The Securities and Exchange Commission is drafting a proposal that would restrict the plans that corporate insiders use to avoid insider trading reports when buying or selling shares of their own company.
Speaking Monday at The Wall Street Journal CFO Network eventSEC Chairman Gary Gensler said he was looking to revise the rules that govern arrangements, known as 10b5-1 plans. Insiders make plans in advance and use them to plan future transactions. The arrangement provides executives with a defense against allegations of insider trading that arise from the possession of material, undisclosed non-public information at the time of a trade.
Plans are often controversial because there is no required public disclosure of a plan by the time an insider establishes one. Some investors say the plans can be manipulated because, for example, executives can change or cancel them. SOEs sometimes disclose plans to mitigate the perception that executives are negotiating on non-public information.
The SEC passed a rule creating 10b5-1 plans in 2000. Agency officials were aware of the weaknesses of the structure, former SEC commissioner Joseph Grundfest said in 2013, but the agency didn’t not refined the rule.
Mr Gensler suggested on Monday that rule changes are now due. “In my opinion, these plans have led to real cracks in our insider trading regime,” he said.
He added that regulators “will ensure that we identify and punish abuses of the 10b5-1 plans” under the current rule.
A group of researchers from Stanford University, the University of Pennsylvania and the University of Washington reported this year that some executives are using the plans to make an “opportunistic and large-scale sale of company shares.”
A red flag, researchers say: Some insiders have plans in place for a single exchange that took place within 60 days of the plan’s creation. These trades, on average, helped executives avoid losses of 4%, defined as the stock’s performance against its industry peers in the six months following the first sale.
“For the SEC to review this is smart and timely,” said Jina Choi, partner at Morrison & Foerster LLP and former SEC office manager in San Francisco. “There seem to be some gaps, especially when you look at university studies.”
The SEC has brought relatively few enforcement actions on trades linked to a 10b5-1 plan, Ms Choi wrote in a customer note Last year. The last SEC case was filed in January 2012.
In one of those cases, the SEC in 2009 accused the former chief executive of Countrywide Financial Corp. Angelo Mozilo of insider trading linked to the 10b5-1 plans he had in place. Mr. Mozilo settled the claims in 2010 without admitting or denying the wrongdoing.
An SEC proposal could attempt to reduce the risk of inappropriate trading by forcing insiders to wait four to six months after designing a plan before trading; put limits on cancellations or plan changes; disclosure of their adoption and any changes; and reduce the number of plans that leaders can put in place.
“Insiders can cancel a plan when they actually have material non-public information,” Gensler said. “It seems a bit backwards to me. It can also undermine investor confidence.
The Council of Institutional Investors asked the SEC in 2012 and 2013 to curb the 10b5-1 plans, saying they were being abused. At the time, the SEC did not revise the rule that allows plans.
Mr. Gensler also discussed changes within the Public Company Accounting Oversight Board, an organization that oversees auditors of public companies. The SEC last week fired PCAOB chairman William Duhnke, a Republican appointed in 2017. Both Republican SEC commissioners criticized the move.
The PCAOB was not living up to its role and mission as the organizer and enforcer of auditing standards, Gensler said. “I have supported taking a new direction and re-energizing this important organization,” he said.
Mr Gensler also reported that the SEC is drafting new rules or guidelines for special purpose acquisition companies, a trading structure that has flourished over the past year as an alternative to the traditional initial public offering. Mr. Gensler questioned whether SPACs, which have raised over $ 100 billion this year, are good for small investors, who may not understand their complex structure and conflicts of interest.
Mr Gensler, an appointed Democrat, took control of the SEC in April. He was chairman of the SEC’s sister agency, the Commodity Futures Trading Commission, during the Obama administration. At the CFTC, he put in place rules designed to reduce risk and increase transparency in the swap market, after unregulated trading helped fuel the 2008 financial crisis.
The CFTC under Mr. Gensler pushed most exchanges of standardized swaps on exchanges and demanded that they be guaranteed by clearing houses.
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