SEC Chairman Gary Gensler to Finally Tackle Rule 10b5-1 Reform: I Offer a Few Suggestions

06/08/2021

SEC Chairman Gary Gensler to Finally Tackle Rule 10b5-1 Reform: I Offer a Few Suggestions

Speaking Monday at The Wall Street Journal’s CFO Network event, SEC Chairman Gary Gensler said he is seeking to revise rules that govern the arrangements, known as 10b5-1 plans. Insiders set up plans ahead of time and use them to schedule future trades. The arrangement gives executives a defense against insider-trading claims that would stem from having undisclosed material nonpublic information at the time of a trade.

I suspect that I will be opposing most of Chairman Gensler's proposals over the next few years, but on this issue I am in complete accord. I discuss Rule 10b5-1 planes in my book Insider Trading Law and Policy (Concepts and Insights). As I explain therein, Rule 10b5-1 plans are widely abused:

There is growing evidence that many executives are abusing Rule 10b5–1 by establishing or amending trading plans while in possession of material nonpublic information on the basis of which they proceeded to trade while using the plan for cover.

I also discuss a number of best practices that could be mandated so as to reduce the current ease with which Rule 10b5-1 plans are abused:

Corporate insiders should have only one Rule 10b5-1 plan in effect at any given time. Insiders with multiple Rule 10b5–1 plans with overlapping execution terms, can game the choice of plans to take advantage of material non-public information.
Plans should have a term of at least one year, because short-term plans are more likely to be have been motivated by inside knowledge.
Require the issuer's board of directors' Compensation Committee take responsibility for overseeing Rule 10b5-1 plans by the Named Executive Officers.
- Adoption by an NEO of new Rule 10b5–1 plans, plan amendments and plan terminations should be pre-cleared by the committee.
Adoption by an NEO of new Rule 10b5–1 plans, plan amendments and plan terminations should be pre-cleared by the issuer's internal audit function or its compliance office.
Rule 10b5–1 plans should be adopted, modified, or terminated only at times when the corporate insider can buy or sell securities under the company’s insider-trading policy, such as during an open trading window or soon after an earnings announcement (when material non-public information will be communicated to the public).
Bar corporate insiders from adopting new Rule 10b5–1 plans for six months or a year after a plan termination.
Bar insiders from taking in the issuer's stock outside of a Rule 10b5-1 plan.
A Form 8-K should be filed whenever an NEO adopts, modifies, or terminates a Rule 10b5-1 plan.
With respect to Section 16 officers, their Form 4 disclosures should specify whether the trade was made pursuant to a Rule 10b5-1 plan.
There should be a waiting period of 30 trading days between adoption of a plan and execution of the first trade pursuant to the plan.

Posted at 01:12 PM in Insider Trading | Permalink

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The WSJ reports:

Speaking Monday at The Wall Street Journal’s CFO Network event, SEC Chairman Gary Gensler said he is seeking to revise rules that govern the arrangements, known as 10b5-1 plans. Insiders set up plans ahead of time and use them to schedule future trades. The arrangement gives executives a defense against insider-trading claims that would stem from having undisclosed material nonpublic information at the time of a trade.

There is growing evidence that many executives are abusing Rule 10b5–1 by establishing or amending trading plans while in possession of material nonpublic information on the basis of which they proceeded to trade while using the plan for cover.

I also discuss a number of best practices that could be mandated so as to reduce the current ease with which Rule 10b5-1 plans are abused:

Corporate insiders should have only one Rule 10b5-1 plan in effect at any given time. Insiders with multiple Rule 10b5–1 plans with overlapping execution terms, can game the choice of plans to take advantage of material non-public information.
Plans should have a term of at least one year, because short-term plans are more likely to be have been motivated by inside knowledge.
Require the issuer's board of directors' Compensation Committee take responsibility for overseeing Rule 10b5-1 plans by the Named Executive Officers.
- Adoption by an NEO of new Rule 10b5–1 plans, plan amendments and plan terminations should be pre-cleared by the committee.
Adoption by an NEO of new Rule 10b5–1 plans, plan amendments and plan terminations should be pre-cleared by the issuer's internal audit function or its compliance office.
Rule 10b5–1 plans should be adopted, modified, or terminated only at times when the corporate insider can buy or sell securities under the company’s insider-trading policy, such as during an open trading window or soon after an earnings announcement (when material non-public information will be communicated to the public).
Bar corporate insiders from adopting new Rule 10b5–1 plans for six months or a year after a plan termination.
Bar insiders from taking in the issuer's stock outside of a Rule 10b5-1 plan.
A Form 8-K should be filed whenever an NEO adopts, modifies, or terminates a Rule 10b5-1 plan.
With respect to Section 16 officers, their Form 4 disclosures should specify whether the trade was made pursuant to a Rule 10b5-1 plan.
There should be a waiting period of 30 trading days between adoption of a plan and execution of the first trade pursuant to the plan.