As noted in our blogpost last week, Gary Gensler, Chair of the U.S. Securities Exchange Commission, has asked the Commission staff to consider updates to Rule 10b5-1 in an effort to “address cracks” in the current insider trading regime and otherwise “freshen up” the rule. In prepared remarks given to the Commissions’ Investor Advisory Committee (IAC) on June 10, Gensler reiterated his concerns about 10b5-1 trading plans.
Following Gensler’s remarks, the IAC hosted a panel discussion on 10b5-1 trading plans that included the perspective of academics and representatives of institutional investors and public corporations. Among other proposals, the panel discussed amending Form 4 so that Section 16 filers must disclose whether reportable trades were made pursuant to a 10b5-1 plan and, if so, certain information relating to the plan’s adoption and modification. The panel discussed the inclusion of similar information in Form 144 filings, which affiliates must file when disposing of shares under the Rule 144 safe harbor from Securities Act registration. One item on which the panel agreed was that Form 144 filings should be required to be filed electronically on the Commission’s EDGAR (“Electronic Data Gathering, Analysis, and Retrieval”) database (currently Form 144 filings are only required to be mailed to the Commission, although some are filed on EDGAR). The panel also discussed proposals that would require a Form 8-K filing whenever insiders adopt, modify or otherwise cancel a 10b5-1 trading plan and a proposal that would require proxy statement disclosure regarding the number of shares held by directors and named executive officers that are subject to 10b5-1 trading plans.
Though not required, many insiders already disclose when trades are made pursuant to 10b5-1 plans, believing that such disclosure will offset any investor concerns that an insider’s transactions reflect his or her current views or concerns about the issuer’s business prospects. Additionally, when companies enter into share repurchase programs, they often disclose that the company may effect such repurchases pursuant to 10b5-1 trading plans.
However, requiring disclosure around the dates that companies and insiders enter into such plans would be a significant development, and the collateral consequences could limit the intended benefits to investors in having trades conducted pursuant to these plans, and the benefit of the Rule 10b5-1 safe harbor to companies and insiders. The Commission (and plaintiff’s attorneys) would certainly scrutinize such information and compare it to subsequent events, such as merger announcements, earnings releases and other material information. This increased exposure to liability could make companies and insiders reticent to use 10b5-1 trading plans out of fear of being second-guessed.
In addition, the panel discussed a four to six-month cooling off period before an insider could execute a trade under a 10b5-1 plan following its adoption (the same cooling off period was previously suggested by former Commission Chair John Clayton and more recently by current Chair Gensler, among others). While such proposals certainly address concerns that some insiders are not entering into 10b5-1 plans in good faith, they also limit the utility of the 10b5-1 safe harbor.
Any thoughtful discussion of 10b5-1 trading plans must temper the Commission’s goal of combatting fraud while also permitting companies and insiders to reap the benefits of the Rule 10b5-1 safe harbor. The evolution of this discussion will be important to many insiders who rely on 10b5-1 trading plans.