Vega expert Professor Dan Taylor's new research article "Gaming the System: Three 'Red Flags' of Potential 10b5-1 Abuse" was featured in Cooley's special counsel Cydney Posner's discussion "Are 10b5-1 Plans Subject to Insider Trading Abuse?" on Cooley PubCo.
In Professor Taylor's article, he and his coauthors examined data on all sales reported on Form 144 between January 2016 and May 2020 and the adoption date of any corresponding 10b5-1 plans. They examined a total of 20,595 plans, trading activity by 10,123 executives at 2,140 unique firms, and 55,287 sales transactions totaling $105.3 billion during the period. The average trade size was $1.9 million.
The study found that some executives did use 10b5-1 plans to conduct “opportunistic, large-scale selling that appears to undermine the purpose of Rule 10b5-1” and highlighted three “red flags” that could be used to detect potentially improper exploitation of Rule 10b5-1 and provided recommendations.
The SEC adopted Rule 10b5-1 to provide an affirmative defense against allegations of insider trading to executives whose jobs regularly expose them to material nonpublic information. In this Closer Look, we present evidence on the trading behavior of corporate executives using a unique dataset of over 20,000 10b5-1 plans to show that a subset of executives use these plans to engage in opportunistic, large-scale selling that appears to undermine the purpose of Rule 10b5-1. We identify three “red flags” associated with 10b5-1 abuse: 1) short cooling-off periods, 2) plans that cover a single block trade, and 3) plans that are adopted and commence trading immediately prior to earnings announcements.
• Would simple modifications to Rule 10b5-1 prevent these abuses?
• Why doesn’t the SEC require disclosure of 10b5-1 plans and the trades made under these plans?
• Does the board or compensation committee monitor executive stock sales under 10b5-1?
• Why don’t they require best practice guidelines to reduce the potential for abuse?
The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Vega Economics. For more information about Professor Taylor, please email firstname.lastname@example.org.
Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse