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E-MailGary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks at the CFO Network Summit. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.
Thank you, Jean, for that kind introduction and for your question. Before I answer, as is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.
Your question is particularly relevant for this audience. I welcome the opportunity to share some thoughts on executive stock ownership and the means by which insiders—CFOs, other executives, directors, and senior officers—sell shares in the companies with which they’re affiliated.
The core issue, as this audience knows, is that these insiders regularly have material information that the public doesn’t have.
When I started out in finance, the accepted practice was that such insiders would limit their transactions to what was known, then and now, as open trading windows: limited periods of time following quarterly earnings announcements and other major company disclosures.
About 20 years ago, the SEC further addressed this issue in Exchange Act Rule 10b5-1. This rule provided affirmative defenses for corporate insiders and companies themselves to buy and sell stock as long as they adopt their trading plans in good faith, before becoming aware of material nonpublic information.
In my view, these plans have led to real cracks in our insider trading regime.
Thus, I’ve asked staff to make recommendations for the Commission’s consideration on how we might freshen up Rule 10b5-1.
First, when insiders or companies adopt 10b5-1 plans, there’s currently no cooling off period required before they make their first trade. I worry that some bad actors could perceive this as a loophole to participate in insider trading.
Research has shown that 14 percent of sales of restricted stock in 10b5-1 plans initiate the planned transactions within 30 days of plan adoption, and about two in five plans within the first two months. [1]
Proposals to mandate four- to six-month cooling-off periods have received public, bipartisan support from former SEC Chair Jay Clayton and current Commissioners Caroline Crenshaw and Allison Herren Lee. [2] I believe this approach deserves further consideration.
Second, there currently are no limitations on when 10b5-1 plans can be canceled.
As a result, insiders can cancel a plan when they do have material nonpublic information. This seems upside-down to me. It also may undermine investor confidence.
In my view, canceling a plan may be as economically significant as carrying out an actual transaction. That’s because material nonpublic information might influence an insider’s decision to cancel an order to sell. Thus, I’ve asked staff to consider limitations on when and how plans can be canceled.
Third, there are no mandatory disclosure requirements regarding Rule 10b5‑1 plans. I believe more disclosure regarding the adoption, modification, and terms of Rule 10b5‑1 plans by individuals and companies could enhance confidence in our markets.
Fourth, there are no limits on the number of 10b5-1 plans that insiders can adopt. With the ability to enter into multiple plans, and potentially to cancel them, insiders might mistakenly think they have a “free option” to pick amongst favorable plans as they please. I have asked staff to consider whether there should be a limit on the number of 10b5-1 plans.
Make no mistake: As the rule stands today, cancelling or amending any 10b5-1 plans calls into question whether they were entered into in good faith. If insiders don’t act in good faith when using 10b5-1 plans, those plans will not offer them an affirmative defense.
In addition, I’ve asked staff to consider other potential reforms to the rule, including the intersection with share buybacks.
Many of your companies may already do these things as they’re considered best practices for 10b5-1 plans.
I believe, though, that our capital markets might be better served if these practices were consistently required. In addition to evaluating the rule itself, SEC staff will use all of the tools in our toolbox to ensure we are identifying and punishing abuses of 10b5-1 plans.
These issues speak to the confidence that investors have in the markets—that everybody, from working families to big institutions to insiders, has a level playing field. Anytime we can increase investor confidence in the markets, that’s a good thing. It helps both investors and businesses seeking to raise capital, grow, and innovate.
Thank you.
Endnotes
1See David F. Larcker, Bradford Lynch, Phillip Quinn, Brian Tayan, and Daniel J. Taylor, “Gaming the System: Three ‘Red Flags’ of Potential 10b5-1 Abuse” (Jan. 19, 2021), available at https://www.gsb.stanford.edu/sites/default/files/publication-pdf/cgri-closer-look-88-gaming-the-system.pdf.(go back)
2See Jay Clayton, Letter to Rep. Brad Sherman (Sept. 14, 2020), available at https://www.sec.gov/files/clayton-letter-to-chairman-sherman-20200914.pdf; Caroline Crenshaw and Daniel Taylor, “Insider Trading Loopholes Need to Be Closed” (Mar. 15, 2021), available at https://www.bloombergquint.com/gadfly/insider-trading-loopholes-need-to-be-closed; and Allison Herren Lee, Letter to Sen. Elizabeth Warren (April 14, 2021), available at https://www.warren.senate.gov/imo/media/doc/Warren%20et%20al%20-%20Rule%2010b5-1%20-%20ES159896%20Response.pdf.(go back)
