SEC adopts insider trading rule, proposes 4 rules to protect stock traders

The SEC adopted a rule Wednesday designed to better protect against insider trading and released four proposed rules aimed at protecting individual investors who trade stocks.

Adopted rule: Insider Trading Arrangements and Related Disclosures

SEC Chair Gary Gensler: “About 20 years ago, the SEC established Exchange Act Rule 10b5-1. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith — before becoming aware of material nonpublic information. Over the past two decades, though, we’ve heard from courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information. I believe today’s amendments will help fill those potential gaps. … It helps investors decide where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation.”

The four rules proposed Wednesday will be published in the Federal Register and will be open for public comment until March 31, 2023, or until 60 days after publication, whichever is later.

Proposed rule: Order Competition Rule

Gensler: “Today’s markets are not as fair and competitive as possible for individual investors — everyday retail investors. This is in part because there isn’t a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges. Further, the markets have become increasingly hidden from view, especially for individual investors. These everyday individual investors don’t have the full benefit of various market participants competing to execute their marketable orders at the best price possible.”

Proposed rule: Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders

Gensler: “A large and growing amount of equity trading now goes into what many call the dark markets, particularly off-exchange market centers such as wholesalers and dark pools. Such off-exchange market centers, though, benefit from transacting using a different set of rules from the ones on national securities exchanges. This may undermine competition. Thus, I am glad to support today’s proposal. Consistent with our mandate, guided by economic analysis, and shaped by public opinion, this proposal would enhance efficiency, competition, and fairness across our equity markets.”

Proposed rule: Disclosure of Order Execution Information

Gensler: “In the 22 years since Rule 605 was adopted, our equity markets have been transformed by ever-changing technologies and business models. Current Rule 605 disclosures have not kept up with our markets and provide investors with an incomplete picture of execution quality. Thus, I am pleased that today’s proposal would modernize Rule 605 in a number of ways. This proposal, if adopted, would increase transparency for investors and facilitate their ability to compare brokers.”

Proposed rule: Regulation Best Execution

Gensler: “I am pleased to support this proposal because, if adopted, it would help ensure that brokers have policies and procedures in place to uphold one of their most important obligations: to seek best execution when trading securities, whether equities, fixed income, options, crypto security tokens, or other securities. …. Today, equities often trade on off-exchange dark venues that have different business models and are less transparent than the familiar lit exchanges. Such developments in our markets make best execution that much more important. They also raise a number of questions about how brokers handle their best execution obligations in light of conflicts of interest that may lead broker-dealers to place their own interests ahead of their customers’ interests. Altogether, I believe a best execution standard at the commission level, as well as the proposed enhancements, would lead to better execution for retail and institutional investors.”

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.