Insider trading is always a juicy topic in the financial media. Once the spotlight is focused on trades that appear well-timed, Rule 10b5-1 technicalities are of limited use to companies and execs who want to reclaim the narrative – which is especially true when the “safe harbor” trades occur only days after adopting a trading plan. This Bloomberg article shows that those types of details are now getting picked up and scrutinized. Here’s an excerpt:
Short-term plans for stock trades are surprisingly prevalent, hinting at a significant gap in the agency’s surveillance, according to research from Stanford University and the Wharton Business School. The academics there reviewed 20,000 plans filed on paper by corporate leaders. About 38% of the plans call for trades within the same quarter, before earnings results were announced. About 82% have cooling-off periods of fewer than six months. The transactions consistently avoid large losses and foreshadow future price declines, according to the study.
I first blogged back in February about the Stanford research that Bloomberg is citing – the study was getting quite a bit of buzz and was cited by a handful of US Senators who were urging the SEC to take action. Fast-forward to now, and reforms to Rule 10b5-1 are looking more likely in light of SEC Chair Gary Gensler’s remarks earlier this month and the appearance of the rule on the Reg Flex Agenda.
One of the biggest changes that’s being evaluated is whether to propose adding a “cooling off” requirement to the safe harbor. Another potential change would be proposing disclosure about a plan’s adoption date on the Form 4 that’s filed to report the transactions under the plan. Right now, that info is only required on Form 144s, which see very little daylight since they’re typically submitted in paper format to the SEC. That was another big point of contention in the Stanford study.
Although it’s currently not baked into the rule, many companies already require insiders to observe a “cooling off” period when they adopt Rule 10b5-1 trading plans. The pause between the time the plan is adopted and the execution of the first trade functions as a “belt & suspenders” to ensure the insider doesn’t possess any material non-public info at the time the plan is adopted, which is one of the requirements to get safe harbor treatment. As we note in our “Rule 10b5-1 Trading Plans Handbook,” practice varies in terms of the length of this period – typical time frames are anywhere from two weeks, to 30, 60 or 90 days. Chair Gensler floated the idea that there should be a much longer pause than is common right now – as long as 4-6 months.
– Liz Dunshee