On December 15, 2021, the US Securities and Exchange Commission (SEC) announced its proposed amendments to Rule 10b5-1 trading plans which generally permit corporate insiders to trade their companies’ securities at pre-determined intervals without being subject to insider trading prosecutions. According to the press release, the proposed amendments address perceived gaps in Rule 10b5-1 that will lead to an increase in investor confidence by helping shareholders understand when and how insiders are trading in securities for which they may at times have material nonpublic information. The SEC’s focus on insider trading, coupled with its increase in overall enforcement efforts, signals that a push in insider trading enforcement will also accompany these proposals. In light of this renewed focus, companies may want to review their insider trading plans and policies.
By way of background, Rule 10b5-1(c) provides an affirmative defense
"safe harbor" to insider trading for parties that frequently have access to material nonpublic information. This safe harbor allows companies and their insiders to buy and sell stock as long as they adopt trading plans in "good faith" before becoming aware of material nonpublic information. Despite the underlying intent of the rule, however, SEC chairman Gary Gensler noted in the press release the gaps in the rule and concerns that have been raised over the years about the insider trading program and unequal access to corporate information. For example, currently insiders may begin trading immediately upon implementation of Rule 10b5-1 plan thereby creating concern that the rule may give an unfair advantage to those with inside information who trade in good faith under the rule. Indeed, a recent study, "Gaming the System: Three "Red Flags" of Potential 10b5-1 Abuse," revealed that trades occurring within 60 days of a 10b5-1 trading plan’s establishment were more likely to avoid significant losses and to have come ahead of stock-price declines. These advantages, however, disappeared after 60 days.
Accordingly, the proposed amendments address the SEC’s perceived shortcomings of Rule 10b5-1 by both adding and modifying existing requirements related to the proper adoption of 10b5-1 plans. First, the proposed amendments update the requirements for the affirmative defense to insider trading:
- Officers or directors would have a 120-day mandatory cooling-off period before any trading could commence following the adoption of a Rule 10b5-1 plan.
- Issuer trading arrangements would be held to a mandatory 30-day cooling-off period.
- The proposal prohibits overlapping trading plans and limits single-trade plans to one trading plan per 12-month period.
- Directors and officers will have to provide written certifications that they are not aware of any material nonpublic information when they enter into the plans.
Second, the proposed amendments provide enhanced disclosure requirements including the following:
- Issuers must annually report their adopted insider trading policies and procedures, or, alternatively, why they have no such policies or procedures.
- With respect to corporate share repurchase agreements pursuant to a Rule 10b5-1 plan, instead of the current requirement for quarterly disclosures of aggregated monthly data, issuers will be required to report share repurchase disclosures the next business day following the execution of a share repurchase. Specifically, the issuers would have to identify the class of securities purchased, the total amount purchased, the average price paid and the aggregate total amount purchased on the open market.
- Officers and directors would have to disclose whether a reported transaction was made under an affirmative safe harbor. Specifically, insiders who report on Forms 4 or 5 would have to indicate via a new checkbox whether the reported transactions were made pursuant to a Rule 10b5-1(c) or other trading plan.
The proposed amendments will be open for comment for 45 days following their publication in the Federal Register. Given the SEC’s programmatic focus on information asymmetries, clients may also want to take the opportunity to review their current trading plans.
Special thanks to Emma Yeremou-Ngah for her assistance in the preparation of this content.