CLS Blue Sky Blog

Insider Trading After the 2022 Rule 10b5-1 Amendment

In December 2022, the SEC finalized a major overhaul of Rule 10b5-1, which governs pre-scheduled insider trading plans. The amendment to the rule introduced several procedural safeguards designed to curb what critics saw as widespread abuse of the rule. While many lauded the reform as necessary to restore trust in insider trading disclosures, others warned of unintended consequences – most notably, that stricter rules could reduce legitimate insider participation in markets or chill price-relevant signals.

In a recent working paper, we provide early, large-sample empirical evidence on how insiders and the market responded to the 2022 amendment. We find suggestive evidence that the amendment was largely successful in reducing opportunistic trading under 10b5-1 plans, but at a cost: Compliance burdens rose, use of such plans modestly declined, and stock price efficiency deteriorated for firms potentially more affected by the reform.

Background: Rule 10b5-1 and the Problem It Tried to Solve

Originally introduced in 2000, Rule 10b5-1 was designed to provide corporate insiders with a safe harbor: As long as trades are made according to a prearranged plan adopted in good faith, they are generally insulated from liability for trading on material nonpublic information (MNPI). This was intended to allow executives to diversify their wealth without triggering insider trading concerns.

In practice, the rule became increasingly controversial. Numerous studies and investigative journalism by The Wall Street Journal suggested that insiders were exploiting the rule’s flexibility. Executives could adopt, modify, or cancel plans shortly before trades; stack overlapping plans; and trade immediately after plan adoption, often just before stock prices fell or disappointing earnings were released. A 2022 WSJ report estimated that insiders using 10b5-1 plans within 60 days of adoption earned $500 million more than if they had waited three months.

The 2022 amendment attempted to close these loopholes. Key provisions included:

These changes went into effect in early 2023. Our study tracks how insider trading behavior and market dynamics evolved in the wake of these reforms.

Main Findings

  1. Sharp Decline in Trades Soon After Plan Adoption

The clearest effect of the rule change was a dramatic drop in trades occurring soon after a plan was adopted. Before the amendment, roughly 31.1 percent of 10b5-1 sales occurred within 90 days of plan adoption. After the amendment, that figure fell to 1.7 percent. Insiders now overwhelmingly comply with the bright-line 90-day threshold, with trades clustering just beyond the cutoff. This outcome suggests that the new rule is effectively enforced and clearly understood by insiders and compliance teams.

  1. Reduced Opportunistic Trading Under 10b5-1

We next examined whether trades under 10b5-1 plans became less opportunistic. Prior to the amendment, such trades were often followed by significant negative stock returns, suggesting that insiders were selling ahead of bad news. After the amendment, the pattern reverses: Trades under 10b5-1 are followed by flat or even slightly positive abnormal returns. Insiders are also significantly less likely to sell under 10b5-1 plans before earnings misses in the post-amendment period. These results suggest that the amendment accomplished its core goal of reducing the misuse of 10b5-1 plans to trade on MNPI.

  1. Modest Shift Away from 10b5-1 Plans

Critics of the reform argued that stricter requirements would discourage insiders from using 10b5-1 plans altogether, leading them to revert to trades outside of 10b5-1 plans. We do find a decline in usage from 52.5 percent of all insider sales before the amendment to 50.3 percent after. While the economic magnitude of this decline is relatively modest, we find evidence consistent with under-reporting of 10b5-1 sales during the pre-period when the Form 4 checkbox was not mandated. Thus, our estimates of the post-amendment shift away from 10b5-1 plans likely represent a lower bound.

Interestingly, the decline is most pronounced among “potential abusers,” defined as insiders who had previously executed trades within 90 days of plan adoption. Among this group, 10b5-1 usage dropped by 8.6 percentage points. But instead of migrating to unscheduled (non-10b5-1) trades, many simply curtailed their trading activity altogether. This suggests that the cooling-off requirement imposes real frictions, especially on those who previously took advantage of its absence.

  1. Spillover Effects on Non-10b5-1 Trades

The amendment also appears to have had a general deterrent effect. Opportunistic behavior declined even among non-10b5-1 trades, although the effect was smaller. One possible explanation is that increased regulatory scrutiny and internal compliance oversight discouraged all forms of aggressive insider trading, not just those using 10b5-1 plans.

  1. Evidence of Plan Termination Opportunism Persists

Another provision of the amendment requires companies to disclose 10b5-1 plan terminations in the next 10-Q or 10-K filing. This was intended to prevent insiders from canceling trades opportunistically when good news was anticipated. However, our findings show that trades are still being terminated ahead of stock price increases. We document positive abnormal returns following plan terminations, suggesting that this type of opportunistic behavior continues, possibly because delayed disclosure in quarterly reports is not an effective deterrent.

  1. Stock Gift Backdating Largely Curtailed

Prior to the amendment, insiders often disclosed stock gifts months after the fact, enabling them to backdate transactions for favorable tax treatment. The amendment now requires gifts to be reported within two business days. We find that the classic “reverse V” pattern in stock prices around gift dates, indicative of backdating, disappears after the rule change, especially for large gifts.

  1. Option Grants Shift Away from Sensitive Dates

The SEC was also concerned about option grants timed around material news, either just before good news or after bad news. While we find no evidence that such grants were systematically opportunistic pre-amendment, firms are now less likely to issue options around earnings announcements or 10-Q/K filings. This suggests that firms are responding conservatively to the new disclosure regime.

An Unintended Consequence: Reduced Price Efficiency

While the amendment successfully curbed opportunistic insider behavior, it also appears to have weakened price discovery in some firms. Specifically, we find that stock price efficiency, measured by intraday variance ratios, declined for firms that had previously relied heavily on short cooling-off periods. This result aligns with the theory that insider trading can contribute to market efficiency by incorporating private information into prices (Leland 1992).

Conclusion

Our evidence suggests that the 2022 amendment to Rule 10b5-1 largely worked as intended: It reduced the frequency of opportunistic trades. The rule’s bright-line cooling-off period appears especially effective in discouraging the misuse of these plans.

However, these gains came with trade-offs. Compliance costs likely increased, especially for insiders who previously used more flexible trading strategies. And market price efficiency may have declined for firms where insider trades once played a meaningful role in disseminating information.

This post comes to us from professors Sehwa Kim at Columbia Business School, Seil Kim at Baruch College, City University of New York, and Shivaram Rajgopal at Columbia Business School. It is based on their recent paper, “Insider Trading After the 2022 Rule 10b5-1 Amendment,” available here.

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