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Investors Gain Valuable Information With New Disclosure System for Insider Trading

by Wayne Cheveldayoff, 2003-05-26

After a couple of false starts, Canada’s security regulators are finally introducing a new computer-based disclosure system for insider trading that will allow investors, with only the click of a computer mouse, to see what senior executives are doing with their stock holdings. This is important information that is valuable for investors in Canadian companies, since buying or selling activity by company officers often is indicative of the future prospects of the company.

The new system, known as the System for Electronic Disclosure by Insiders (SEDI), is long overdue. It has been delayed for several years and has incurred significant cost overruns due to computer glitches. Nevertheless, SEDI represents such a major jump in transparency and convenience for investors that all the problems should be forgotten once the system is fully functioning after its launch on June 9.

SEDI replaces a very inadequate and inconvenient paper-based system. Insider trades for companies and individuals resident in Ontario, which covers most such trading in Canada, have been published to date in a special section of the OSC Bulletin, a weekly publication of the Ontario Securities Commission. A subscription to the bulletin costs close to $500 a year. Investors wanting this insider trading information would have to pay for the subscription, or look for the bulletin at a library. Some fee-based financial web sites also have offered this information.

With SEDI, all insider trading information will now be free and available 24/7 to anyone with an Internet connection. The information will also be comprehensive and timely, since all insiders across Canada must report their trades within 10 business days (in contrast to the outgoing system where some of the reported trades were months out of date).

The regulators say investors will be able to view a weekly summary that displays all transactions filed in SEDI in the preceding week, details of individual transactions by insiders, a list of insiders who have registered for each SEDI issuer and the closing balance of all that issuer’s securities they hold, and an “issuer event history” that includes information on stock dividends, stock splits, consolidations, amalgamations, reorganizations, mergers or other similar events reported on SEDI.

What SEDI won’t reveal, however, is why insiders are buying or selling. Insiders are not required to say what is behind the transaction and that complicates any attempt to evaluate the importance of the information.

The buying of a company’s stock by an insider is generally thought to be an indication that the insider is bullish on the company’s prospects. If someone thinks the stock is going down, would they buy?

But it is not so simple to come to a conclusion about insider selling. For instance, selling could be part of a plan to diversify holdings (it is rarely advisable for company executives, like other investors, to have all their eggs in one basket). It could be triggered by stock options expiring. Or selling could be part of estate planning or a desire to build a dream home. It doesn’t necessarily mean the insider is negative on the prospects for the company.

An illustration of the difficulty of making conclusions based on insider selling is the massive insider selling of tech shares during the boom years from 1996 to March 2000. For most of that period, the insiders got it wrong, at least in the short run, since share prices continued to climb. However, eventually they were proven right about the extreme overvaluation of their companies.

On the whole, while not as conclusive an indicator as insider buying, insider selling is still an important warning flag. It is a sign that things may not be rosy for the company and that the situation bears further investigation.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. He can be contacted at

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©2003 Wayne Cheveldayoff