As the SEC mulls its 10b5-1 proposal (see this PubCo post), neither its Enforcement Division nor the DOJ are waiting around to see what happens. According to Bloomberg, they are using data analytics “in a sweeping examination of preplanned equity sales by C-suite officials.” The question is whether executives “been gaming prearranged stock-sale programs designed to thwart the possibility of insider trading”? Of course, there have been countless studies and “exposés” of alleged 10b5-1 abuse over the years, the most recent being this front-page analysis of trading by insiders under Rule 10b5-1 plans in the WSJ (see this PubCo post). While these concerns have been percolating for quite some time, no legislation or rules have yet been adopted (although several bills have been introduced and the SEC proposed new regs at the end of 2021). Bloomberg reports that these investigations by Enforcement and the DOJ are consistent with the recent “tougher line on long-standing Wall Street trading practices during the Biden era. Federal officials requested information from executives early this year, said one person. They’re now preparing to bring multiple cases, said two other people.”
Bloomberg has observed recent evidence of the investigations, with companies disclosing the receipt of SEC and DOJ subpoenas, including one from a grand jury, “seeking materials concerning the trading activities.” The article also pointed to recent charges against the CEO and the President of Cheetah Mobile, as a possible consequence of this investigation.
Bloomberg observed that 10b5-1 plans “are appealing to corporations and executives because, if properly used, they can give a solid defense against insider-trading allegations.” As a result, Bloomberg suggested, they have been widely adopted “since the SEC created rules for them two decades ago, and they’re now responsible for thousands of transactions collectively worth billions of dollars annually.” Nevertheless, Bloomberg reported, critics have identified “many possible loopholes,” such as the opportunity for multiple overlapping plans and the absence of required cooling-off periods. Legislation has been introduced a number of times but nothing has been adopted.
According to the article, both Gensler and his predecessor, Jay Clayton, “have said the agency’s rules for the plans have led to gaps in its surveillance of potential insider trading.” Almost a year ago, the SEC proposed new rules designed to address some of the concerns about potential abuse of Rule 10b5-1 and to add new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements.