By Natalie DeCoste

Newly appointed head of the Securities and Exchange Commission (SEC) Gary Gensler has announced his intention to tighten rules around corporate insider use to avoid insider trading.

During the Wall Street Journal’s CFO Network event, Gensler said he is seeking to revise the rules that regulate arrangements that corporate insiders use known as 10b5-1 plans. The 20-year-old rules allow for stock trading by corporate executives and directors through pre-established trading plans that limit them to open trading windows and are adopted in good faith. 

This arrangement gives executives a defense against any insider-trading claims that would originate from these executives having access to undisclosed material nonpublic information at the time of a trade.

Gensler has called for a change to the rules, saying at the event, “in my view, these plans have led to real cracks in our insider-trading regime.”

These arrangements often generate controversy as public disclosure of these plans is not required. This has led some investors to believe these plans can be manipulated. For example, some claim that executives can modify or cancel their plans if the sell-off is not in their favor. While public companies sometimes disclose the plans to reduce the perception that executives are trading on nonpublic information, it has not entirely convinced investors.

“If insiders don’t act in good faith when using such plans, the plans will not offer them an affirmative defense,” Gensler said

Gensler pointed to research indicating that about 14% of sales in stock involving the 10b5-1 plans occur within 30 days of plan adoption. This lack of a “cooling-off period” before a trade provides a quasi-loophole for executives and insiders. Gensler said that a mandate requiring a four-month waiting period had garnered bipartisan support.

Other suggestions for changing the plans include setting limits on when an executive may cancel a 10b5-1 plan or mandating disclosure requirements regarding the plans.

Gensler hopes that by altering the rules, he and the SEC can increase investor confidence in the market and help investors and businesses innovate, grow, and raise capital.

While the SEC is reviewing the rule to begin enacting a change, Gensler has also promised that regulators would be sure they are identifying and punishing abuses of 10b5-1 plans under the existing rule.

Research from Stanford University, the University of Pennsylvania, and the University of Washington this year indicated that some executives use the existing plans to conduct what the researchers labeled “opportunistic, large-scale selling of company shares.”

Researchers pointed to the example of insiders who set up plans for a single trade that occurs within 60 days of the plan’s creation. On average, those trades allow the executives to avoid losses of 4%.