Democratic senators are asking the US Securities and Exchange Commission to review rules for 10b5-1 plans, which allow executives to buy and sell company stock on predetermined days.
Lawmakers are asking Wall Street’s top cop to review rules meant to prevent insider trading after new research suggested existing regulations may actually help some people trade on material, non-public information.
Democratic Senators Elizabeth Warren, Sherrod Brown and Chris Van Hollen sent a letter to the Securities & Exchange Commission asking it to review rules for so-called 10b5-1 plans, which allow corporate executives to buy and sell company stock at predetermined days in the future.
“These plans were designed to prevent insider trading, but new evidence indicates that executives — especially those in the health-care industry — are abusing these plans to obtain huge windfalls at the expense of ordinary investors,” the senators wrote in a letter dated Feb. 10 to acting SEC Chair Allison Lee.
Public companies disproportionately disclose positive news on days when corporate executives sell shares under predetermined Rule 10b5-1 plans, according to academic research by Columbia Law School professor Josh Mitts that the lawmakers cited. When good news is disclosed, share and dollar volume of insider sales under 10b5-1 plans are higher, according to Mitts, who analyzed sale data and material events from 1996 to October 2020.
“These findings show the urgent need for policy reform in connection with 10b5-1 trading plans,” Mitts said in an emailed statement.
The SEC created the 10b5-1 “safe harbor” rule in 2000 to allow corporate executives, who often have consistent access to company secrets, to sell their holdings without engaging in insider trading.
While the plans were intended to be set months in advance, they can be modified days or hours before a corporate announcement. Former SEC Chairman Jay Clayton has recommended the SEC enact a “cooling-off period” of four to six months between the adoption of a plan and the execution of the first trade.
Democratic lawmakers have long sought to toughen insider-trading laws, which are enforced under general rules against market manipulation.