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US Securities and Exchange Commission

Senate Democrats Call for Tougher 10b5-1 Trading Plan Restrictions

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Three Senate Democrats are calling on the SEC to tighten requirements to the Rule 10b5-1 safe harbor to prevent executives from reaping “huge windfalls at the expense of ordinary investors” through their access to material nonpublic information. The February 10, 2021, letter to Acting SEC Chair Allison Herren is the latest in a years-long campaign to reform the trading plans amid alleged abuses by corporate insiders.

“These plans were designed to prevent insider trading, but new evidence indicates that executives – especially those in the healthcare industry – are abusing these plans to obtain huge windfalls at the expense of ordinary investors,” Sens. Elizabeth Warren of Massachusetts, Chris Van Hollen of Maryland, and Sherrod Brown of Ohio wrote in the letter. “These abuses, and the plans’ lack of transparency, damage investors and risk undermining public confidence.”

Brown is the chairman of the Senate Banking Committee, of which Van Hollen and Warren are members.

Rule 10b5-1 exists to give company insiders a structured way to buy or sell shares without running afoul of insider trading restrictions. Critics say the current safe harbor is vulnerable to abuses, allowing insiders to use the rule strategically in order to beat the market using material nonpublic information. Plans can be canceled when there is no news to trade on and kept in place when there is. Canceling a plan is not in itself considered a securities transaction.

Former SEC Chairman Jay Clayton last year urged public companies to implement mandatory waiting periods after adopting, changing, or ending a plan under Rule 10b5-1 before executives can trade shares. He declined, however, to implement the disclosure and enforcement reforms pushed by Democratic lawmakers. (See SEC Chairman Clayton: Companies Should Adopt Mandatory Waiting Period for Trading Plans in the September 25, 2020, edition of Accounting & Compliance Alert.)

Warren, Van Hollen, and Brown, in their letter, cited the timing of transactions under Rule 10b5-1 by Pfizer CEO Albert Bourla, who sold some $5.6 million worth of shares on the same day the pharmaceutical company announced positive clinical trial results for its novel coronavirus vaccine. Bourla offloaded those shares on November 9, 2020, months after adopting the trading plan on August 19, according to an SEC filing.

“The misuse of 10b5-1 plans appears to be creating significant disadvantages for other investors,” the senators wrote. “Experts believe that 10b5-1 plans often set a ‘trigger’ price at which the executive’s shares will be sold, which appears to be one of the primary mechanisms leading to large stock sales on the days of ‘good news’ announcements, such as Pfizer’s.”

Those plans and prices, however, “are not disclosed to the public in advance.”

“As a result, institutional and retail investors who buy shares on the day of these positive announcements are unaware that they are trading against a large sell order from the company’s executives, which effectively pulls the share price down,” Brown, Warren, and Van Hollen wrote.

The lawmakers want the SEC to implement a series of reforms to prevent 10b5-1 abuses: The SEC should implement Clayton’s recommendations for a four-to-six-month-long cooling-off period following adoption of amendment of a plan before trading can begin; the content of the plans and trades should be made available to the public in SEC filings “so that other shareholders can factor in the degree to which stock prices are influenced by corporate executives’ plans;” the SEC should enforce existing filing deadlines to ensure prompt disclosures; and the commission should “explore options to better align executives’ incentives with those of shareholders and the public by considering enforcing penalties when executives benefit from short-term windfalls that do not translate into long-term gains.”

Democratic lawmakers have for years put forth bills, so far unsuccessfully, that would force reforms to Rule 10b5-1 trading plans, including House Financial Services Committee Chair Maxine Waters’s Promoting Transparent Standards for Corporate Insiders Act. Waters’ bill would direct the SEC to study potential new limits to Rule 10b5-1, including additional restrictions on when an issuer can adopt a 10b5-1 plan and how soon afterward trades can take place. Among other provisions, the bill would also require the SEC to study how such changes might improve existing prohibitions against insider trading, and whether to limit how frequently companies and insiders can modify or cancel trading plans.


This article originally appeared in the February 17, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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