Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Welcome
Go
Free Newsletter Sign Up

SEC Proposes Crackdown on Executives’ Well-Timed Stock Sales (1)

Dec. 15, 2021, 4:11 PM

Corporate chieftains have long been suspected of skirting rules that are meant to prevent top executives from trading on inside information. Now, the Securities and Exchange Commission is cracking down.

The regulator is addressing a controversial question: When should corporate insiders, who may have access to material non-public information, be allowed to sell stock? Currently, executives can set up sales just days before dumping shares, which Senator Elizabeth Warren and other lawmakers say enables them to front run corporate announcements that can move share prices.

In response, the SEC on Wednesday unanimously proposed new rules that would force company insiders to wait roughly four months from when they schedule a trade before they sell. The agency will now seek public comment before it votes again to finalize the policies after taking into account that feedback.

The current regulations, created two decades ago, were designed to help senior executives sell stock and avoid being accused of insider trading later. But recent academic research shows that stock-sale plans are rife with suspiciously-timed transactions. SEC Chair Gary Gensler said in June that these corporate policies had “led to real cracks in our insider trading regime.”

Corporate Bosses Make Well-Timed Stock Sales in SEC ‘Blind Spot’

“The proposal addresses a number of the gaps that we’ve found,” Gensler said in an interview before officials voted to propose the plan. “It will help instill better trust in our capital markets.”

The issue is of keen interest to the SEC’s Democratic commissioners and progressive lawmakers. Warren, a frequent critic of Wall Street, called on the agency earlier this year to look into tightening regulations.

Scheduled stock sales, so-called 10b5-1 plans, are common across corporate America. Insiders at more than half of S&P 500 companies have enacted them, according to 2018 data from Morgan Stanley. Despite their popularity, executives don’t have to disclose that they’ve adopted a plan, though some do voluntarily.

The SEC’s new rules would change that. Companies would be required to disclose in regulatory filings whether executives have adopted or made any changes to when they plan to sell stock. Employees would also be prevented from having multiple plans for trading the same security -- a change that could minimize concerns that employees are gaming the system.

Other changes the SEC is considering include:

  • Limiting plans that execute a single trade to once a year
  • Disclosing insider trading policies and procedures in annual reports
  • Detailing the option grant process and reporting each grant made within two weeks of the release of material non-public information
  • Attesting that when an executive’s plan to sell is adopted or amended, the employee is not in possession of inside information

(Adds SEC vote in third paragraph.)

To contact the reporters on this story:
Matt Robinson in New York at mrobinson55@bloomberg.net;
Ben Bain in Washington at bbain2@bloomberg.net

To contact the editors responsible for this story:
Jesse Westbrook at jwestbrook1@bloomberg.net

Elizabeth Dexheimer

© 2021 Bloomberg L.P. All rights reserved. Used with permission.

To read more articles log in.

Learn more about a Bloomberg Law subscription.