SEC Committee Recommends Reforms to Rule 10b5-1 Trading Plans

In a move that boosts the likelihood that updates are coming to Rule 10b5-1, the SEC’s Investor Advisory Committee (IAC) recently issued draft recommendations that the SEC implement new 10b5-1 plan restrictions and disclosure requirements. This action adds support to SEC Chairman Gensler’s recent direction to SEC staff to provide ideas on how to “freshen up” the 20-year-old rule.

A Brief History of Rule 10b5-1 and Trading Plans

Rule 10b5-1 was adopted by the SEC in 2000 and permits executives or other insiders of publicly traded corporations to establish an advance written trading plan to make trades in shares of the company’s stock.

The trading plan is to be adopted when not in possession of material, non-public information (MNPI). Along those lines, the basic intent is to allow insiders who have limited access to trading windows the ability transact in the company’s stock in a way that creates a good faith defense to claims of insider trading.

Gray Areas Lead to Scrutiny of Possible 10b5-1 Plan Loopholes

While Rule 10b5-1 has largely appeared to serve it’s intended purpose, some gray areas around practices have led to questions about whether the current rule, as written, provides opportunity for opportunistic trading.

In recent years, transactions within these trading plans have been scrutinized by regulators, shareholders, and the public. The IAC acknowledges this, saying that “Research conducted on the use of Rule 10b5-1 plans by insiders have consistently supported concerns that some plans are used to engage in opportunistic trading behavior that contravenes the intent behind the rule. In particular, the timing of plan adoptions, modifications, and cancellations, appear to present a heightened risk of potential misuse.”

SEC Committee Proposes Reforms to Trading Plan Adoptions, Modifications and Disclosures

In their proposed recommendations, the IAC outlines specific guidelines to establish guardrails around trading plans, nicely summarized in a McDermott Will & Emery blog “SEC Committee Supports Chairman’s Call to Reform Rule 10b5-1 Plans.”

• A “cooling off” period of at least four months between plan adoption and trading or modification. This would prevent a plan from being adopted in the same quarter that the trades were executed.

• Prohibiting “overlapping plans.” Allowing only one active plan “would signal to the market that a plan was entered into in good faith.”

• Requiring electronic submission of Form 144. Currently, the forms can be mailed to the SEC and are destroyed after 90 days, which the IAC believe makes it more difficult to detect insider trading activities.

• Disclosing in Proxy statements the number of shares scheduled for sale by each of the named executive officers.

• Disclosing on Form 8-K the adoption, modification or cancellation of 10b5-1 plans and the number of shares covered on a timely basis.

• Ensuring that all companies with listed American Depository Receipts (ADRs) and American Depository Shares (ADS) filing Form 20-Fs are subject to Form 4 reporting requirements.

Timing and Next Steps in Trading Plan Reform

The Corporate Counsel’s John Jenkins points out that “there are some potential changes that [SEC Chair] Gensler referenced that aren’t addressed in the draft. These include limits on the ability of insiders to terminate plans while in possession of MNPI, and his cryptic reference to rules addressing 'the intersection [of 10b5-1 plans] with share buybacks.'” Whether these will be addressed in an initial round of rulemaking is unclear.

What is known is that the IAC is expected to formally approve these recommendations when it next meets on September 9, 2021.

A recent Sullivan & Cromwell memo on the topic suggests that the SEC is prioritizing rulemaking in this area and it’s possible that proposed rules will emerge as early as this fall.