SEC Proposed Amendments to Rule 10b5-1 Insider Trading Plans Aim to Enhance Safe Harbor
On December 15, 2021, the U.S. Securities and Exchange Commission (SEC) proposed amendments to the rule allowing corporate insiders to trade their company’s securities pursuant to a pre-established trading plan. While SEC Chair, Gary Gensler, lauded the proposal as a “good thing” to “increase investor confidence in the markets,” corporate officers and directors should take note of the safe harbor enhancements that the proposal aims to offer.
Rule 10b5-1
The
proposed amendment would modify Rule 10b5-1 under the Securities Exchange Act of 1934, which provides an affirmative defense to insider trading liability for corporate executives who make trades as part of a pre-announced portfolio management plan. Rule 10b5-1 applies to trades executed by a third party pursuant to a plan set up at a time when the plan beneficiary—the corporate insider—is not aware of material non-public information. Rule 10b5-1(c) provides an affirmative defense to insider trading for those that frequently have access to such information, including corporate officers and directors. Under the rule, corporate insiders can buy or sell a predetermined number of shares of their company’s stock at a predetermined time. The Rule, however, historically has been viewed as having gaps and loopholes that diminished transparency.
“Over the past two decades, we've heard concerns about gaps in Rule 10b5-1—gaps that today's proposals would help fill,”
SEC Chair Gary Gensler said in a statement.
To fill these gaps, the proposed amendments would enhance the safe harbor against illegal insider trading where an insider trading plan is properly announced and followed. Under the proposed amendments to the rule, the SEC would require a cooling off period during which a corporate officer or director would have to refrain from trading until 120 days after they have entered into a 10b5-1 plan, would prohibit overlapping plans, and would limit single-trade plans to one such plan per 12-month period. The proposed rules would also require an officer or director to certify in writing that they are not aware of any material non-public information when they enter into a Rule 10b5-1 plan.
The amendments would also impact issuers by requiring broader disclosure of their policies and procedures regarding insider trading along with their practices relating to the timing of option grants and the disclosure of material nonpublic information. Under the amended rule, companies would have to publish a table reporting any options granted within 14 days of the disclosure of material nonpublic information along with the market price of the underlying securities the trading day before and the trading day after the release of such information.
The period for the public to submit comments on the proposed rule should remain open for 45 days after publication in the Federal Registrar, after which the SEC will consider issuing the new rule.
Connect with Ice Miller for More Details
If you have questions concerning the SEC Insider Trading Plans, Ice Miller has extensive experience regarding corporate disclosures and related legal issues. Our team includes
Tim Belevetz, Co-Chair of Ice Miller’s
White Collar Defense & Investigations Group and a former federal prosecutor and SEC Enforcement Division attorney, and
Matt Fornshell, the former Director of Enforcement for the Ohio Division of Securities.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.