Better Markets filed a comment letter in response to the Securities and Exchange Commission’s proposed amendments to Rule 10b5-1, an SEC rule that provides a safe harbor to insider trading liability under certain circumstances.

Why It Matters.  Rule 10b5-1, adopted in 2000, gave corporate insiders a safe harbor from insider trading liability for trades pursuant to a predetermined trading plan, where the plan is adopted when the insider does not have relevant inside information (otherwise known as “material nonpublic information” or MNPI).  Over time, it has become clear that the safe harbor established in Rule 10b5-1 has been widely abused, allowing corporate insiders to engage in insider trading and hide behind secretive Rule 10b5-1 plans that can be created, and changed, and canceled at will and with no transparency. Multiple academic studies have shown that insiders trading pursuant to these plans, which are supposed to ensure insiders are not trading on the basis of inside information, have experienced abnormally high returns that are difficult to explain if the trading is truly pursuant to pre-established parameters rather than by use of inside information.

What We Said. In combination, the enhancements as proposed will make it less likely that insiders can successfully abuse Rule 10b5-1 trading plans to profit at the expense of the shareholders whose welfare they are supposed to maximize.  In particular, the SEC must not weaken or eliminate any aspect of the Proposal in response to what are often overstated industry concerns about the supposed “burden” of complying with the requirements of an entirely voluntary safe harbor.  Moreover, the SEC should consider whether the safe harbor serves any function at all, and it should consider eliminating it entirely.

Bottom Line. Better Markets supports the Commission’s amendments, which should make it more difficult for corporate insiders to abuse the safe harbor provided by Rule 10b5-1.  However, to the extent that the Proposal will reduce the likelihood of abuse, it will only do so meaningfully if the SEC resists industry pressure to weaken or eliminate any elements of the Proposal.

Read our full Comment Letter here or click the button below.