SEC proposes new insider trading regulations
By Robert Davis
18:16, 15 December 2021
The Securities and Exchange Commission (SEC) proposed new rules on Wednesday aimed at modernising the way the agency handles insider trading by corporate executives.
The rules follow a series of high-dollar stock sales by the chief executives of Amazon, Microsoft, Tesla, and a host of other companies that totalled more than $69bn (£55.22bn) so far in 2021, according to SEC documents.
SEC Chair Gary Gensler said the new rules are meant to address the concerns and gaps that the agency has seen concerning Rule 10b5-1, which defines when a transaction may be considered insider trading.
Investor confidence
"These issues speak to the confidence that investors have in the markets,” Gensler said. “Anytime we can increase investor confidence in the markets, that’s a good thing.”
Capital.com reached out to Amazon, Microsoft and Tesla - all of which have executives who sold stock under the rule the SEC proposes to change - for comment on the new rules but did not immediately receive a reply.
The laws concerning Insider trading are codified under 17 CFR § 240.10b5-1, which also provides a series of “affirmative defenses” that can be asserted if a person is accused of trading on material nonpublic information.
Nonpublic information
Known more commonly as 10b5-1, the SEC describes the rule as one that tells shareholders when a company’s executive may be trading on nonpublic information.
However, the rules do not require executives to state affirmatively that they are not aware of nonpublic information at the time they sell or purchase stock. The rules also do not require executives to wait to sell their stock after a company adopts a new portfolio management plan.
Under the new rules, executives who wish to sell stock must disclose that the transaction is not based on any nonpublic information and wait at least 120 days before making any transactions after their company updates its portfolio management strategy.
The SEC also proposed amending 10b5-1 to require “more comprehensive disclosures” relating to the timing of options grants and the release of nonpublic information.
Musk stock sales
While the proposed rules could impact the stock sales of executives at nearly every publicly traded company, they seem particularly aimed at one individual in particular - Tesla’s Elon Musk.
In November, Musk sold approximately $5bn worth of Tesla stock following a Twitter poll that cited taxes as a concern. But SEC filings show the sale was pre-planned in September, which threw the poll’s legitimacy into question.
Insiders are allowed to trade at pre-planned times based on 10b5-1 plans that corporations submit to the SEC. However, the laws concerning these plans do not require the disclosures to include a CEO’s real reason for selling the stock.
The rules also require the SEC to prove that Musk, or any CEO who sells stock pursuant to 10b5-1, harmed shareholders by selling their stock to hold them accountable for insider trading. But, the proposed rules do not address this and instead expand the existing “good faith” requirements for trading.
The rules are available for public comment on the Federal Register for the next 45 days.