The SEC is restricting when top executives can unload company shares and is forcing them to disclose more information about their planned stock sales as part of a renewed effort to combat insider trading.
The Securities and Exchange Commission on Wednesday voted unanimously to adopt rulesthat will require company directors and officers to wait at least 90 days between when they schedule a trade and sell their shares, about a month less than initially proposed. Companies also will have to report on their executives’ use of trading plans in quarterly reports.
The rules, if properly followed, give executives a defense against insider trading cases brought by the SEC. The existing regulations from 2000 don’t mandate waiting periods, which can allow company officials to sell stock around the time of big company news as long as they’ve set up a trading plan ahead of time. The new rules are intended to prevent unethical executives looking to cash in on confidential, market-moving information, SEC Chair Gary Gensler said at a meeting to consider the regulations.
“It’s a matter of fair competition and trust in our capital markets,” Gensler said.
The SEC changed the roughly four-month waiting period after reviewing public feedback on its initial plans, Gensler said.
The cooling-off period is now about three months, or two days after a company releases its financial statements, whichever is longer. But it cannot exceed 120 days. Company employees who aren’t directors or officers and have trading plans would only have to wait 30 days between when they schedule a trade and sell their shares, according to the new rules.
The updates to Rule 10b5-1 follow years of news reports and academic research about company officials’ suspiciously well-timed trades. Scheduled stock sales using so-called 10b5-1 plans are common, but executives’ cooling-off periods vary. Company officials waited between two and three months on average to trade, with some making sales within 30 days of enacting a 10b5-1 plan, according to a 2021 study by Stanford University professor David Larcker, University of Pennsylvania professor Daniel Taylor and other academics.
The Council of Institutional Investors, which represents state pension funds, first petitioned the SEC to tighten Rule 10b5-1 in 2012, asking for a multi-month cooling-off period and more disclosures. Similar calls by Sen. Elizabeth Warren (D-Mass.) and the SEC’s Investor Advisory Committee followed.
But companies have defended the 22-year old regulations as strong enough to prohibit the misuse of 10b5-1 plans. Executives must have plans that are made “in good faith and not as part of a plan or scheme to evade the prohibitions” against insider trading, according to the 2000 rules. The regulations are intended to help executives—whose compensation is often tied up in company shares—generate income without facing insider trading accusations, even if they frequently have access to market-moving information that isn’t public.
The US Chamber of Commerce sought a 30-day cooling-off period, which it told the SEC earlier this year was “market practice.” The normal cadence of the corporate calendar can explain what appear to be advantageously timed trades, according to the Chamber.
The final rules are more restrictive than need be, Republican SEC Commissioner Hester Peirce said at the meeting. But addressing concerns about gaps in the old rules was important, she said.
“I support it for likely doing more good than bad,” Peirce said. “It should help insiders to trade without fear of liability, while making it more difficult to misuse 10b5-1 plans.”
Trading Plan Access
The new rules came after updated regulations in June that made it easier for the public to see executives’ trading plans. The SEC started requiring executives planning to sell company stock to put information about their trading plans into the agency’s EDGAR public corporate filings database, eliminating the option to mail it in.
An executive must submit the details when they intend to sell at least $50,000 of stock in a three-month period. The information appears in what’s called a Form 144, which has information about the adoption or modification of trading plans.
Only 234 of the roughly 30,000 Form 144 filings the SEC received last year were submitted electronically through EDGAR, according to the agency.