When the WSJ performs a study and publishes the results on the front page, it often has consequences. It’s worth remembering that it was a study reported in the WSJ about stock option backdating that kicked off the option backdating scandal of the mid-2000s (see, e.g., this news brief, this news brief and this news brief). Now, the WSJ has conducted a new front-page analysis of trading by insiders under Rule 10b5-1 plans that “shows that executives benefit when sales happen quickly after the plans’ adoption.” Academics and the SEC, the WSJ observes, suggest that “some corporate insiders might be using nonpublic information to game the system.” Under SEC Chair Gary Gensler, the SEC has already proposed new rules to “freshen up,” as Gensler likes to say, the rules on 10b5-1 plans, including mandatory cooling-off periods after adoption or modification of the plan—an aspect of the proposal designed to address precisely this issue. The WSJ analysis found that about 44% of the trades reviewed (about 33,000 stock sales), would not have been permitted under the cooling-off periods proposed in the SEC rule. The SEC has targeted April 2023 as the target date for adoption. (See this PubCo post.) In the light of some of the results shown, will the new study reinforce the SEC’s inclination to adopt its new proposal?
In the study, the WSJ analyzed 75,000 10b5-1 plan stock sales by corporate insiders from 2016 through 2021, based on a review of Form 144 filings. (The analysis “adjusted returns to remove the effect of sector-wide moves in the market.”) The data showed that about 20% of these trades “occurred within 60 trading days of a plan’s adoption. The timing in aggregate made the trades more profitable: On average, those trades preceded a downturn in share price more often than when insiders waited longer to trade, the analysis found. Collectively, insiders who sold within 60 days reaped $500 million more in profits than they would have if they sold three months later, according to the analysis.” But trades that occurred 120 days or more after adoption of the plan had more uniform results, as “roughly half sold before a downturn and half before a stock upturn, suggesting that the sellers reaped no unusual gains after more time had passed.” In the analysis, about 5% of the total trades occurred less than 30 days after plan adoption, with slightly under 2% occurring in less than 14 days. And the study showed that some executives even traded the same day they adopted a plan.
The article observes that, currently, there’s no requirement for public disclosure (other than on Forms 144, which are typically filed on paper, but see this PubCo post for a description of the new electronic filing mandate). In addition, plans can be modified or canceled at any time.
The article indicates that, based on a review of disclosures of insider stock sales in recent years, about 60% of insiders said those trades were conducted under 10b5-1 plans.
The WSJ analysis also “found scores of examples where company insiders adopted a plan when a quarter was nearly complete and sold stock under the plan before that quarter’s results were announced.” The article provides a number of specific examples, such as the company where, in 21 instances, insiders sold stock on the same day they adopted their plans, with stock price drops within 60 days following those trades for all but four of the trades.