The U.S. Securities and Exchange Commission (SEC) is closing loopholes that previously allowed company insiders to get away with illicit insider trading.
What Happened? The SEC is adopting amendments to Rule 10b5-1, a 2002 regulation that provided defenses for issuers and insiders against insider trading liability. Rule 10b5-1 allowed insiders to execute pre-planned trades on the basis of pre-established criteria, even if the insiders later became aware of material non-public information.
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Why It's Important: Company insiders often have the best sense of the health of a company and where business is headed.
The phrase “insider trading” has a negative connotation to many Americans, but it's perfectly legal assuming all trades are publicly disclosed to the SEC and are not based on specific non-public information.
Company insiders are free to buy and sell a stock as they please provided they fill out the proper paperwork in a timely manner notifying other investors of what they are doing.
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Unfortunately, academic research has shown insiders were abusing the protections Rule 10b5-1 provided by selling shares of stock less than a month after establishing the plan or implementing the plans right before a major stock catalyst, such as an earnings announcement. Some company insiders were even adopting multiple plans and then later canceling the ones that wouldn't be profitable to execute.
The rule amendments will make it more difficult for company insiders to take advantage of the protections Rule 10b5-1 provided to effectively trade on non-public information.
The new rule changes will be implemented for most U.S.-listed stocks on April 1.
Benzinga's Take: Insider trading laws are made to ensure company insiders play by the same rules in the market that every other investor does. The new changes to Rule 10b5-1 will help maintain the integrity of the market and make sure the tables aren't tilted against the average retail investor.
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