It seems like the media turns a spotlight on Rule 10b5-1 Plans every few years. I have posted on 10b5-1 Plan issues more than ten times in the last 10 years alone (see, for example, Executive Sales of Company Stock in the News Again and Recent Court Decision Illustrates the Value of a 10b5-1 Plan). The rash of recent articles and interest partly stems from large and profitable stock sales made pursuant to 10b5-1 plans by executives of Pfizer and Moderna shortly after those companies announced successful COVID-19 vaccine trials. Since these sales and the resulting controversy was widely reported, I will skip the details and proceed to some of the resulting fallout.
Glass Lewis is the Voice of Reason?
Glass Lewis is not known for going easy on corporations that don’t meet its standards. However, in January, GL posted a blog titled “Operation Warp Pay, How 10b5-1 Plans Allowed Pfizer and Moderna Executives to Cash In,” addressing the controversial trades and suggesting “best practices” for 10b5-1 Plans. While the suggestions were useful, the blog ultimately seems sympathetic to the positions of the Pfizer and Moderna executives.
Other forms of best practice include avoiding the use of multiple, overlapping plans, avoiding short-term plans (most plans are six months to two years) and avoiding making changes to existing plans. All of these best practices help simplify the flow of publicly available information and present a clear way for insider trading rules to be followed. They help to avoid situations where executives are put into the spotlight, as was the case for Pfizer and Moderna – and ensure that when things do go public, the market has the information it needs to put things in context.
The existence of a timetable, with clear disclosure of the events as they unfolded, helps to mitigate potential concerns about insider trading. Moreover given the context, it is understandable that when Pfizer released the information regarding its vaccine candidate, the stock price shot up — triggering the 10b5-1 plan. Similar conclusions can be drawn when looking into the Moderna executive’s transactions.
Legislation in the House of Representatives
On April 20, the House of Representatives passed H. R. 1528 the Promoting Transparent Standards for Corporate Insiders Act, which would require the SEC to carry out a study of whether Rule 10b5–1 should be amended to, among other things,
- limit the ability of issuers and issuer insiders to adopt a plan described under paragraph (c)(1)(i)(A)(3) of Rule 10b5–1 (trading plan) to a time when the issuer or issuer insider is permitted to buy or sell securities during issuer-adopted trading windows;
- limit the ability of issuers and issuer insiders to adopt multiple trading plans;
- establish a mandatory delay between the adoption of a trading plan and the execution of the first trade pursuant to such a plan
- limit the frequency that issuers and issuer insiders may modify or cancel trading plans;
- require issuers and issuer insiders to file with the Commission trading plan adoptions, amendments, terminations, and transactions; and/or
- require boards of issuers that have adopted a trading plan to adopt policies covering trading plan practices, periodically monitor trading plan transactions, and ensure that issuer policies discuss trading plan use in the context of guidelines or requirements on equity hedging, holding, and ownership.
Although I generally like to poke fun at Congress, the foregoing proposal is not unreasonable. However, it would not have prevented or effected the 10b5-1 plan sales of Pfizer or Moderna, since those undertaken by the book, as recognized by Glass Lewis.
-Mike Melbinger, CompensationStandards.com May 7, 2021
