At long last, the Securities and Exchange Commission has sketched out a plan to address a difficult issue in the U.S. stock market: how and when corporate insiders, who inevitably have better information than the investing public, can legally trade in the shares of their companies.
The proposal is good, as far as it goes. But it could do a lot more to assure regular investors that insiders aren’t taking advantage of them.
Under current rules, executives and directors can largely avoid charges of illegal insider trading by setting up a predetermined schedule of sales or purchases, known as a 10b5-1 plan. Yet if they know that their company is about to do a big deal or report some bad news, there are still plenty of ways they can use such plans to act on the information. They can set one up for a single trade and act on it the next business day. They can set up multiple plans, then cancel the disadvantageous ones at any moment. It’s hard for the public to understand what’s going on, because many of the relevant details of the plans typically aren’t disclosed or are hard to find.
Now the SEC is moving to make the plans harder to game. Its proposed new rule would establish a 120-day cooling-off period before a first trade can be executed — long enough to erase any informational advantage the insider might have when a plan is created. It would limit single-trade plans to one per year, and effectively disallow executives to have multiple plans simultaneously. All these are positive changes. But in other areas, particularly public disclosure, the SEC’s proposal falls short.
Right now, when an executive creates or terminates a 10b5-1 plan, it’s up to the company to decide whether or not to disclose the move. For example, as far back as 2004, Cisco Systems would regularly file 8-K disclosures about such plans, including the executive’s name, the number of shares and the timeframe for the sales. But starting in 2018, the company stopped providing that level of detail, with no explanation. Absent any formal rules, the company and its lawyers could pick and choose what they wanted to reveal.
