- The SEC should overhaul plans that allow executives to schedule stock trades, three senators said Friday.
- The plans let insiders profit while leaving retail traders at a disadvantage, the lawmakers said.
- The flaws also risk undermining public confidence in markets, they added.
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A trio of Democratic Senators called on the Securities and Exchange Commission to overhaul insider trading rules that allegedly put retail investors at a disadvantage.
Sens. Elizabeth Warren, Sherrod Brown, and Chris Van Hollen urged the regulator to review and update policies regarding 10b5-1 plans. The policy allows corporate executives to schedule stock purchases and sales for the purpose of avoiding instances of insider trading. Yet the group of lawmakers suggests executives – particularly those in the health care sector – are misusing the plans for personal profits.
While trades made through 10b5-1 plans are meant to be scheduled months ahead of time, “it is not unusual” for the timing to shift days or hours before public disclosures, the senators said. Such adjustments “undermine” the purpose of the plans by cutting down on the time between executives’ learning of inside information and their trades.
Public companies also disproportionately reveal positive news on days when executives have scheduled stock sales, according to a study by Columbia University professor Joshua Mitts cited by the lawmakers. Retail and institutional investors who buy shares following such rosy announcements aren’t aware they’re trading against company insiders offloading large amounts of stock, the senators said.
"These abuses, and the plans' lack of transparency, damage investors and risk undermining public confidence," the group added in a letter dated Thursday.
The lawmakers suggested the SEC should enforce a four-to-six month "cooling off period" between when trades are planned or rescheduled and when they're executed. The agency's previous chair recommended such a period but the SEC hasn't yet adopted it.
The market regulator should enforce filing deadlines to make sure retail investors are kept informed of insider trades in a timely manner, the group added. More than 14,000 executive trades have been filed more than 10 days late since 2014, The Hill reported in December.
The senators also called on the agency to consider enforcing penalties on executives who benefit from short-term gains that don't translate to long-term returns. The Securities and Exchange Act of 1934 requires that any profits an executive takes in through a "short-swing" trade need to be returned to the company. The senators recommended the SEC should work with Congress to include 10b5-1 sales in the law.
"Such a requirement could disincentivize executives from pursuing short-term gains at the expense of the public while rewarding those whose management creates long-term value for the company and its shareholders," they said.