SEC's Gensler Pushes For Executive Trading Plan Changes Aimed At Preventing Insider Trading

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by Tyler Durden
Wednesday, Jun 09, 2021 - 03:45 PM

Company executives and insiders could be playing by a new set of 10b5-1 plan rules soon.

That's because the Securities and Exchange Commission, headed up by Gary Gensler, has signaled that it plans on seeking to revise the rules that govern the stock trading plans, which are usually set up ahead of time to allow insiders to sell stock on a schedule. 

The plans have drawn scrutiny because there is no required disclosure when they are set up, despite many companies choosing to disclose the plans, and because they can be modified or canceled. They have also come under scrutiny after analysis from Stanford and U Penn found the plans were used for “opportunistic, large-scale selling of company shares.”

For example, plans can be set up for a single trade that can take place as soon as 60 days from the plan's creation. These types of trades have, on average, allowed executives to avoid losses of 4% on their own company's stock during the six months from the sale, the analysis found. 

The 10b5-1 plans were created in 2000 and officials were "aware of weaknesses in the structure" at the time, the Wall Street Journal reports

New SEC chief Gary Gensler said on Monday: “In my view, these plans have led to real cracks in our insider-trading regime.” He added that he wanted the SEC to “ensure we are identifying and punishing abuses of 10b5-1 plans”.

In the past, the SEC has accused executives like former Countrywide Financial Chief Executive Angelo Mozilo of using a 10b5-1 plan for insider trading. Of late, however, the SEC has brought "relatively few" enforcement actions involving the plans. 

The Wall Street Journal highlighted the proposed changes:

An SEC proposal could try to reduce the risk of improper trading by requiring insiders to wait four to six months after a plan’s conception before trading; putting limits on plan cancellations or modifications; disclosing their adoption and any changes; and curbing the number of plans that executives can set up.

Gensler added: “Insiders can cancel a plan when they actually do have material nonpublic information. This seems kind of upside-down to me. It also may undermine investor confidence.”

Gensler has also moved for changes at the Public Company Accounting Oversight Board. He said: “I supported taking a new direction and reinvigorating this important organization.”