SEC Chairman: Time to "Freshen Up" Rules Governing 10b5-1 Plans

Jones Day

Jones Day

Chairman Gensler's comments indicate that new, additional requirements for 10b5-1 plans are likely to be coming.

In prepared comments made at The Wall Street Journal's CFO Network event on June 7, 2021, SEC Chairman Gary Gensler explained that he has asked the SEC Staff to make recommendations on how to "freshen up" Rule 10b5-1 under the Securities Exchange Act of 1934 (the "Exchange Act") in light of what he described as "real cracks" in the regulation of insider trading.

Rule 10b5-1 provides public-company insiders an affirmative defense to a claim that the insider traded company securities on the basis of material nonpublic information in violation of Section 10(b) of the Exchange Act, when the insider can demonstrate that the trade was pursuant to a contract, instruction or plan (a "10b5-1 plan") established at a time before the insider became aware of the information and the 10b5-1 plan meets certain other requirements.

Rule 10b5-1 has faced scrutiny over the years on the basis of the perceived potential for public-company insiders to abuse 10b5-1 plans, notwithstanding the rule's catch-all requirement that a 10b5-1 plan must have been "entered into in good faith and not as a part of a plan or scheme to evade the prohibitions of" the antifraud provisions of the Exchange Act. In his comments on June 7, 2021, Chairman Gensler said that he has asked the SEC Staff to review four ways in which Rule 10b5-1, as currently in effect, could be subject to such potential abuse, and to make recommendations on how to update the requirements:

  • "Cooling off" periods. Currently, there is no required amount of time that a public-company insider must wait between the entry into a 10b5-1 plan and executing a trade under the plan. The Chairman explained that, without such mandatory "cooling off" periods, he worries that "bad actors could perceive this as a loophole to participate in insider trading." He further stated that there is bipartisan support for a mandatory cooling off period of 4 to 6 months, which he believes deserves further consideration.
  • Cancellation limitations. Currently, Rule 10b5-1 does not set any limitations on when 10b5-1 plans may be cancelled. According to the Chairman, this seems "upside down," given that cancelling a scheduled trade could be as economically significant as executing a trade.
  • Mandatory disclosure. The Chairman called for the SEC Staff to consider requiring disclosure of the entry into, modification of, and the terms of, 10b5-1 plans for greater transparency and increased confidence in the markets.
  • Limits on the number of 10b5-1 plans. Currently, there is no limit on the number of 10b5-1 plans that public-company insiders may enter into concurrently. According to the Chairman, this may lead to the mistaken belief that insiders have a "free option" to choose which 10b5-1 plans to use at any given time.

The SEC Chairman's comments are an indication that new, additional requirements for 10b5-1 plans are likely to be coming. As a result, companies should review their insider-trading policies and their executives' 10b5-1 plans to understand how additional requirements responsive to Chairman Gensler's concerns might affect them.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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