Jul 12, 2021 - Economy

Lawmakers push for changes to insider trading rules

A person whispering to another person.

Illustration: Annelise Capossela/Axios

Bipartisan legislators are pushing a receptive SEC to make major changes to Rule 10b5-1, which was established in 2000 to help companies create executive trading plans that wouldn't fall afoul of insider trading rules.

The backdrop: Academic research has determined that insiders often are able to limit losses via 10b5-1 plans. This is particularly true for single-trade plans, which often are adopted and executed just before quarterly earnings releases.

Why now: "The data suggest corporate insiders trades are much more aggressive than what we have seen historically, with the only exception being the 2007-2008 financial crisis," says Dan Taylor, a Wharton accounting professor whose research on 10b5-1 trading has been cited by members of Congress.

  • He adds that legislators may have been influenced by media coverage of trades by executives at COVID-19 vaccine makers like Pfizer and Moderna, even though such sales were ahead of positive news. Moderna execs, for example, would have done better by holding onto their shares — and Taylor doesn't believe any proposed changes would have applied to the vax maker trades.

State of play: The House of Representatives in April passed a 10b5-1 bill, and Sens. Chris Van Hollen (D-Md.) and Deb Fischer (R-Neb.) last month reintroduced their version.

  • Neither bill mandates any fixes, instead asking the SEC "to study" such things as limiting the time frame during which 10b5-1 plans can be adopted and delaying the time between adoption and first trades.
  • New SEC chair Gary Gensler has indicated support for such moves, which Dan Taylor calls "data driven and a paragon of evidence-based rulemaking."

The bottom line: When we see insider trading in the future, tied to deals or anything else, we may be more able to call it by its name.

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