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Dec 16, 2022

SEC’s insider trading reform gets rare unanimous backing

Commission approves changes to Rule 10b5-1

Plans to beef up insider trading rules have been approved with rare unanimous support among members of the SEC, who in recent years have frequently disagreed along party lines.

Hester Peirce, a Republican member of the commission and frequent critic of SEC rulemaking during the Biden administration, said in a statement: ‘While this rulemaking is more prescriptive and restrictive than I would have preferred, I support it for likely doing more good than bad. It should help insiders to trade without fear of liability, while making it more difficult to misuse 10b5-1 plans.’

On the other side of the aisle, Democratic commissioner Caroline Crenshaw described the changes as containing ‘protections [that] should help limit the scope of 10b5-1 plans to situations where insiders are truly trading without the unfair benefit of material non-public information and protect against opportunistic trading. And, in so doing, they should help bolster confidence to the public and the market that the proverbial deck is not stacked in favor of the house.’

At issue are amendments to Rule 10b5-1. The rule provides for corporate insiders such as directors and executives to use ‘Rule 10b5-1 plans’ that spell out a pre-established formula triggering sales in their company’s stock. If such a plan was established while the insider had no material non-public information, the rule would provide an affirmative defense against allegations of insider trading.

The new changes update the conditions that must be met for that 10b5-1 affirmative defense. Specifically, the amendments adopt cooling-off periods for persons other than issuers before trading can start under a Rule 10b5-1 plan. They add a condition that all persons entering into a Rule 10b5-1 plan must act in good faith regarding the plan.

Under the changes, directors and officers must include representations in their plans certifying that at the time a new or modified Rule 10b5-1 plan is adopted:

  • they are not aware of any material non-public information about the issuer or its securities
  • they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.

Among other things, the amendments curb the use of multiple overlapping trading plans and limit the ability to rely on the affirmative defense for a single-trade plan to one single-trade plan per 12-month period for all persons other than issuers.

The changes will also require more comprehensive disclosure about an issuer’s policies and procedures related to insider trading, including quarterly disclosure by the issuer regarding the use of Rule 10b5-1 plans and other trading arrangements by directors and officers for the trading of its own securities.

‘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 non-public information,’ SEC chair Gary Gensler said in an announcement.

‘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 non-public information. I believe today’s amendments will help fill those potential gaps.’

Peirce also welcomed changes made to the initial proposal in response to feedback from outside the agency. She described ‘improvements’ to the final rule as including:

  • Dropping ‘the unnecessary and likely unworkable changes to 10b5-1 plans for issuers’
  • Changing the definition of non-10b5-1 plans. ‘I question the need for quarterly disclosures about non-10b5-1 plans, but the definition of non-10b5-1 plans is more precise than the proposal’s expansive and confusing one’
  • Reducing disclosures; for example, it does not require directors or officers to disclose pricing information about their 10b5-1 plans.

Outside of the SEC, Rep Maxine Waters, D-California, chair of the House Committee on Financial Services, said in response to the vote: ‘I am pleased that the [SEC] has adopted rules that incorporate the recommendations from my bill, HR 1528 ‘Promoting transparent standards for corporate insiders act,’ which passed the House with bipartisan support and requires the SEC to stop company executives and others from hiding insider trading through 10b5-1 trading plans.

‘These plans permit certain employees of publicly traded corporations to sell their shares without violating insider trading prohibitions, but several high-profile examples have suggested that current rules are too lax. Like my bill, the action by the SEC… would limit the abuses and misuses of 10b5-1 plans.’

The Council of Institutional Investors (CII) also welcomed the reforms, noting that it had been pushing the SEC for 10 years to reform Rule 10b5-1 trading plans. ‘The new rules close gaps in the SEC’s enforcement regime that allow executives to use 10b5-1 plans as cover for insider trading,’ CII executive director Amy Borrus said in a statement.

‘The SEC amendments will better protect public investors from misuse of these plans and strengthen confidence in corporate management teams and the capital markets generally.’

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...

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