New SEC regulations that go into affect on April 1st seek to close many of the loopholes that corporate insiders have slipped through over the last two decades, according to an article in The Wall Street Journal. One of the biggest loopholes to be closed is the institution of a 90-day waiting period after executives begin or modify a 10b5-1 plan before they can start trading, as well as disclosure of the plans on quarterly and annual reports. Previously, executives could utilize a high-value 10b5-1 plan without leaving any trace of it and selling shares mere days—or even hours, in some cases—after adopting such a plan, or adopting multiple plans and then canceling the ones that weren’t beneficial.
Of course, corporate insiders are bound to find ways to manipulate the new rules, the article contends. The SEC pointed out that insiders could potentially time market-moving disclosures to coincide with prescheduled trading dates, so that any bad news wouldn’t be made public until after a sale. While the new regulation requires anyone using 10b5-1 plans to “act in good faith,” that’s not exactly easy to enforce, and executives are bound to be tempted to manipulate timing to benefit their sale. Indeed, an advisory committee recommended that making more timely disclosures by companies using 10b5-1 mandatory would help make those kinds of machinations easier to identify, but the SEC declined to layer that into the new rule. And while the same committee also suggested making overseas companies that trade on U.S. exchanges subject to the same rules and regulations as insiders at U.S.-based companies, the new regulations still allow different disclosures of stock sales and purchases for foreign filers.
Validea runs stock and ETF models based on investment strategies with proven long-term track records. If you’re new to Validea, consider taking a look at our product overview or introductory videos.