Risk & Compliance

SEC Proposes Tighter Insider Trading Rule for Execs

The proposal addresses the safe harbor for CFOs and other corporate executives who make trades as part of a pre-announced portfolio management plan.
Matthew HellerDecember 15, 2021

The U.S. Securities and Exchange Commission on Wednesday proposed tightening a rule that shields corporate executives from insider trading liability for making trades as part of a pre-announced portfolio management plan.

Rule 10b5-1 applies to plans executed by a third party and set up at a time when the plan beneficiary isn’t aware of material non-public information, providing corporate insiders with a safe harbor to protect them from future accusations of insider trading

Under the proposed amendments to the rule, the SEC would require company officers to wait 120 days before they can trade under a 10b5-1 plan, prohibit overlapping plans, and limit single-trade plans to one trading plan per 12-month period.

“The core issue is that these insiders regularly have material information that the public doesn’t have,” SEC Chair Gary Gensler said in a statement. “So how can they sell and buy stock in a way that’s fair to the marketplace?”

He added that “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.”

As The Wall Street Journal reports, the SEC’s proposal “follows academic research suggesting [Rule 10b5-1] arrangements are being abused as company leaders cash in at historic levels on their companies’ shares.”

As of Nov. 29, sales by insiders were up 30% from 2020 and up 79% against a 10-year average, according to InsiderScore/Verity, with corporate leaders including Microsoft’s Satya Nadella, Amazon founder Jeff Bezos, and Tesla’s Elon Musk selling a record $69 billion in stock.

Ben Silverman, director of research at InsiderScore/Verity, said executives have been anticipating tax increases and cashing in as markets reached new highs earlier in the fourth quarter of 2021.

The SEC’s two Republican commissioners, Hester Peirce and Elad Roisman, voted in favor of the rule change, but Roisman said the commission appeared to be addressing “a problem in our marketplace which we do not have much evidence actually exists.”

“Our markets have developed such that a large portion of executives’ compensation is made up of their companies’ securities,” he said.  “For this compensation to be valuable, those individuals need to be able to access that wealth.”