SEC Chair Has 10b5-1 Trading Plans in His Crosshairs

SEC Chair Has 10b5-1 Trading Plans in His Crosshairs

June 8, 2021, Covington Alert

On June 7, 2021, during prepared remarks delivered at the CFO Network Summit, SEC Chair Gary Gensler announced that he has asked the SEC Staff to focus closely on reforms to Exchange Act Rule 10b5-1 in order to scale back what he believes are potential abuses by public company executives and directors in the use of 10b5-1 trading plans.

Rule 10b5-1 provides an affirmative defense for corporate insiders and companies to buy and sell stock as long as certain conditions are satisfied, including the adoption of trading plan in good faith, before becoming aware of material nonpublic information. Corporate insiders regularly use 10b5-1 trading plans to sell and buy company shares throughout the year regardless of whether such sales or purchases are made when the insider is in possession of material non-public information.

To remedy what he classified as “real cracks in our insider trading regime,” Gensler highlighted the following specific reforms he has requested the SEC Staff to consider:

• Cooling Off Periods: Rule 10b5-1 does not currently mandate a cooling off period between set-up of a trading plan and the initiation of sales or purchases. It is common today for insiders to wait approximately 30 days before the first trade. Gensler cited bipartisan support for cooling off periods as long as four to six months as a way to prevent some bad actors from using the lack of a cooling off period as a loophole to participate in insider trading.
• Limitations on Cancellation: Rule 10b5-1 does not currently place any limits on the ability of a corporate insider to cancel an existing trading plan. Gensler stated that he believes canceling a plan may be as economically significant as carrying out an actual transaction due to the fact that material nonpublic information might influence an insider’s decision to cancel an order to sell. Gensler has asked the Staff to consider limitations on when and how plans can be canceled.
• Disclosure: There are currently no mandatory disclosure requirements regarding 10b5‑1 plans. Gensler stated that he believes more disclosure regarding the adoption, modification, and terms of 10b5‑1 plans by individuals and companies could enhance confidence in our markets.
• Limits on Number of Trading Plans: There are currently no limits on the number of 10b5-1 plans that insiders can adopt. Gensler stated that he believes the ability to enter into multiple plans, and potentially to cancel them, give insiders a potential “free option” to pick amongst favorable plans as they please.

In light of such a strong public statement, corporate insiders and public companies should expect proposed modifications to Rule 10b5-1 in the not too distant future.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Securities and Capital Markets practice.