensure 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.The comparison suggests that the personal tax regime may have been one of the factors which impacted the desire to receive backdated options in lieu of other forms of compensation in Canada but not so in the United States. Prior to 2003, the long-term capital gains rate was generally 20%. The practice of backdating executive stock options has received significant attention in the U. financial and legal literature, and has recently begun to be discussed in the Canadian legal literature. Backdating, in its most basic form, is the use of hindsight to selectively pick a local low point in a stock’s trading price and issue executive stock options stipulating the selected date as the grant date when, in fact, the options are granted at a later date. In 2003, the rate was reduced to 5% for individuals in the lowest two income brackets and 15% for all others.
Although backdating had not yet been recognized as a problem, the provisions of Sarbanes-Oxley requiring that insiders report the acquisition of securities, including options, within two days of receipt greatly hindered the ability of corporations to backdate options.Because the backdated options’ strike price is lower than the market price on the actual grant date, the recipient has received something of greater monetary value (even if the options have not yet vested) than a correctly dated at-the-money option. Companies could reward executives with cash compensation or additional properly dated and priced incentive awards, including options, rather than engage in dubious backdating practices. It is clear that there must be reasons other than greed that have led so many to backdate executive options. Academics, regulators, and practitioners alike have tried to gain a better understanding of these incentives and the roles they have played in the backdating scandal; however, there is as of yet no consensus regarding the causes of backdating. This is problematic because policy, legislative, or regulatory changes are unlikely to be effective if the root causes are unknown. In 2008, the long-term capital gain rate for individuals in the lowest two tax brackets (currently 5% and 15%) was further reduced to zero. Untangling the causes of backdating will remain elusive unless each factor is considered in detail using evidence from different regimes. III 2009) (allowing carry forward for a credit for the prior year’s minimum tax liability that resulted from certain timing differences). D (illustrating in Example 4 the effect of AMT); see generally Francine J. 337 (2002) (providing a detailed discussion of the AMT and its application to ISOs). These reduced rates are currently effective until the end of 2012. 111-312, 124 Stat 3296 (extending reduced rates from the end of 2010 until the end of 2012). Backdating of stock options is an example of an agency problem.It has emerged despite all the measures (i.e., new regulations and additional corporate governance mechanisms) aimed at addressing such problems?