Speaking at the Wall Street Journal’s CFO Network event on June 7, SEC Chairman Gary Gensler announced that he is looking to revise rules governing 10b5-1 plans to reduce the risk of improper insider trading.

Executives are frequently in possession of material non-public information (“MNPI”), which limits their ability to trade shares without the risk of claims of insider trading. Rule 10b5-1 was adopted by the SEC in 2000 and sets forth a procedure that provides an affirmative defense against allegations of insider trading.

Under Rule 10b5-1, executives execute a 10b5-1 plan instructing a third-party to execute trades on their behalf according to a set of written instructions which specify when such trades are to be made (e.g., timing, share prices, etc.). A 10b5-1 plan must be adopted at a time when the executive is not aware of any MNPI and can be modified at any time that the executive is not aware of any MNPI. However, a 10b5-1 plan or any trades to be made pursuant to a 10b5-1 plan may be cancelled at any time, even if the executive is in possession of MNPI. In addition, SEC rules do not require public disclosure of 10b5-1 plans and trades reported on Form 4 are not required to indicate whether the trade was made pursuant to a 10b5-1 plan.

Chairman Gensler said that tightening restrictions on the use of 10b5-1 plans would increase investor confidence and ensure a level playing field in the market.

Possible changes to Rule 10b5-1 may include:

  • a required cooling-off period of four to six months after a 10b5-1 plan is implemented before trades are permitted;
  • limits on cancelling 10b5-1 plans;
  • public disclosure of the adoption of and changes to 10b5-1 plans; and
  • limiting the number of 10b5-1 plans that executives can set up.

We will have to wait to see what changes the SEC proposes to 10b5-1 plans. The updated SEC regulatory agenda suggests that proposed rules could be released before year-end.

It is advisable to consider an increased SEC focus on 10b5-1 plans now. In his remarks, Mr. Gensler reiterated that insiders must act in good faith when using 10b5-1 plans and commented that regulators would “ensure we are identifying and punishing abuses of 10b5-1 plans” under the current rule. Some companies already impose some of the proposed limitations as a matter of best practice. Others may want to consider implementing additional limits in anticipation of possible increased SEC enforcement action in this area. In addition, companies may want to review executive 10b5-1 plan documentation and compliance.

A copy of Chair Gensler’s remarks is available at https://www.sec.gov/news/speech/gensler-cfo-network-2021-06-07.


Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2021 Harter Secrest & Emery LLP

Disclaimer

This website presents only general information not intended as legal advice. Although we encourage calls, letters and emails from prospective clients, please keep in mind that merely contacting Harter Secrest & Emery LLP (HSE) does not establish an attorney-client relationship between us. Confidential information should not be sent to HSE until you have been notified in writing by HSE that a formal attorney-client relationship has been established. Information sent to us before then may not be treated as confidential by HSE or the court.

I have read this and agree     Cancel

Our website uses cookies. By continuing to use our site, you agree to our use of cookies in accordance with our Privacy Policy.