(Bloomberg) — When Abbott Laboratories chief Miles White cashed out $32 million of stock and options in 2019, shareholders had reason to shrug it off. Online regulatory filings said the sales were part of a “previously adopted plan” — a sign they weren’t based on any current inside information.

It turns out, the disposals that Monday had been set up the previous Friday. To learn that detail, investors would have to track down the plan he filed with the Securities and Exchange Commission by traveling to the agency’s headquarters in Washington, clearing security and digging into a filing cabinet.

A growing body of academic research shows an arcane government program that’s supposed to help senior executives buy and sell shares properly and avoid unnecessary scrutiny is rife with well-timed transactions. As SEC Chair Gary Gensler put it last week, the agency’s loose rules have led to “real cracks” in its surveillance of potential insider trading.

It boils down to this: The SEC requires executives to set up trades in advance, ideally creating a “cooling-off period” so that any insider information they have can go stale before transactions are carried out.

But there’s no rule that executives must wait once plans are established, and some execute transactions within days or weeks. What’s more, short-term trading plans can be hard to scrutinize because they’re filed on paper, which the SEC has stored in ways that make it hard for the public and its own surveillance systems to access.

Academics, lawmakers and the SEC’s new chair, Gensler, are now calling for tougher rules to govern how executives across corporate America buy and sell their own companies’ stock.

Followed Rules

White was Abbott’s chief executive officer when he set up his plan to dispose of millions of dollars in stock and options on the next trading day, just two weeks before the end of the first quarter in 2019.

The health-care giant’s share price fell more than 7% in the month that followed — in part after Abbott announced quarterly results, beating estimates but refraining from raising a profit-per-share forecast for the year. A fresh debate on Capitol Hill over whether to embrace a single-payer insurance system also was pressuring shares at the time.

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White has never been accused of wrongdoing. There’s no sign the SEC investigated. While no longer CEO, he remains chairman.

“We follow all SEC rules and regulations and have robust internal practices in place, including blackout periods,” said Scott Stoffel, an Abbott spokesperson speaking on behalf of White and the company. “This transaction involved options moving toward expiration.”

Stoffel noted that Abbott’s stock returned 11% from the date of the sale to the end of that year and eventually rose more than 50%. “Mr. White retains extensive holdings in the company,” the spokesperson said.

Regulatory filings detailing White’s compensation show how much time he had left to exercise his options: He had until February 2020 to cash in about half, and the following year for the rest.

Paper Filings

Gensler, speaking at an industry conference on June 7, said the SEC is looking to toughen the rules executives use to sell stock, possibly requiring a cooling-off period between when plans are adopted and when trades commence.

Another problem academics cite is the way the SEC handles certain filings. When top executives sell shares, the agency posts reports on the transactions online, often with a note on whether they were part of a prearranged plan. But those forms don’t specify when the plan was adopted. That key detail is noted separately on a Form 144, which executives typically submit by mail. Once the filings arrive at the SEC, they can be hard to track down.

Until last year’s pandemic, the agency’s longstanding practice was to keep the paper records in cabinets in its reading room. Behind the scenes, the data wasn’t added to the agency’s sophisticated surveillance systems, according to people familiar with the matter, who asked not to be named discussing internal monitoring software. Instead, the records were thrown out after 90 days.

Short-term plans for stock trades are surprisingly prevalent, hinting at a significant gap in the agency’s surveillance, according to research from Stanford University and the Wharton Business School. The academics there reviewed 20,000 plans filed on paper by corporate leaders. About 38% of the plans call for trades within the same quarter, before earnings results were announced. About 82% have cooling-off periods of fewer than six months. The transactions consistently avoid large losses and foreshadow future price declines, according to the study.

“This is a huge blind spot for the SEC,” said Dan Taylor, an accounting professor at the University of Pennsylvania’s Wharton who co-wrote a report on the group’s study this year. The changes Gensler is now weighing “are well-grounded in the data, and show the SEC is committed to evidence-based policy making.”

