The Securities and Exchange Commission (SEC) called for the tightening of a rule on Wednesday that allows corporate insiders to set predetermined plans to sell company stocks in accordance with insider trading rules.
Progressives critical of this rule, known as 10b5-1, say that restrictions on this measure are too loose and offer corporate insiders to "game the system," Reuters reported, while staying within the confines of the law.
Under the new proposal, executives will have to disclose their predetermined trading plans and any modifications made to them. The SEC also seeks to implement a "cooling-off period" of 120 days between the time an individual adopts a new plan and makes their first trade. For those trading in the stock of their own companies, this period would be 30 days.
The new regulations would also prevent corporate insiders from having several overlapping plans which Reuters reported that SEC Chair Gary Gensler disapproves of because of the ability for insiders to "cherry-pick favorable plans as they please."
"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," Gensler said in a press statement issued Wednesday. "These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that's a good thing. It helps investors deciding where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation. I'm pleased to support today's proposal and, subject to Commission approval, look forward to the public's feedback."
Additionally, the SEC is also seeking to clamp down on Wall Street malpractice by introducing a requirement that companies disclose the purchasing of their own shares—known as a "buyback"—one business day after the trade is executed, as opposed to the current requirement of a quarterly disclosure.
"At a time when many Americans believe the stock market is rigged, cleaning up practices that can be a pathway for abusive trades will help restore trust in our markets," Amy Borrus, head of the Washington, D.C.–based Council for Institutional Investors, told Reuters in response regarding the new measures.
This crackdown, particularly regarding the 10b5-1 rule, comes amid increased scrutiny toward corporate insiders' trading after executives at Pfizer and Moderna executed trades during the vaccine development process.
For example, Reuters reported in July 2020 that Moderna's chief executive and chief medical officer reaped millions of dollars each month by selling shares in the company stock as its price was on the rise amid news of its vaccine development progress. Their sales were conducted on a fixed schedule set by a 10b5-1 plan put in place before the pandemic. This move allowed them to lock in profits, even if the company stock had not continued its growth.
"There is mounting evidence that these plans are, at best, being used in a manner in which they were not intended, and at worst, being abused to enrich corporate insiders," Daniel Taylor of the University of Pennsylvania's Wharton School of Business told Reuters.
Newsweek reached out to the SEC for comment and was directed to a comment on the agency's website issued by Gensler.
"I support these amendments because, if adopted, they would help close potential gaps in our insider trading regime," Gensler said in the statement. "Today's proposals would add new conditions to the existing affirmative defense under Rule 10b5-1(c)(1), to help address concerns about potentially abusive practices associated with the use of that defense."
Update 12/16/2021 5:20 p.m.: This story has been updated to include a comment from Gensler.
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