SEC moves to tighten insider trading rules—as C-suite execs sell shares in record numbers
Wall Street’s top regulator is finally moving to beef up insider trading rules in the U.S.
For two decades, the leaders of C-suites and boardrooms across corporate America have alerted the U.S. Securities and Exchange Commission of their intentions to buy or sell stock ahead of time through what are known as 10b5-1 plans.
And for about just as long as they’ve been around, 10b5-1 plans have been the subject of widespread scrutiny, with everyone ranging from Sen. Elizabeth Warren to pension funds to SEC officials complaining that the plans are riddled with loopholes that allow executives to trade on nonpublic material information before it’s released.
So the SEC is cracking down.
Under a new proposal issued Wednesday—at the tail end of what has been a record year for corporate insider share sales—the SEC would require that executives and directors wait 120 days after filing or amending a 10b5-1 plan with the regulator before taking any of the actions outlined in it. Currently, corporate insiders can adopt a 10b5-1 plan and trade on it in the same day, according to the SEC’s proposal. Insiders would also need to attest that they are not aware of any material nonpublic information about the company or its stock when adopting or amending a 10b5-1 plan under the proposal. And the proposed rule changes would mandate that companies publicly disclose if executives have filed or amended one, which is not the case today, though some issuers do voluntarily disclose such information.
“Over the past two decades, we’ve heard concerns about and seen gaps in Rule 10b5-1—gaps that today’s proposals would help fill,” SEC Chair Gary Gensler said in a statement.
The SEC has long been under pressure to make such changes, but the scrutiny has only accelered as of late.
In February, Warren wrote to then acting SEC Chair Allison Herren Lee, who is now a commissioner at the agency, that abuses of 10b5-1 plans were hurting investors and risked “undermining public confidence.” Months later, the SEC’s Investor Advisory Committee—a group of 19 academics, investors, legal experts, and others—recommended that the commission “establish meaningful guardrails” around 10b5-1 plans. Even former SEC Chairman Jay Clayton waded into the conversation in late 2020 in a letter to Rep. Brad Sherman, writing that companies “should strongly consider requiring” a waiting period between a 10b5-1 plan’s adoptions, amendment, or termination and the resulting trading taking place. “The integrity bang for the compliance buck is large,” Clayton wrote in the letter, which was sent while he was still at the SEC.
Gensler made it clear himself in June that he does not believe 10b5-1 plans in their current form are adequate, either.
“In my view, these plans have led to real cracks in our insider trading regime,” Gensler said at a conference over the summer.
Insiders are cashing out
Part of the reason why concerns about 10b5-1 plans have been on the rise is because corporate insiders have been racing to cash out some of their shares over the course of the COVID-19 pandemic amid a booming U.S. stock market and an election in 2020 that carried a range of tax implications going forward.
Data from InsiderScore/Verity show that officers and directors across the public markets sold 2.3 billion shares in 2020 that were valued at what was then a record $120.8 billion. The sales only accelerated in 2021, though, with corporate insiders including Tesla’s Elon Musk, Microsoft’s Satya Nadella, and Alphabet’s Sergey Brin having cashed out on more than 3 billion shares worth $161.9 billion, through Dec. 14, according to InsiderScore/Verity.
A growing body of academic research, meanwhile, has shown that many executives may be using 10b5-1 plans as cover for their own gains. In late 2020, for instance, a Columbia law school professor found that public companies tend to disclose positive news on days when corporate executives have share sales planned under a 10b5-1 arrangement. And in January, professors and researchers from Stanford University, the University of Pennsylvania, and the University of Washington wrote in a piece called “Gaming the System” that executives who sell within 60 days of their 105b-1 plan being adopted tend to avoid many of the losses that disappear thereafter.
The SEC’s approval Wednesday kicks off what will likely be a months-long process to finalize the proposal.
And while the vote was unanimous among the SEC’s five commissioners, the regulator’s two top Republicans—Commissioners Hester Peirce and Elad Roisman—did raise some concerns that could end up weighing on the final rule.
In a statement, Roisman voiced support for the 120-day cooling-off period. However, the SEC commissioner said that “to say I have reservations about other aspects of the proposal is an understatement.” Among those cited by Roisman was the fact that many individual executives have a substantial part of their pay tied up in their company’s stock.
“Executives have access to a lot of material information about their companies, which is inaccessible to the general public. If they and other insiders were allowed to trade their companies’ stock while in possession of that information, they could have an unfair advantage in the marketplace and the integrity of our markets would suffer,” Roisman said. “Yet, our markets have developed such that a large portion of executives’ compesnsation is made up of their companies’ securities. For this compensation to be valuable, those individuals need to be able to access that wealth.”
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