SEC Proposes Amendments to Rule 10b5-1 Insider Trading Plans

January 2022


 

Background

Company insiders, such as officers and directors, often hold material nonpublic information (“MNPI”), which may present a barrier to trading due to the perceived notion of insider trading. Rule 10b5-1 provides a defense against claims of insider trading, allowing the establishment of a plan to dictate the trading of shares by insiders. In accordance with Rule 10b5-1, an insider must act in good faith and without knowledge of MNPI when the plan is established. A trade made in accordance with a plan established in accordance with Rule 10b5-1 provides an insider with an affirmative defense against insider training. The SEC’s proposed amendments are intended to deter perceived abuse of such defense as cited in academic studies, and statements made by district courts, commentators, and a member of Congress.
 

Summary

The proposed amendments include mandatory cooling-off periods, which are not required under the current rule. Under the proposed amendments, upon the adoption of, or modification to, a trading arrangement, and prior to trade commencement, insider plans would require a 120-day cooling off period and company buyback plans would require a 30-day cooling off period. The amendments also include a certification requirement for officers and directors. The certification must be furnished to the company upon the adoption of, or modification to, a trading plan, and affirm that such plan was adopted, or modified, in good faith, and without knowledge of MNPI. While this notion is required under the current rule, such certifications are not required to be furnished.

Additionally, the proposed amendments would not provide an insider with an affirmative defense for multiple overlapping plans for the same security. There are also several enhanced and new disclosure requirements included in the proposal, such as disclosure of equity grants to named executive officers made within 14-days of filing or furnishing MNPI.

Comments on the proposing release are due 45 days after publication to the Federal Register.