SEC Readies Changes to 10b5-1 Plans

Regardless of whether you agree with Securities and Exchange Commission Chair Gary Gensler’s views on policy, you can’t argue against his ability to get things done. Since he took over at the agency, the SEC has acted on hot-button issues like climate disclosure rules and regulating special purpose acquisition companies. Now another of his passion projects is nearing completion, with tougher insider trading rules set to take effect in the coming weeks.

Last month, the SEC adopted changes to Rule 10b5-1 of the Securities Exchange Act of 1934 in an effort to shore up what Gensler has said are “real cracks in our insider trading regime.” So-called 10b5-1 plans allow executives and members of companies’ boards of directors to avoid insider trading violations by creating schedules for trading stocks. The idea is to give them the ability to execute trades without the benefit of material nonpublic information. Research suggests that over time, the plans have come to account for the majority of securities trades by corporate insiders.

Gensler has never hidden his skepticism that 10b5-1 plans are being used in good faith. He noted in the SEC’s announcement about the amendments that the agency for decades has “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.” (It seems telling that the changes received a rare show of unanimous support from the SEC’s commissioners.)

So what do issuers and insiders need to know in preparation for the new rules taking effect next month? Among the changes, before directors and officers can begin trading stocks in 10b5-1 plans, they will face a three-month “cooling off” after the adoption or modification of the plans or “two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification).” The cooling-off period is only 30 days for insiders other than issuers or directors and officers. Directors and officers also must certify that they are not in possession of material nonpublic information or trying to work around insider trading rules. Additionally, the new rules would disallow overlapping trading plans for everyone except issuers.

As expected, the amendments also impose some new disclosure requirements related to 10b5-1 plans. Registrants must disclose use of the plans by their directors and officers every quarter, for example. Furthermore, companies will be tasked with providing annual statements about their insider trading policies and procedures.

Ultimately, drawing attention to the potential for abuses of 10b5-1 plans will likely have as much effect on curbing their misuse as the new rules will. With the changes all but done, look for Gensler to move on to his next project.

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