(BFM Bourse) – To prevent managers from enriching themselves by using privileged information, it is possible for them to draw up a plan formalizing in advance the conditions for future sales of securities. But the terms of application make it easy to circumvent the objective, judges the boss of the SEC, who wants to significantly toughen the conditions.
Equity compensation can be a very important part of an executive’s total package, especially in the United States (at Tesla, it’s even Elon Musk’s only compensation). There is nothing abnormal in the fact that, at one time or another, the beneficiaries sell securities for financial or personal reasons of their own. But here it is: by definition, a leader knows much more about what is going on in his company than an average saver. The risk is therefore that he buys or sells by taking advantage of information not known to the public, which constitutes the famous insider trading (the other investors being harmed, breaking the integrity of the market).
In 2000 the Securities and Exchange Commission (SEC) devised a solution by modifying the rule against insider trading, taken from the main regulatory body relating to the supervision and repression of fraud on the financial markets in the United States – the Securities and Exchange law of 1934. Called “10b5-1”, this new rule implies that a manager can sell securities on condition that he has formalized in advance a trading plan providing for the possibility of selling a predetermined number of actions within a certain time frame and at certain price conditions. The idea is that by forcing oneself to sell only at the time and time scheduled in advance, it becomes less easy to intervene based on information of which only the management of the company would have knowledge. “It was hoped that the transactions would take place only after all shareholders had been made aware of any significant information,” SEC Chairman Gary Gensler said last December. “But this 10b5-1 rule has become obsolete, revealing gaps in our provisions for enforcing insider selling law.”
Therefore, the SEC proposes to strengthen the legislation by amending this rule to restore confidence and the integrity of the system.
Impose a minimum period before you can sell
Thus, the American financial policeman first wants to extend to four months (even six initially mentioned) the period after which a manager can sell securities from the date of creation of the plan. Today, it is theoretically possible to tie up a sales plan, submit it in the morning, and sell securities in the afternoon… Imposing a minimum of four months makes it possible to be sure that at least one publication of quarterly results occurs in the interval (any information likely to significantly influence the results must then be disclosed). In addition, the Commission wants to impose that the date of filing of the plan be made public, so that everyone knows that an executive potentially intends to intervene in the title of the company.
Finally, it should no longer be allowed to file… one plan at a time. Currently, there is no limit to the number of plans a single leader can set up, which allows for a large number of opportunities to sell “on the off chance”. And to be able, in fact, to intervene almost when it sees fit and under the best conditions, which eliminates all the point of resorting to a predetermined plan.
“The goal is to put everyone on the same level so that insiders cannot make a better deal than the rest of the investors,” concludes the 33rd chairman of the SEC. In a way, the current design indeed allows a dishonest leader to operate insider transactions, while hiding behind the fact of having followed a 10b-5 plan to the letter.
Guillaume Bayre – ©2022 BFM Bourse