In remarks before the Chief Financial Officer Network Summit, SEC Chair Gary Gensler reported that he directed staff to develop recommendations for revising SEA Rule 10b5-1 ("Trading 'on the Basis of' Material Nonpublic Information in Insider Trading Cases").
Mr. Gensler explained that, although the rule has created affirmative defenses for company insiders to purchase and sell stock if they adopt their trading plans "in good faith" prior to becoming privy to nonpublic information, there are loopholes in the rule.
Mr. Gensler identified the following potential changes:
- a required "cooling off period" prior to a company insider making their first trade after adopting a Rule 10b5-1 plan, which Mr. Gensler noted former SEC Chair Jay Clayton and current Commissioners Caroline Crenshaw and Allison Herren Lee support;
- limitations as to when a Rule 10b5-1 plan can be canceled, without which a company insider can cancel a plan once they become privy to material nonpublic information;
- required disclosure requirements concerning the adoption, modification and terms of Rule 10b5-1 plans; and
- restrictions on how many Rule 10b5-1 plans a company insider can adopt, which Mr. Gensler stated effectively enable a company insider to have a "free option" to select among favorable plans as they desire.
Mr. Gensler emphasized that, "as the rule stands today, cancelling or amending any 10b5-1 plans calls into question whether they were entered into in good faith. If insiders don't act in good faith when using 10b5-1 plans, those plans will not offer them an affirmative defense." Although many of these factors are already considered in many companies' best practices, Mr. Gensler stated, he believes that uniform requirements of such practices would better serve the capital markets.
Commentary Kyle DeYoung
Chair Gensler's decision to revise the requirements for Rule 10b5-1 plans makes sense. The Rule has not been modified since it was originally adopted in 2002 and there has recently been increased attention on the potential for insiders to use 10b5-1 plans opportunistically. The suggestions set out in his speech are reasonable steps the SEC can take to prevent the abuse of Rule 10b5-1 plans. Chair Gensler's remarks also suggest that the SEC will be looking closely at trades made pursuant to Rule 10b5-1 plans in the enforcement context. Companies and insiders who rely on Rule 10b5-1 plans may be well-served to review their plans with Chair Gensler's comments in mind.
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