The SEC's investor advisory committee should recommend increased disclosure and a cooling-off period for corporate insiders buying and selling stocks, a panel of experts said Thursday.
SEC Chairman Gary Gensler announced Monday that the SEC will revisit Rule 10b5-1 on executive stock sales. In prepared remarks Thursday before the investor advisory committee, Mr. Gensler said that 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."
The committee heard from experts — Keir Gumbs, vice president, deputy general counsel and deputy corporate secretary at Uber Technologies; Jeff Mahoney, general counsel for the Council of Institutional Investors; and Dan Taylor, associate professor at the Wharton School at the University of Pennsylvania — who said that while many companies already have policies with cooling-off periods in place, not all companies do.
Mr. Taylor endorsed a recommendation made by the previous SEC chairman, Jay Clayton, who called for a mandatory 4-6 month cooling-off period — the time between when a 10b5-1 plan is adopted and when subsequent trades can be executed. "We need to ensure that the plan cannot be adopted and trade prior to the same quarter's earnings announcement," Mr. Taylor said.
There are currently no limitations on when 10b5-1 plans can be canceled, which Mr. Gensler would also like to see changed. CII's Mr. Mahoney said there should be some limitations on when and how such plans can be canceled.
Executives with material non-public information could potentially use the current system to their advantage, Mr. Taylor explained. "What everyone worries about is a circumstance in which at the beginning on a quarter someone sets up a plan to sell a few days before the earnings announcement," he said. "And if the quarter turns out to be a dud, the plan is allowed to execute and sell the shares before the earnings announcement. But if the quarter is going well and the earnings are going to be reported very high, then they might just cancel the plan and sell after the earnings announcement. "
It's an area Mr. Gensler has asked SEC staff to examine.
"In my view, canceling a plan may be as economically significant as carrying out an actual transaction," he said Thursday. "That's because material nonpublic information might influence an insider's decision to cancel an order to sell."
Mr. Taylor also called for disclosing the adoption of a 10b5-1 plan, along with any subsequent modifications or cancelations, for top executives on a company's Form 8-K.
The committee will now decide what, if any, recommendations to make on this issue to the SEC.