Executive stock purchases outperformed the S&P 500 by an average of 5% each year from 2015 to 2020,
per an article in Bloomberg investigating the pervasiveness of insider trading in the US.
It is almost impossible for regulators to determine when an insider has made a trade based on material, non-public information versus directing a trade because they understand the business, the article highlights. In particular, the article cites research that corporate executives were consistently able to avoid losses, selling prior to negative news, in SEC probes from 2000-2017. Such stories often raise the ire of the public, contributing to the belief that the market is rigged. Insider trading is also one of the few issues that unite Republican and Democratic legislators. Senator Elizabeth Warren (D-MA) and Representative Elise Stefanik (R-NY) have called for reforms. However, calls to increase prosecutions of purported insider trading often misunderstand how the insider trading law works. The SEC must show not just that there was profit on non-public information, but that the trader in question specifically intended to cheat.
The article, as should be expected, contains a high proportion of the most suspicious examples. The authors specifically emphasize “cracks” in the 10b5-1 plan rules, calling out the lack of a “cooling off period” as well as the lack of limits on the number of plans and the ability to cancel plans. It is likely this report will add pressure to the SEC’s push to reform 10b5-1 plans. Further, there could be significant calls to strengthen insider trading laws or implement requirements that executives hold shares in a blind trust.
The article concludes with a controversial suggestion from Mississippi College School of Law Professor John Anderson – leave it up to companies to decide whether they allow insider trading of their own stock. This way, once approved, insiders could buy and sell as they wish, and investors who believe it to be a bad practice could “take their capital elsewhere.” Although an unlikely scenario, and not generally advocated for by companies, Anderson’s idea is an provocative potential solution to the seemingly unsolvable problem of insider trading.
