The SEC is being urged to tread carefully as it considers toughening rules that allow executives’ company stock sales without running afoul of insider trading laws.
Corporate executives regularly unload stock through scheduling plans they create under the Securities and Exchange Commission’s Rule 10b5-1. The plans provide a defense against accusations of insider trading, but may help unscrupulous executives cash in on nonpublic, market-moving information.
SEC Chairman Gary Gensler said June 7 the SEC is considering ways to “freshen up” Rule 10b5-1, citing the potential for abuse. The regulation from 2000 places no restrictions on when or how often plans are adopted, modified, or canceled—creating potential loopholes for insider trading, according to Gensler. Public details about the plans also are limited.
The SEC appears committed to action, but could face pushback from companies that have come to rely on the rule to help their executives sell stock. The agency’s updated regulatory agenda, released four days after Gensler’s speech, lists a proposed rule for this October.
One of the people issuing caution for the SEC is Uber Technologies Inc. deputy general counsel Keir Gumbs. The executive told the agency’s investor advisory committee last week that Rule 10b5-1 plans are effective at helping executives ethically sell stock and shouldn’t be discouraged. The regulation could benefit from some increased disclosure and the adoption of corporate best practices, he said.
“No one wants to see insider trading happen, and I guarantee no one wants to be accused of insider trading,” he said.
The SEC is looking at adding cooling-off periods between when plans are adopted and the first trades are made, as well as restrictions on plan cancellations and on the number of plans an executive can have, according to Gensler. The agency also is considering disclosures on plan adoptions, modifications, and conditions.
Striking a Balance
Susan Light, a Katten Muchin Rosenman LLP partner, said she expects the SEC to strike a balance between demands for significant change and requests to keep the rule and its protections from insider trading allegations mostly intact. The agency needs to ensure it doesn’t disrupt the vast majority of company insiders who rely on the rule to trade, she told Bloomberg Law.
“If they try to eviscerate it, then there will logically be significant pushback,” Light said.
Under the current rules, an executive with nonpublic, material information who sets up or modifies a plan still can face insider trading allegations for not acting in “good faith,” Gumbs told the advisory committee.
10b5-1 plans are popular and a ready source of liquidity for corporate executives, said Peter Rasmussen, senior legal analyst at Bloomberg Industry Group. Executives will argue that a cooling-off period isn’t necessary because the SEC has been clear that setting up stock sales doesn’t protect from insider trading charges, Rasmussen said.
However, the SEC has encountered “a really messy problem of showing intent and mental state” when pursuing insider trading cases, he said.
Agency staff will likely try to get at that problem by requiring more detailed disclosures of stock sale plans, Rasmussen said.
Call for Action
Gensler’s push to update Rule 10b5-1 follows years of calls to toughen the regulation. The Council of Institutional Investors, which represents pensions, petitioned the SEC in 2012 to prohibit executives from having multiple 10b5-1 plans and frequently modifying or canceling them.
The group also urged the agency to mandate a cooling-off of at least three months between a stock plan’s creation and the first trade under it.
The petition came after 2012 Wall Street Journal analysis that found evidence that executives did better than expected on their trades around the time of market-moving news.
“We believe that when insiders transact in their own company’s stock through a 10b5-1 plan using practices that appear to be inconsistent with the spirit of the rule, we agree that public confidence in both corporate management teams and the capital markets more generally can be eroded,” CII general counsel Jeff Mahoney, said at the advisory committee meeting.
The SEC needs to keep in mind that the executives often have much of their compensation and personal wealth tied up in company stock and need ways to cash out, Gumbs said.
A defined cooling-off period after establishing a 10b5-1 plan could shift the structure of executive compensation packages, said Kerry Berchem, a partner at Akin Gump Strauss Hauer & Feld LLP.
Executives who would otherwise be heavily compensated with stock, particularly at small- and mid-cap companies, are more likely to want larger cash compensation instead, she said.
Gumbs said the agency should gather data to justify any new restrictions on stock sale plans.
Uber already restricts how its executives use 10b5-1 plans. The company bars overlapping plans, limits modifications to specific times, and has a 30-day cooling-off period between a plan’s adoption or modification and its first trade, he said. Uber also requires executives to wait at least six months between terminating a plan and starting a new one, according to Gumbs.
Boosted disclosures for 10b5-1 plans could help investors and the SEC as it combats insider trading, to an extent, Gumbs said. The SEC and investors could get a lot of different information from executive plans, which vary in complexity and may have details that aren’t useful, he said.
“As you all think about disclosure, I would suggest, encourage that you think about what you’re trying to get out of that disclosure,” Gumbs said.