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SEC to tighten insider trading rules, boost money market fund resilience

SEC Chair Gary Gensler

(Reuters) — The U.S. Securities and Exchange Commission on Wednesday proposed tightening a legal safe-harbor that allows corporate insiders to trade in a company's shares, and other rules to improve the resilience of money market funds.

The agency also unveiled measures to increase transparency around share buybacks and the complex derivatives at the center of New York-based Archegos’ meltdown earlier this year.

The slew of long-awaited changes mark a milestone for SEC Chair Gary Gensler who has outlined an ambitious agenda to crack down on corporate wrongdoing and address inequities in the markets since joining the Wall Street watchdog in April.

The changes, which are subject to consultation, will affect a swathe of corporate America, from publicly traded companies and their top executives, to banking groups and asset managers including BlackRock, Vanguard, Fidelity and Goldman Sachs.

The proposed tightening of “10b5-1” corporate trading plans, in particular, will be cheered by progressives who have long said the current rules are too loose, allowing insiders to game the system and reap windfalls at the expense of ordinary investors.

The plans allow insiders to trade in the company's stock on a pre-determined future date, providing legal protection against potential allegations of insider trading on material non-public information. Critics say it is far too easy to adopt, amend or cancel trades with little scrutiny.

Wednesday's proposal requires executives to disclose those plans and any modifications, neither of which is currently required. For executives, the SEC also wants a "cooling off period" of 120 days between the adoption of a plan and the first trade. For companies trading in their own securities, the proposal would establish a 30-day cooling off period.

The proposal would also bar insiders from having several overlapping plans, which Mr. Gensler said may allow insiders to cherry-pick favorable plans as they please.

While critics have long said the plans are flawed, trades executed by executives at Pfizer and Moderna during the COVID-19 vaccine development process renewed scrutiny of such plans and highlighted transparency issues, said Daniel Taylor of the University of Pennsylvania's Wharton School.

“There is mounting evidence that these plans are, at best, being used in a manner in which they were not intended and, at worst, being abused to enrich corporate insiders,” he said.

Separately, the agency also said it wants companies to disclose share buybacks one business day after a trade is executed, in contrast to the current quarterly disclosure rule.

“These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that’s a good thing,” Mr. Gensler said.

The agency also detailed changes to address systemic risks in the roughly $5 trillion U.S. money market fund sector, which was bailed out for a second time as investors fled those vehicles during the 2020 pandemic-induced turmoil.

Regulators have for years struggled to get a grip on the sector, which critics say now enjoys an implicit government guarantee.

On Wednesday, the SEC proposed new liquidity requirements, scrapping redemption fees and restrictions, and adjusting funds' value in line with dealing activity so as to transfer costs to redeeming investors, a process known as “swing pricing.”

The agency also outlined a plan to stamp out fraudulent, deceptive or manipulative conduct via security-based swaps.

Such privately negotiated derivatives were at the center of the Archegos meltdown that left Wall Street banks on the other side of the family office's trades nursing $10 billion in losses.

Under the new rule, investors will have to publicly disclose such trades.



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