In June 2021, Chairman Gary Gensler of the Securities and Exchange Commission (SEC) expressed the view that it was time to “freshen up” Exchange Act Rule 10b5-1—the rule that provides an affirmative defense to claims of insider trading for corporate insiders and companies that buy and sell company stock pursuant to an appropriately adopted trading plan—and reported that he had asked staff to review the rule and consider potential reforms.¹  On December 15, 2021, the SEC proposed those rule amendments. The amendments are “intended to reduce . . . potentially abusive practices associated with Rule 10b5-1(c)(1) trading arrangements.”²  The proposed amendments would impose significant restrictions on the adoption and use (from an affirmative defense perspective) of Rule 10b5-1 trading plans by both individuals and companies, as well as increase corporate disclosure requirements related to the use of trading plans and to trading policies and procedures more generally. On the same day, the SEC also proposed new disclosure rules concerning share repurchases, or buybacks, which we discuss further here.

The SEC has long expressed concerns that insiders can abuse Rule 10b5-1 plans given, among other things, the lack of requirements for a “cooling off” period after adoption, insiders’ ability to establish multiple plans, and the fact that trading plans can be canceled at any time,³  including when an insider is in possession of material nonpublic information (MNPI). Just last year, SEC Chair Jay Clayton raised similar concerns about Rule 10b5-1 plans, suggesting that all Rule 10b5-1 plans should have mandatory cooling-off periods, both before the establishment of a plan, between modification and resumption of trading, and between canceling and entering into a new plan.⁴  

Existing Rule

The SEC adopted Rule 10b5-1 in 2000 to define when a purchase or sale constitutes trading “on the basis of” MNPI in insider trading cases brought under Securities Exchange Act Section 10(b) and Rule 10b-5.⁵  Rule 10b5-1 broadly provides that a person trades “on the basis of” MNPI when the person “was aware of” MNPI at the time of the trade.⁶  However, the rule also provides an affirmative defense to corporate insiders and companies that trade when they are in possession of MNPI “where it is clear that the [MNPI] was not a factor in the decision to trade.”⁷  Under the rule, MNPI is not a factor in the decision to trade where a trade is made in good faith pursuant to a written plan to purchase or sell the securities that was entered into when the insider or company was not aware of MNPI.⁸  The trading plan must, in turn, either (1) specify the price, amount and date of the trade, (2) include a written formula or algorithm for determining the price, amount and date of the trade, or (3) not allow the adopter of the plan to influence how, when or whether a trade occurs.⁹

Proposed Amendments

The proposed amendments include:

1. Cooling-Off Periods. Rule 10b5-1 currently does not require any cooling-off period between the date a plan is adopted and the date trading begins. The SEC has proposed an amendment requiring that plans for corporate insiders include a cooling-off period of 120 days between adoption and the start of trading. For company trading plans, the SEC has proposed a 30-day cooling-off period. The proposed rules would also require a cooling-off period of 120 days for insiders and 30 days for companies after modification of an existing trading plan, although it is unclear whether this cooling-off period would apply to de minimis modifications.
2. Certifications. There are currently no certification requirements for Rule 10b5-1 trading plans. The SEC has proposed that insiders must personally certify that they are not aware of MNPI regarding the company or its securities and that they are adopting the trading plan in good faith. These proposed certifications would need to be kept by insiders for 10 years but would not be required to be filed publicly.
3. Limitations on the Number of Trading Plans. The SEC has proposed that the affirmative defense not apply to multiple overlapping Rule 10b5-1 trading arrangements and that the availability of the affirmative defense for single-trade plans be limited to one single-trade plan during any 12-month period. Single-trade plans permit only one trading event.
4. Extension of Good Faith Requirement. As noted above, the affirmative defense is available only when the written plan was entered into in good faith. The SEC has proposed to expand the current good faith requirement in Rule 10b5-1 to require that the plan also be “operated” in good faith, although the SEC did not define “operate.” The proposed amendment is intended to clarify that the affirmative defense would not be available for a trader who cancels or modifies a planned trade on the basis of MNPI or improperly influences the timing of a corporate disclosure in order to benefit a planned trade.¹⁰
5. Disclosures. There are currently no disclosures required for Rule 10b5-1 trading plans. The SEC has proposed four new disclosure requirements: 

