On June 7, 2021, Securities and Exchange Commission (SEC) Chair, Gary Gensler, expressed concern about potential abuses of Securities Exchange Act Rule 10b5-1 and announced that he expects to revise the rule.1 The agency followed with an updated regulatory agenda which signals that proposed new rules may come before the end of the year.
Rule 10b5-1 provides an affirmative defense from insider trading for corporate insiders and companies to buy and sell company stock as long as they adopt their trading plans in good faith and while not in possession of material nonpublic information. These arrangements typically involve periodic sales pursuant to a schedule determined at the outset of the plan, sometimes combined with giving a third party (generally a broker) sole discretionary authority with respect to certain aspects of the trades. However, academic studies have asserted that some executives use 10b5-1 plans to engage in opportunistic, large-scale selling of company shares.2 There are limited SEC enforcement actions concerning Rule 10b5-1 and none recent.
Concerns about potential abuses of Rule 10b5-1 trading plans are not new. Last year, then-SEC Chair, Jay Clayton, raised questions about the use of 10b5-1 plans, when those plans overlap with company share repurchases, and recommended a mandatory waiting period after adoption, amendment, or termination of a 10b5-1 plan.3 In 2019, the U.S. House of Representatives introduced bipartisan legislation that would have required the SEC to explore and possibly implement amendments to 10b5-1.4 Additionally, publications such as the Wall Street Journal have expressed concerns over the years, citing specific circumstances of alleged abuse, such as directors using 10b5-1 plans to sell their shares heavily in a short period of time.5
Chair Gensler listed five areas he has asked the staff to consider for potential reforms:
- Cooling off Period: Chair Gensler recommended a cooling off period when insiders or companies adopt 10b5-1 plans before they can make an initial trade. He noted, with approval, that proposals of four to six months have received support from former Chair Clayton and current Commissioners Caroline Crenshaw and Allison Herren Lee. We note that while cooling off periods are in our experience common, they are typically much shorter than four to six months.
- Limitations on Cancellation of 10b5-1 Plans: Chair Gensler has asked the staff to consider limitations on when and how plans can be cancelled, because currently there is no regulatory prohibition on canceling a 10b5-1 plan when in possession of material nonpublic information.
- Mandatory Disclosure Requirements: There are no disclosure requirements for 10b5-1 plans, and Chair Gensler recommends disclosure for the adoption, modification, and terms of Rule 10b5-1 plans.
- Absence of Limits on Number of 10b5-1 Plans: Insiders can currently enter into multiple plans, permitting insiders to cancel, amend, or choose the most favorable plan to rely on for sales.
- Share Buybacks: Chair Gensler has asked the staff to consider reforms that address the relationship between 10b5-1 plans and corporate share buybacks.
Key Takeaways and Considerations for Companies Now
Some of these recommendations are already considered best practices for those adopting a 10b5-1 plan. Chair Gensler’s comments signal the likelihood of a near-term rulemaking proposal or request for public comment and increased scrutiny of trading and policies related to 10b5-1 plans. In particular, Chair Gensler noted that when insiders cancel and amend plans, this raises the question as to whether the plan was entered into in good faith. Companies should prepare by reviewing their policies and practices related to the use of 10b5-1 plans to protect the company and its insiders should the SEC investigate. We note that the SEC Enforcement Division’s increased use of data analytics could be used to identify anomalous executive trading, including pursuant to 10b5-1 plans.
1 Chair Gary Gensler, Prepared Remarks CFO Network Summit, U.S. Securities and Exchange Commission (June 7, 2021), https://www.sec.gov/news/speech/gensler-cfo-network-2021-06-07.
2 See e.g., David F. Larcker, et al., Gaming the System: Three 'Red Flags' of Potential 10b5-1 Abuse (Rock Center for Corp. Governance at Stan. U. Working Paper Forthcoming), https://ssrn.com/abstract=3769567.
3 Letter from Jay Clayton, Chair of SEC, to Representative Brad Sherman, House Financial Services Committee Chairman (Sept. 14, 2020) (https://www.sec.gov/files/clayton-letter-to-chairman-sherman-20200914.pdf).
4 See Barry W. Rashkover et al., U.S. House Introduces Bipartisan Bill to Restrict Rule 10b5-1 Trading Plans, Sidley Austin LLP (Jan. 23, 2019), https://www.sidley.com/en/insights/newsupdates/2019/01/house-introduces-bipartisan-bill.
5 See Susan Pulliam and Rob Barry, Directors Take Shelter in Trading Plans, The Wall Street Journal (Apr. 24, 2013), https://www.wsj.com/articles/SB10001424127887323696404578300073046959086; see also Jean Eaglesham and Rob Barry, Trading Plans Under Fire, The Wall Street Journal (Dec. 13, 2012), https://www.wsj.com/articles/SB10001424127887324296604578177734024394950.
Sidley Austin LLPはクライアントおよびその他関係者へのサービスの一環として本情報を教育上の目的に限定して提供します。本情報をリーガルアドバイスとして解釈または依拠したり、弁護士・顧客間の関係を結ぶために使用することはできません。
弁護士広告 - ニューヨーク州弁護士会規則の遵守のための当法律事務所の本店所在地は、Sidley Austin LLP ニューヨーク：787 Seventh Avenue, New York, NY 10019 (+212 839 5300)、シカゴ：One South Dearborn, Chicago, IL 60603、(+312 853 7000)、ワシントン：1501 K Street, N.W., Washington, D.C. 20005 (+202 736 8000)です。