SEC Continues to Scrutinize Rule 10b5-1 Plans

Akin Gump Strauss Hauer & Feld LLP

Gary Gensler, Chair of the U.S. Securities and Exchange Commission (SEC), 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. Rule 10b5-1 of the Securities Exchange Act of 1934 provides an affirmative defense for directors, executive officers and other insiders transacting in the company’s securities as long as a 10b5-1 trading plan is adopted in good faith and while not in possession of material nonpublic information. Earlier this year, three Democratic senators called for the Commission to tighten restrictions around 10b5-1 plans.

In prepared remarks given on June 7, 2021, Gensler noted that there is currently no required cooling off period following implementation of a 10b5-1 plan and suggested consideration of a mandated four- to six-month cooling off period. This cooling off period had been suggested by former Commission Chair, John Clayton, and the former head of the Commission’s Division of Corporate Finance.

Gensler also requested the Commission staff to consider, among other potential reforms:

  • Limits on when and how a 10b5-1 plan can be cancelled.
  • Disclosure requirements regarding the adoption, modification and terms of Rule 10b5‑1 plans.
  • Limits on the number of 10b5-1 plans that insiders can adopt.
  • The intersection of Rule 10b5-1 and share buybacks.

Gensler also reiterated that insiders must act in good faith when using 10b5-1 plans.

Companies that have, or whose insiders have, 10b5-1 plans should review those plans and confirm that they have been implemented and amended (or cancelled) in good faith.

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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