The Securities and Exchange Commission voted unanimously Wednesday to propose new rules that would encourage company insiders to institute a “cooling off” period before executing trades in their company’s stock under a framework that gives them protection from insider trading liability.
Under current rules, company insiders are given a safe harbor to protect against accusations of insider trading if they buy and sell their company’s stock through predetermined plans, executed by a third party and set up at a time when the individual isn’t aware of material non-public information.
The proposal would institute a 120-day cooling off period before trades can commence under such plans for individuals, and would require companies themselves to wait 30 days before executing trades in a stock buyback program.
Further, the new rule would restrict company officers from instituting overlapping trading plans that could enable them to skirt the rules prohibiting the use of inside information when buying and selling shares.
“These issues speak to the confidence that investors have in the markets,” SEC Chairman Gary Gensler, a Democrat, said when voting to propose the rules at a virtual meeting of the commission Wednesday. “Anytime we can increase investor confidence in the markets, that’s a good thing.”
The SEC’s two Republican commissioners, Hester Peirce and Elad Roisman, voted to propose the rule, but expressed reservations about some of the details, including the requirement that companies themselves wait 30 days before engaging in share buybacks.
Companies “must make determinations about whether share repurchases are appropriate, and if so, how many shares to buy, and at what price, based on current information about how much cash the company has and what its anticipated uses for it are,” Roisman said. “Our cooling off period is more burdensome for an issuer than for an individual, because we’ll make these considerations much more uncertain.”
The SEC also voted 3-2, along party lines, to propose rules requiring companies to report information on share buybacks, including the price and number of shares bought, by the close of business the day after those transactions took place.
Democrats on the SEC supported the rule, pointing to potential for companies to engage in buybacks in order to influence metrics like earnings-per-share, which can affect executive compensation. The agency’s two Republicans warned that the disclosures would prevent companies from engaging in buybacks, to the detriment of shareholders.
“Other countries, such as Australia and the United Kingdom, have long required more timely share buyback disclosures next day,” Gensler said. “I believe freshening up our own share buyback disclosures would help the U.S. capital markets remain the most competitive in the world.”
analysts predicted in October that S&P 500
companies will repurchase $808 billion in stock in 2021 and $872 billion in 2022, and will rank as the single largest use of company cash this year and next, ahead of capital expenditures, research and development, acquisitions and dividends.
The public will have 45 days to comment on the proposed rule changes, after which the SEC will amend the rule to take those comments into account and vote on whether to implement the new regulations.