Trouble Policing

Investors would be hard-pressed to find the plans on the Edgar database — the SEC’s massive online repository of corporate disclosures. Virtually all Form 144s submitted from 2016 to 2019 — more than 90,000 — were mailed, according to Taylor. He conducted his research through a subscription service that sends someone to SEC headquarters to digitize the filings before their disposal.

“The absence of mandatory disclosure and electronic filing severely limits the SEC’s ability to study and police these plans,” he said. SEC rules only require insiders to disclose plans to sell securities that were at one point restricted. Otherwise, company insiders aren’t required to disclose the terms of such plans or when they were adopted.

Since the rules were approved two decades ago, the plans have become common practice. Insiders at more than half of S&P 500 companies have enacted them, according to survey data from Morgan Stanley in 2018.Plans can also be canceled or modified any time, potentially letting insiders nix a sale if they know the company will announce news that will push the stock’s price higher.

“Rule 10b5-1 plans have become a ‘polite’ form of insider trading as executives can time corporate public statements to support their sales,” said John Coffee, a professor at Columbia Law School who focuses on securities regulation.

Coffee’s colleague, Professor Joshua Mitts, documented in a 2020 paper another pattern that suggests executives may be delaying positive news announcements to occur just before their planned trades.

Under Armour

Over the years, SEC officials have occasionally warned that while scheduling trades can offer a defense against insider trading claims, it isn’t a shield. In a few cases, the SEC has sued executives for allegedly using plans to sell off shares while aware of brewing problems in their businesses.

There are indications that shareholders are starting to pay more attention to stock-selling plans. Former Under Armour CEO Kevin Plank is facing an investor lawsuit that accuses him of using a plan to unload more than $100 million of shares while the company’s outlook was worsening. Last month, Under Armour agreed to pay $9 million to settle the SEC’s claims that it failed to disclose it was pulling forward orders from future quarters to close a revenue gap. The sports apparel company neither admitted or denied the agency’s allegations, and the regulator didn’t accuse Plank of any wrongdoing.

Still, the six-month cooling off period that Gensler is considering would have prevented Plank’s trades if it had been on the books.

“The SEC reviewed all of the relevant material, including Mr. Plank’s trading records, and did not bring any charges against Mr. Plank,” said Lorin L. Reisner, an attorney for Plank. “The settled complaint with the company did not make any reference to insider trading. Mr. Plank’s conduct was proper in all respects. He believed that any applicable requirements of the securities laws were satisfied in all respects.”

Lawmaker Pressure

The academic research has prompted lawmakers to take up the issue. In February, Democratic Senators Elizabeth Warren, Chris Van Hollen, and Sherrod Brown sent a letter to the SEC asking the agency to consider changing its rules. The trio recommend the regulator require a four-to-six month cooling-off period between the adoption or modification of a plan and the execution of the first trade. The lawmakers have also proposed that insiders be required to report the content of the plans.

For now, executives don’t always have to disclose that they have set up a plan once enacted and some file new plans for every transaction.

To be sure, executives may have innocuous reasons to sell shares in a hurry, like if they need cash to buy a house. And some executives contacted by Bloomberg disputed the information in regulatory filings.

SEC records showed Daniel de Boer, the head of drug developer ProQR Therapeutics, adopted a plan a week before an earnings announcement on Nov. 7, 2018. He sold a stake worth several million dollars the day before earnings that sent the price down 5%.

In response to Bloomberg’s questions, de Boer said the filing showing a five-day window between setting up a plan and trading was incorrect. He resubmitted the disclosure to the SEC to show that the plan was adopted on Sept. 10, a 57-day cooling off period before the first trade.

With the pandemic shutting access to SEC offices, the agency has started uploading the Form 144 filings online. But it’s still harder to find them than many other disclosures.

Scanned copies of those forms aren’t listed among companies’ other corporate filings when investors access Edgar. Instead, every day’s batch from across the U.S. stock market is placed into a folder labeled with the date, which investors have to open and sift to find companies in their portfolio.

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