United States: the SEC wants to toughen the rules for insiders

Posted Jan 18, 2022, 6:08 AM

It’s a short three minute video. In a playful tone, the president of the financial markets policeman Gary Gensler, poses a question to Internet users: “When is it acceptable for insiders to sell shares when they know something the rest of us do not know? »

For twenty years, a rule called “10b5-1” has governed stock market transactions for executives holding shares in their company. This rule, by giving the manager the possibility of drawing up share sale plans in advance, aims to oppose a suspicion of insider trading by demonstrating the manager’s good faith and concern for transparency.

When the leaders of Moderna and Pfizer were criticized for having monetized their actions during the first results on the vaccines against Covid, they also brandished in defense their plans “10b5-1”, recall Daniel Taylor, Alan Jagolinzer and David Larcker, three researchers authors of a forum on the subject.

“Real shortcomings”

But the rule today has “real shortcomings”, says the SEC. “Since the adoption of Rule 10b5-1, courts, observers and parliamentarians have expressed concern that the defense offered by the rule has allowed traders to take advantage of liability protections to trade securities on the basis material non-public information,” the SEC points out. Because leaders can actually file a plan in the morning to sell in the afternoon, or write multiple sales plans in advance, and only carry out the one that benefits them. “It doesn’t seem right”, points out in his video Gary Gensler, who adds to his regulatory tropism the taste for pedagogy – he taught at MIT.

The SEC has therefore just approved a draft rule change, which it has submitted for consultation until the end of January. In particular, it provides for a period of four months between the filing of a plan to sell shares and its completion. Enough to ensure the publication of quarterly results, which are traditionally an opportunity to provide fresh information to shareholders, and thus put managers and external shareholders on a more equal footing. Only one plane would also be allowed at a time. Executives would also have to certify in writing that they “have no knowledge of material non-public information when subscribing to the plans,” the SEC said.

This project comes after a reform at the Federal Reserve, after the resignations that followed the discovery of stock market operations that were at least unethical. The new central bank rules notably require central bank leaders to no longer trade individual stocks, but also to leave 45 days between the announcement of a transaction and its completion. “This system is now easily the toughest in government and the harshest I have ever seen,” Fed Chairman Jerome Powell told senators on Tuesday. “Public confidence is absolutely critical,” he said.

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