Large, seemingly well-timed stock sales by executives at Pfizer, Moderna and others have garnered significant attention. The companies quickly defended their executives by pointing out that many of these stock sales were preplanned, according to a “10b5-1 plan.” In theory, these plans allow insiders who are not in possession of material non-public information to commit to a series of trades well in advance of market-moving events and provide “safe harbor” against violations of securities laws. If used as intended, these plans provide corporate insiders with a tool to trade their shares and obtain liquidity without raising legal concerns. But like any tool, these plans can be misused. Our research shows that the recent examples are the tip of the iceberg.
Most of the media attention has focused on trades by individual executives — little attention has been paid to the lax SEC rules that surround these plans and provide the opportunity for abuse. The Securities and Exchange Commission (SEC) should reform its current policies and practices that contribute to these abuses.
First, the Commission should require disclosure of whether a trade was made pursuant to a 10b5-1 plan. Corporate insiders must publicly disclose their trades with the SEC on Form 4, but there is no requirement that they disclose whether the trade was preplanned.
Second, the Commission should require disclosure of the plans themselves. Currently, neither the public nor the Commission know the details of all such plans. At the very least, information on the adoption, modification, termination, and the number of shares covered by these plans should be required to be disclosed in the company’s annual filing. By not disclosing these plans, companies are robbing investors of valuable information about executives’ equity incentives. Current rules already require disclosure about whether the executive’s equity holdings are hedged or pledged. The SEC should also require disclosure about whether the executive’s equity holdings are scheduled to be sold. This is important information for the compensation committee of the board of directors when considering new stock options and restricted stock awards for executives.
Third, the Commission should follow through on Chair Clayton’s suggestion and require a delay between when a plan is adopted and when the first trade is executed, or a “cooling-off period.” Clayton suggested a four-to-six-month cooling off period. This constitutes a meaningful change in how such plans are currently used. We analyzed data on plans from 2016 to 2019 and found the vast majority of plans (70 percent) do not comply with the chair’s insightful suggestion, and executives at over 100 companies used plans that executed a trade the same day the plan was adopted.
Fourth, the Commission should require companies to explain why they allow executives to adopt such plans in close proximity to corporate events. Over the past three years, more than 250 companies permitted plans to be adopted 30 days prior to corporate earnings announcements — a period when executives are commonly thought to be in possession of material non-public information and trading is usually prohibited.
Fifth, the Commission should enforce existing laws covering filing deadlines. Corporate insiders are required to report their trades to the SEC within two business days. However, a striking number of trades are reported well past the deadline. Since 2014, we find more than 14,000 trades covering over $6 billion have been filed more than 10 days late. Late filings are not innocuous. Research indicates that reporting delays are systematically correlated with opportunism. What good are filing deadlines if they are not enforced?
Finally, the SEC should stop accepting (snail) mail filings. Form 144 contains information on 10b5-1 adoption dates. The SEC continues to allow this form to be filed by mail and is not posting mail-filed forms to its public EDGAR database. From 2017 to 2019, we find more than 89,000 Form 144s were mail-filed and not posted on EDGAR. Instead, the forms were stored for 90 days in the SEC reading room and then discarded. Commercial data providers send couriers to the reading room every few days to scan the forms and sell the scanned images to corporate clients. By continuing to accept mail-filed forms and not posting them to EDGAR, the SEC has created a two-tiered disclosure system that disadvantages individual investors and shrouds details of a significant number of planned stock sales from public scrutiny.
Disclosure surrounding preplanned stock sales is a clear problem for public markets and shareholders. There is strong evidence that some corporate insiders are exploiting 10b5-1 rules. Fortunately, the SEC can substantially mitigate these problems by implementing several straightforward regulatory and disclosure changes.
Alan Jagolinzer is a professor at the University of Cambridge. David Larcker is a professor at Stanford University and Daniel Taylor is an associate professor at the Wharton School at the University of Pennsylvania.