A forthcoming academic article in the Duke Law Journal asserts that well-timed gifts of stock by insiders continue to be widespread – a phenomenon John blogged about a few years ago. The data continues to suggest that this could result from a combination of gifting based on MNPI as well as backdating.
What’s the big deal? Well, although charitable organizations benefit greatly from insider stock gifts, the logic goes that when the donations are made just before disclosure that causes a drop in stock price, insiders personally benefit from “inflated” charitable tax deductions and reputational accolades while avoiding the loss in value. Similar to conventional insider trading, it creates an uneven playing field and undermines public trust in the market.
The study also suggests that large investors engage in this “insider giving.” It doesn’t provide a clear definition for this group – although the authors discuss controlling shareholders, venture capitalists and activist hedge funds. Here’s an excerpt:
We find that large shareholders’ gifts are suspiciously well timed. Stock prices rise abnormally about 6% during the one-year period before the gift date and they fall abnormally by about 4% during the one year after the gift date, meaning that large shareholders tend to find the perfect day on which to give.
These results are almost certainly not the result of luck. To the contrary, our research lets us identify information leakage as the most important cause of these results: executives seem to provide large shareholders with material non-public information, who then use it to time gifts.
The study’s authors believe that problematic “insider giving” thrives due to lax reporting & enforcement. To curb potential misdeeds, they say that the SEC should make gifts subject to the same 2-day reporting requirement that applies to purchases & sales. They suggest a couple of potential alternatives such as potential exceptions for “small” gifts or applying the 2-day reporting requirement to gifts made to charities controlled by the donor or that otherwise raise red flags and then a 5-day window for most other gifts.
This would definitely make things harder for those of us in compliance. An inadvertent miss of a short reporting window can be embarrassing and draw unwanted attention – right when you’re also working to make the filing. The authors also contend that stricter reporting requirements wouldn’t chill legitimate stock gifts, but insiders and charities might feel differently.
Our “Insider Trading Policies Handbook” urges caution when considering whether an insider can gift shares at a time when they possess MNPI. We recommend dealing expressly with that in your policy so that you don’t end up having to make difficult case-by-case decisions about whether gifts are permitted. If transactions are collapsed in a way that makes it look like an insider has benefited, at the very least the company could suffer negative publicity. And studies like this could draw even more attention to the issue.
10b5-1 Plan Primer – With Design Tips!
John blogged last week about Rule 10b5-1 plans – the House of Representatives passed proposed legislation calling for the SEC to study potential revisions to the rule. With calls for more transparency on 10b5-1 plans, a new WilmerHale memo (pg. 24) provides a primer on the technical requirements for 10b5-1 plans, then includes a couple of plan design suggestions for directors and officers who might consider entering into a plan:
– Keep selling formulas simple, this can help minimize the need for clarification or changes later that could constitute amendments
– Keep investor relations considerations in mind that could arise with frequent plan sales or from use of a plan that could result in a single large sale that’s triggered by the company hitting a significant milestone or from market volatility that’s unrelated to company news
The process for putting a 10b5-1 plan in place varies from company to company, including whether plans require review and approval, whether insiders are required to use 10b5-1 trading plans when conducting transactions involving company securities, length of cooling off periods, etc. The report includes survey data (co-sponsored by Deloitte Consulting and NASPP) about these and other 10b5-1 trading plan practices, here are some of the results:
- 98% require plans to be reviewed (or reviewed and approved)
- 10% require insiders to use plans
- 79% require a cooling-off period between plan adoption and commencement of trading – the most common waiting period being 1 – 3 months (45%) followed by the next open window period/fiscal quarter (32%)
For more on Rule 10b5-1 Plans, check out our “Rule 10b5-1 Trading Plans Handbook” – it covers the basics of the rule and includes common Q&As that crop up every so often. The handbook is available online for free to members of TheCorporatecounsel.net, you’ll find a list of all of our handbooks by clicking on “Handbooks” in the blue bar at the top of the home page.
Our May E-Minders is Posted
– Lynn Jokela