Dec 16, 2021 - Economy & Business

The rise of legal insider trading

Data: InsiderScore; Chart: Axios Visuals
Data: InsiderScore; Chart: Axios Visuals

Insider trading — the legal kind — hit new highs in 2021, and the SEC wants to make sure it isn't being abused.

Why it matters: Big-dollar insider stock sales are increasingly common, with no fewer than 82 different corporate insiders selling more than $100 million of stock in 2021. That's up from just 32 in 2019.

Driving the news: The SEC wants to make it much harder for insiders to take advantage of provisions surrounding stock sales that effectively make insider-trading prosecutions impossible.

  • "Over the past two decades, we’ve heard concerns about and seen gaps in Rule 10b5-1," said SEC chair Gary Gensler in a press release announcing the proposal.
  • If Gensler gets what he wants, those gaps are likely to shrink dramatically, if not be eliminated entirely.

How it works: Senior executives and board members are always considered corporate insiders — but they also need to have some way to sell their company shares.

  • The most common way for insiders to sell shares without leaving themselves open to charges of illegal insider trading is to set up a 10b5-1 plan, where all open-market stock sales and purchases are executed according to pre-baked instructions.
  • 10b5-1 plans are generally opaque and can be abused, however. SEC filings where companies disclose the details of their plans are filed by mail, rather than electronically, stored in the SEC reading room, and destroyed after 90 days.
  • Gensler seeks to curb abuse by forcing such plans to be put in place 120 days before any stock sales; by requiring insiders to certify that they aren't in possession of material non-public information when they put the plan in place; and by allowing insiders to execute a single-trade plan no more than once a year.

Companies will also have to disclose the existence of all 10b5-1 plans, along with their terms.

By the numbers: Insiders have sold more than 3 billion shares so far this year, per InsiderScore, the first time that level has been breached. Total proceeds of $162 billion represent an increase of almost $100 billion over the 2019 level of $69 billion.

What they're saying: The SEC proposal "speaks to the power of academic research for policy," according to Dan Taylor, a Wharton professor who has led much of the research into the potential abuses of 10b5-1 plans.

The bottom line: The SEC proposal isn't law yet. But it's eminently sensible, and addresses weaknesses in a part of the market that's growing extremely quickly.

Go deeper