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SEC considering plans to address 10b5-1 plan rule issues

Executive Compensation|Securities
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By Gary Chase and Steve Seelig | June 21, 2021

U.S. Securities and Exchange Commission Chair Gary Gensler proposes tightening rules for insider stock sales.

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.

Background

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.

Four main issues under consideration

Gensler identified four main issues that the staff is considering:

  1. 01

    Create a cooling-off period before an initial sale after plan inception

    Under current rules, no waiting period is required between when a 10b5-1 sales plan is adopted and when the first stock sale can take place. Gensler noted that data indicates a significant number of sales under these plans happen within 30 or 60 days of a plan's inception. The staff is considering proposing a four-to-six-month waiting period.

  2. 02

    Limit cancellation of pending sales

    Current rules do not prevent an insider from canceling a previously scheduled sale under a 10b5-1 plan; Gensler believes this rule allows insiders to do so without risk of penalty even with knowledge of material nonpublic information. The staff is looking at rules on when and how these cancellations may take place.

  3. 03

    Require plan adoption, modification and cancellation disclosures

    Gensler did not elaborate on when and how these disclosures would be required but noted that more disclosure could boost investor confidence. Many companies already provide details of 10b5-1 plan adoption using Form 8-K.

  4. 04

    Limit the number of plans

    There are currently no limits on the number of plans an insider can have. This means that an insider can have multiple sales agreements in place, choose the one that best meets his or her needs, then cancel the rest.

Going forward

The SEC has placed this issue on its Agency Rule List – Spring 2021 as an issue to be addressed through newly proposed amendments to existing regulations. This will involve a drawn-out process where the proposal will solicit public comments before being finalized. However, because the rules are specific to plan implementation, rather than a periodic filing disclosure like a proxy or 10-K, the final regulations may become effective shortly after publication rather than at a date in the future.

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Director, Retirement and Executive Compensation

Senior Director, Executive Compensation (Arlington)

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