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E-MailAnita Anand is a Professor of Law and holds the J.R. Kimber Chair in Investor Protection and Corporate Governance at University of Toronto Faculty of Law. This post is based on a recent paper authored by Professor Anand; Stephen Choi, Murray and Kathleen Bring Professor of Law at NYU Law School; Adam C. Pritchard, Frances and George Skestos Professor of Law at University of Michigan Law School; and Poonam Puri, Professor of Law at York University Osgoode Hall Law School.
Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).
Canadian and American securities market regulators have differing approaches to enforcement. Canadian securities law is largely driven by provincial or territorial legislation and implemented by the jurisdiction’s respective securities commissions. In contrast, the American development of securities law is driven by the federal Securities and Exchange Commission (SEC), with state regulators taking a secondary role. Although provincial securities regulators in Canada have entered into memoranda of understanding with the SEC to facilitate investigations involving conduct in both countries, the enforcement regimes remain separate.
The two countries also vary in their approach to insider trading. While Canada has legislation with explicit prohibitions against insider trading, in the U.S. restrictions on insider trading are nominally based on the prohibition against fraud found in Rule 10b-5 of the Securities Exchange Act (17 CFR § 240.10b-5), but the insider trading prohibition in the U.S. is more accurately a species of common law. U.S. courts have generally been willing to accommodate the SEC in developing this insider trading prohibition without legislation or rulemaking.
The SEC also has greater resources, greater economies of scale, and more experience in bringing insider trading actions than Canadian regulators. Previous analyses have found that when scaled for the respective size of the different stock markets, U.S. authorities prosecute 20 times more insider trading violations than their Canadian counterparts (Bhattacharya, 2006) and that, in comparison to Canada’s largest provincial capital market regulator, the Ontario Securities Commission (OSC), the fines administered by the SEC in the U.S. are higher per insider trading case by a factor of 17 (Bhattacharya, 2006).
More recent empirical research into Canadian securities market regulation reveals evidence of increased action against securities law offenders. Using the OSC as a proxy for Canadian securities enforcement levels, Anand and Green found that Canadian securities law enforcement increased in frequency after the 2008 financial crisis; though, it decreased in subsequent years (Anand and Green, 2018).
Such differences in enforcement invite a comparison of the two approaches; specifically, we posit that the SEC will continue to have the capacity to bring more insider trading actions than its Canadian counterparts even after controlling for scale. In order to test this and related hypotheses, we identified insider trading enforcement actions brought by Canadian provincial securities regulators and the SEC from 2005 to 2015. We collected data on industry, number and type of defendants, time to resolution, and sanctions imposed. Our data are cross-sectional in nature and thus, our findings are largely based on correlations. Nonetheless, we believe that our findings mark a first step in assessing differences and similarities in Canadian and U.S. insider trading enforcement.
We make a number of findings. First, adjusting for trading volume, Canada has a greater intensity of enforcement when compared to the U.S. Second, Canadian securities regulators primarily concern themselves with insider trading in Canadian companies, while the SEC brings more enforcement actions involving insider trading in companies incorporated outside the U.S. Third, we do not find significant differences in the fraction of actions involving multiple traded companies between Canada and the U.S. However, we do see that U.S. investigations involve a significantly greater number of defendants and, relatedly, that the SEC is more than twice as likely to pursue tippers or tippees.
We do not, however, observe a significant difference in the likelihood that top corporate insiders will be pursued. Fourth, we find that U.S. cases are significantly more likely to result in a criminal referral leading to prosecution. Fifth, we find that settlements are more likely in the U.S. Finally, in terms of penalties, we find no significant difference in monetary penalties between the two countries. However, we do find that Canada is more likely to apply a bar as a sanction, but if a bar is applied, the U.S. is more likely to make the bar permanent.
Missing from the existing literature is a comparative analysis of enforcement across borders. This study offers a unique contribution in this regard, providing original data from the SEC and provincial securities commissions in Canada. Our findings neither demonstrate a need for systemic reform in either jurisdiction nor suggest that centralized regulation is necessarily better from an enforcement perspective. But, they do provide insight into the differing points of regulatory emphasis in two jurisdictions. From a comparative perspective, our research thus allows regulators to begin to evaluate whether their enforcement approach is optimal on the basis of quantitative data.
The complete paper is available for download here.
