August 12, 2021

Rule 10b5-1: Single-Trade Plans Under Scrutiny

Yesterday’s WSJ had an article on what aspects of Rule 10b5-1 plans are being scrutinized by the SEC. Not surprisingly, the list generally lines up nicely with the priorities Gary Gensler identified in his June 2021 speech to the WSJ’s CFO Summit. Single-trade 10b5-1 plans weren’t addressed in that speech, but the article suggests that they may be on the SEC’s list as well. This excerpt provides some insight on the reasons why the SEC might be interested in this topic:

Many 10b5-1 plans steadily sell shares, whether the stock is up or down. Facebook’s Mark Zuckerberg, for example, has sold consistent volumes of shares at regular intervals since at least August 2019, according to InsiderScore data. “Those plans that are selling routine amounts of shares every month over multiple years; that’s what the plan was intended for, to sell shares slowly over time,” said Daniel Taylor, an accounting professor who runs the Forensic Analytics Lab at the University of Pennsylvania’s Wharton School and one of the authors of the January study of trading under plans.

But about a third of plans since 2004 involve just a single trade, according to InsiderScore data. (Because documentation is scant, researchers can’t differentiate between plans that intended to execute a single trade and those that planned for multiple trades but were terminated after the first sale.) Single-trade plans outperformed multi-trade plans regardless of the timing, according to Mr. Taylor’s research. “When it’s a single-trade plan, it’s abusive,” he says.

That “January study” referenced in the excerpt is this Stanford study, which included single-trade plans in its list of three “red flags” for opportunistic use of 10b5-1 plans (the other red flags were a short cooling-off period & adoption of plans in a quarter that begin trading prior to the announcement of earnings). Here’s what the study had to say in support of its recommendation to prohibit single-trade 10b5-1 plans:

In the extreme, if the plan is designed to execute only a single trade, it is economically equivalent to a traditional limit order (or date-triggered order). Single-trade plans are inconsistent with traditional financial advice for exiting a concentrated equity position over time. They are also inconsistent with the original expectation that Rule 10b5-1 would govern trades made under a “regular, pre-established program.”

John Jenkins