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Article | Executive Pay Memo North America

SEC considering changes to 10b5-1 plan rules

Governance Advisory Services |Executive Compensation
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By Steve Seelig and Gary Chase | June 9, 2021

SEC Chair Gensler seeks to tighten trading rules for insiders

In a June 7, 2021 speech at the Wall Street Journal’s CFO Network event, Securities and Exchange Commission (SEC) Chair Gary Gensler said that, at his direction, the SEC staff will provide recommendations on how to “freshen up” the more than 20-year-old 10b5-1 rules for insider stock sales. Gensler’s speech suggests that proposed changes to these rules might come in the near term, but it appears those would be via the rulemaking process, with a public comment period before the rules are finalized. Companies, however, might wish to move quickly to adopt these changes soon after the proposals to provide an extra degree of protection for their insiders.

Although commonly thought to provide corporate insiders a safe harbor for stock sales, a 10b5-1 trading program only provides insiders an affirmative defense to a charge of insider trading on material nonpublic information. This defense can be overcome if the SEC demonstrates the trades under the plan were not entered into in good faith. For this reason, some companies already have in place as “best practices” some of the contemplated changes to help bolster their defense against possible SEC action.

Gensler covered four main issues the staff is considering:

  1. Create a cooling-off period before an initial sale after plan inception: Under current rules, there is no specified waiting period between adoption of a 10b5-1 sales plan and when the first stock sale takes place. Gensler noted that for 14% of plans, stock is sold within 30 days of inception, and for nearly two-fifths of plans, stock is sold within 60 days of inception. The staff is considering proposals to impose a four-to-six-month waiting period from inception before the first plan sale can take place.
  2. Limit cancellation of pending sales: Current rules do not prevent an insider from canceling a previously scheduled sale under a 10b5-1 plan, and Gensler believes this rule allows insiders to make those decisions without peril even with knowledge of material nonpublic information. He believes canceling a plan can be as economically significant as a sale itself. The staff is looking at rules as to when and how these cancellations will be allowed to take place.
  3. Require disclosure about adoption, modification and cancellation of plans: Gensler did not elaborate when and how these disclosures would be required but noted that more disclosure would only serve to promote investor confidence. Many companies already provide details of 10b5-1 plan adoption in a Form 8-K.
  4. Limit the number of plans: Gensler noted that along with there being no disclosure required for these plans, there are also no limits on the number of plans an insider can have. This means that an insider can have multiple sales agreements in place and can cancel those that don’t best serve his or her needs, ostensibly permitting an insider to choose the best result. Gensler didn’t elaborate as to what those limits might be.

We will keep you posted on new developments as they arise.

Authors

Senior Director, Executive Compensation (Arlington)

Director, Retirement and Executive Compensation

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