The SEC proposed amendments to Exchange Act Rule 10b5-1 ("Trading 'on the Basis of' Material Nonpublic Information in Insider Trading Cases"). The proposed changes would (i) add new obligations for parties seeking the safe harbor provision of Rule 10b5-1(c)(1) and (ii) impose additional disclosure requirements.

Regulatory Changes

Currently, Rule 10b5-1(c)(1) provides an affirmative defense against allegations of insider trading, provided that the trade in question was made pursuant to a plan made before the trader gained access to material nonpublic information. If adopted, the SEC's proposed amendments would implement the following additional conditions for parties seeking the affirmative defense:

  • impose a 120-day cooling-off period for officers and directors for any new or modified trading plan, and impose a 30-day cooling-off for issuers;
  • prohibit overlapping trading arrangements in the same class of securities;
  • limit single-trade plans to one plan per 12 months;
  • require officers and directors to certify a lack of knowledge of material nonpublic information before entering into or modifying a trading plan; and

expand the existing good-faith requirement, such that all plans must be entered into and operated in good faith. The SEC's proposed amendments would also heighten certain disclosure requirements around insider trading protocols, obligating issuers to disclose through annual reports:

  • more comprehensive disclosures regarding the issuer's policies procedures relating to insider trading and option grants; and
  • a new table listing any options granted within 14 days of the release of material nonpublic information and the market price of the underlying securities the trading day before and the trading day after the disclosure of the material non-public information.

Issuers would also be required to disclose in quarterly reports their director, officer and issuer trading plan adoptions and terminations under 10b5-1, as well as the terms of such arrangements. Finally, Section 16 officers and directors would be required to disclose 10b5-1(c) trading arrangements and gifts of securities on Forms 4 and 5.

Commissioner Statements

SEC Chair Gary Gensler endorsed the proposed amendments, noting the regulatory gaps he hopes the proposed rules will fill. SEC Commissioner Allison Herren Lee expressed full support for the proposed amendments, noting the dual issues of investigating potential abuse of 10b5-1's affirmative defense without sufficient disclosure requirements to gather necessary information were addressed by the updated rules. SEC Commissioner Caroline Crenshaw also voiced full support for the proposal, and asserted that some aspects, like the single trade plan volume provisions, might not go far enough.

SEC Commissioner Hester Peirce offered support for the proposed amendments, praising the cooling-off periods, elimination of overlapping protection and limited plan volume. However, Ms. Peirce sought further public comment on other provisions, particularly the good-faith requirement and the new disclosure requirements, expressing concern with indirect regulation of internal corporate activity. SEC Commissioner Elad Roisman also supported the proposed cooling-off periods, but he criticized the remaining changes and the limited time made available for public comment.

Commentary

Amid the flurry of press releases and fact sheets issued in connection with these proposed amendments, the statements of Commissioner Peirce deserve attention. Commissioner Peirce solicited specific comments from issuers with regards to the consequences of the proposed certification requirement of directors and officers, the condition that any trading plan be "operated" in good faith, and enhanced disclosure requirements. She expressed concern that the good faith requirement may create a hindsight bias when viewing past 10b5-1 plans, or worse yet, influence future director decisions. Ms. Peirce is not the lone dissent on this front so it will be interesting to see how this proposal shakes out.

Primary Sources

  1. SEC Proposed Amendments on 10b5-1 and Insider Trading
  2. Fact Sheet on 10b5-1 and Insider Trading: Proposed Rules
  3. Press Release: "SEC Proposes Amendments regarding Rule 10b5-1 Insider Trading Plans and Related Disclosures"
  4. Statement on Rule 10b5-1 and Insider Trading Proposing Release from Commissioner Hester Peirce
  5. Stock Trading Plans Should Prevent - Not Enable - Insider Trading: Statement on Proposed Amendments to Rule 10b5-1 from Commissioner Allison Herren Lee
  6. Statement on the Proposed Rules regarding 10b5-1 Plans from Commissioner Elad Roisman
  7. Statement on the Proposed Amendments to the Availability of the Affirmative Defense to Allegations of Insider Trading Provided by Exchange Act Rule 10b5-1 from Commissioner Caroline Crenshaw
  8. Statement on Rule 10b5-1 and Insider Trading from Chair Gary Gensler

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