SEC Warning on Insider Stock Sales

Two top officials at the Securities and Exchange Commission warned this week that companies should pay more heed to the policies they use to govern senior executives’ stock sales, to prevent even the appearance of impropriety when an executive is selling shares. 

The comments came from Bill Hinman, director of the Division of Corporation Finance, on Wednesday; followed by comments from SEC chairman Jay Clayton on Thursday. The men were giving different speeches to different groups, but both raised the same points about how to design so-called Rule 10(b)5-1 plans — even using the exact same sentences at some points in their remarks. So clearly the SEC wants to communicate a single message with little room for misinterpretation.

Rule 10(b)5-1 allows corporate insiders to establish written plans for selling shares, where the price, number of shares, and date of sale are all determined ahead of time. Sales then happen according to that fixed schedule, so the executive can avoid violating insider trading laws. 

Important point: executives must design those plans when they aren’t in possession of any material non-public information that might subsequently move the share price. Companies don’t need to disclose their executives’ 10(b)5-1 plans to the public, although some do that anyway just to ward off public relations headaches from large stock sales that some people might view as suspiciously timed.

SOX Compliance


Why are Hinman and Clayton talking about this now? One reason might be Albert Bourla, the CEO of Pfizer. He sold $5.6 million worth of Pfizer shares  on Nov. 9, the day the company announced stellar results of its covid vaccine trials. Suspicious? Probably to some, although Bourla sold them according to his 10(b)5-1 plan, and the sale had been set for months — that is, well before Pfizer knew that its vaccine trials would be so promising.

Congress has viewed 10(b)5-1 plans with a skeptical eye for some time. Just last month, the SEC slapped a $20 million penalty against Andeavor Corp. (now a subsidiary of Marathon Petroleum) for poor internal controls over Andeavor’s 10(b)5-1 plan while its CEO was in talks to sell the business to Marathon. 

Republican SEC commissioners Hester Peirce and Elad Roisman published a statement last week explaining why they disagreed with the sanction against Andeavor. They didn’t like that the agency used its rules for internal accounting controls to punish Andeavor for poor insider trading policies, since internal accounting controls are supposed to be about corporate accounting. Which an executive’s stock sales are not part of.

So there’s a lot of interest at the SEC right now over these plans. 

What Hinman and Clayton Said

Hinman said a good 10(b)5-1 plan should have controls that prevent an insider’s stock sales once the company comes into possession of non-public information, “even if the executive did not personally have knowledge of the information.” Clayton repeated that same point word for word, so let’s reprint the whole thing here:

A well-designed insider trading policy should have controls in place to prevent senior executives and members of the board of directors from trading once a company is in possession of material nonpublic information, even if an individual officer or director did not personally have knowledge of the information. 

So compliance officers should consider how to put that idea into practice. For example, you’ll need clear definitions of what qualifies as material nonpublic information for your business. You’ll need a mechanism to pause any planned 10(b)5-1 sales once that information exists within the business. You’ll need policies and training for board directors and executives who might be dumb enough to sell shares beyond what’s specified in their 10(b)5-1 plans. 


Clayton and Hinman also recommended that 10(b)5-1 plans include waiting periods after a plan is established or revised before any transactions are executed. Those waiting periods, they both said, would “bolster investor confidence in public companies, their management teams and in markets generally.” 

That makes sense. It’s much harder to say an insider’s 10(b)5-1 plan is somehow gaming the system if that plan delays the insider’s sales for a few months — say, long enough for any currently non-public material information to become public. 

Lastly, Hinman and Clayton warned against giving stock options or other equity compensation to executives while the company is in possession of material nonpublic information

The logic there is that options and equity grants are supposed to inspire executives to drive better performance, so those grants become more valuable over time. But if the company awards those grants while sitting on non-public information, the grants might rise when that juicy intel becomes public — which contradicts the premise of aligning executive pay with long-term shareholder value. 

Hinman closed with these words about the ethical imperative in compliance: 

There is a common, simple principle at play in these examples. And that principle is that companies, management teams, their boards of directors and advisors are well-served when they ask, “What should we do?” rather than, “What can we do?” as they seek to comply with the federal securities laws.

Clayton, on the other hand, wrapped up with a suggestion that more rules might be warranted: “These are important corporate governance and policy considerations that I believe public companies and boards, as well as the Commission and Congress, should consider moving forward.”

Hmmm. Those are telling words, considering that Democrats will be back in charge of the SEC starting Jan. 20, 2021. 

Insider Questions to Ask…

  • Who at your company is responsible for setting up 10(b)5-1 plans? The corporate secretary? The general counsel? The compliance officer?
  • How does that person (or the compliance officer) determine when new material, non-public information has arrived at your business, so that you can evaluate its potential effect on 10(b)5-1 plans? 
  • How do you coordinate policy and procedures with the broker-dealer firms that handle 10(b)5-1 sales for your insiders? 
  • The plans themselves: are they best practice, such as using waiting periods? What about broader compensation plans? Do they include best practices such as no equity awards while the company has material non-public information? 

Food for thought.


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