• A quarterly disclosure by companies about adoptions or terminations of trading plans and arrangements by the company or any corporate insiders, including the date of adoption or termination, the duration of the plan or arrangement, and the number of securities to be traded.
• An annual disclosure by companies of any insider trading policies and procedures, or an explanation if there are no such policies or procedures.
• A requirement that insiders identify transactions made pursuant to a Rule 10b5-1 trading plan on Forms 4 and 5. Although unrelated to Rule 10b5-1 plans, the proposed amendments would require insiders to disclose any gifts of securities on Form 4 within two business days after the gift is made.
• Companies would be required to annually disclose their policies and practices regarding the timing of equity grants and the release of MNPI, including how the board determines when to make equity grants and how the board or compensation committee takes MNPI into account when determining the timing and terms of an award.¹¹  Companies would also be required to annually disclose, in a tabular format, any equity grants to named executive officers within 14 calendar days before or after the filing of a periodic report on Forms 10-Q or 10-K, a company share repurchase or the filing or furnishing of a current report on Form 8-K that contains MNPI. The table would disclose the market price of the underlying securities on the trading day before and after disclosure of MNPI.

Commissioner Reactions

The chair, and all four other commissioners, voted in favor of the proposal, expressing particular support for cooling-off periods for individuals. However, that is where the agreement ended, with most commissioners expressing a desire to change aspects of the proposal.

Commissioner Allison Herren Lee supported the proposed amendments, though her comments suggest that she would be open to increasing the length of cooling-off periods, prohibiting single-trade plans, and increasing the specificity of the disclosure requirements for policies and procedures.¹² 

Commissioner Caroline Crenshaw supported the proposed amendments while also observing that they may not go far enough.¹³  She suggested the prohibition of single-trade plans and urged continued research into 10b5-1 plans to ensure that additional modifications to the rule are made if necessary.

Commissioner Elad Roisman agreed with a cooling-off period for individuals and voted for the proposal because of this provision.¹⁴  However, he suggested that no other amendments to the rule are likely necessary, expressing concern that, for individuals, the burdens of compliance will outweigh the benefits. Commissioner Roisman also would have preferred to exclude companies from the mandatory cooling-off period because, in his view, companies need to be able to make decisions about whether share repurchases are appropriate based on current information, and it is fairly easy to determine companies’ knowledge of MNPI.

Commissioner Hester Peirce agreed with the proposed cooling-off periods for both individuals and companies, the restrictions on multiple overlapping plans, and the limitations on single-trade plans.¹⁵  However, she questioned the necessity of certain disclosures and certifications. Among her more pointed questions:

• Is the proposed certification requirement for insiders and the required retention of those certificates for 10 years necessary? The rule already requires that all 10b5-1 trading plans be adopted in good faith and without any awareness of MNPI. What do these requirements add besides more paperwork?
• Does the requirement that the 10b5-1 trading plan be “operated” in good faith weaken the safe harbor? Will the availability of this defense be based upon judgments made in hindsight about whether the corporate insider operated in good faith throughout the life of the plan?
• Are the proposed disclosures of insider trading policies and procedures necessary? 
• Are the proposed disclosure requirements related to spring-loaded equity grants designed to discourage the use of such equity-based compensation?

Looking Ahead

The SEC’s proposed amendments are subject to a comment period of 45 days rather than the typical comment period of 60 or 90 days. Given the shorter-than-normal comment period, it is possible that the SEC will push to adopt final rules in the first half of 2022; however, the SEC has a busy rulemaking agenda, so it is difficult to predict timing.