Major changes may be on the horizon for “Rule 10b5-1” plans, which allow (1) company insiders to sell their company’s stock (often an important part of an employee’s compensation) or (2) an issuer to redeem its shares, each at times when it might otherwise be precluded from doing so under insider trading laws designed to prohibit trading by those in possession of material non-public information ( as is often the case with officers, directors and management of a company) or because of the issuer- blackout periods imposed.

There have been calls to reform Rule 10b5-1 for several years:

  • former Securities and Exchange Commission (SEC) chairman Jay Clayton previously proposed requiring cooling off periods after a plan is adopted, changed or terminated;

  • in late spring 2021, bipartisan legislation was reintroduced in the US Senate asking the SEC to investigate whether rule 10b5-1 should be changed;

  • more recently, SEC Chairman Gary Gensler said the 10b5-1 rule plans “have led to real loopholes in our insider trading regime” and asked SEC staff to review and recommend restrictions on the use of such plans; and

  • On August 26, the investor sub-committee as the owner of the SEC’s Investor Advisory Board (IAC) released draft recommendations regarding changes to the rules governing rule 10b5-1 trading plans, which l ‘IAC officially approved at its meeting held on September 9.

Therefore, unsurprisingly, on December 15, the SEC proposed changes to the rules governing rule 10b5-1 trading plans that are mostly in line with approved IAC recommendations and include the following proposed changes:

Increased restrictions on trading windows

The first set of recommendations seek to limit the methods by which critics have suggested that market participants have attempted to evade the restrictions of the 10b5-1 rule by:

  1. requiring a cooling off period of at least 120 days for directors and officers subject to the reporting requirements under section 16 of the Securities Exchange Act of 1934 (section 16 Directors and officers), and at least 30 days for issuers, between the adoption or modification of a 10b5-1 plan and the execution of the first transaction under this plan;

  2. limiting “overlapping” plans, where the same person has more than one Rule 10b5-1 plan in effect at any one time, to one active plan per person in a 12-month period; and

  3. Limit single transaction plans, where a single transaction is performed during the life of a 10b5-1 plan, to a single single transaction plan within a 12 month period.

Notably, the SEC also said that a modification of a trading plan under Rule 10b5-1 (c), including canceling a trade, is tantamount to terminating the previous trading agreement and adopt a new trading plan under Rule 10b5-1.

The SEC noted that academic studies conducted regarding the potential abuse of rule 10b5-1 plans have found that opportunistic trading behavior most often occurs in plans (1) with short cooling off periods, (2) performing only one transaction; and (3) which were adopted and started to be negotiated prior to the announcement of the results for the same quarter. The SEC has indicated that the above proposals would address these issues regarding Section 16 directors and officers by extending the time between the adoption of a 10b5-1 plan and the start of trading, thereby ensuring those insiders cannot adopt a plan that executes a trade in the same quarter. Additionally, limit the availability of the affirmative defense under Rule 10b5-1 (c) (1) for overlapping plans and single transaction plans to one active plan per person in a 12-month period. months and a single trade plan over the course of 12 – a one month period would prevent gambling and signal to the market that a plan was entered into in good faith.

In addition, the current rules allow anyone with material non-public information about a company or its securities to trade in that company’s securities as part of an effective rule 10b5-1 trading plan, provided, among other considerations, that this plan was adopted in good faith (and not as part of a scheme to circumvent the prohibitions in rule 10b5-1) and at a time when that person was not aware of any material non-public information. An additional proposed amendment would require that section 16 directors and officers now provide the issuer with a written attestation, at the time of the adoption of plan 10b5-1, that such insider is not aware of any uninformed information. important public regarding the issuer and adopts such 10b5-1 plan in good faith.

Improved public disclosure of Rule 10b5-1 plans and insider trading policies

The remaining SEC Amendments propose to require public disclosure of Rule 10b5-1 plans and insider trading policies by:

  1. require issuers to disclose in their quarterly reports the adoption or termination of 10b5-1 plans by the issuer itself and one of its directors and officers, as well as the important conditions of these 10b5-1 plans ;

  2. require issuers to disclose their insider trading policies and procedures in their annual reports, or explain why the issuer has not adopted such policies and procedures; and

  3. modify Form 4s to include the following additional fields: (a) a checkbox to indicate whether a specific transaction was performed in accordance with a 10b5-1 plan, and (b) a field to indicate the date of adoption or modification of 10b5- associated 1 regime.

The SEC is also proposing new rules regarding the reporting of stock donations by section 16 directors and officers, as well as a new disclosure of executive compensation regarding certain awards to directors and certain officers that are made in specified timeframes. These proposals include:

  1. require that all “good faith” donations of shares by section 16 directors and officers be reported on Form 4 before the end of the second business day following the date of such donation; and

  2. require issuers to include in their executive compensation information all option grant policies and practices and to provide tabular information indicating the option grants made within 14 days following the publication of certain material non-public information, and the market price of the underlying securities on the trading day before and after the publication of such information.

The SEC will seek public comments on the proposed changes for 45 days following the publication of the request for comment in the Federal Register. The full press release of the proposed changes is available here.

© 2021 Katten Muchin Rosenman LLPRevue nationale de droit, volume XI, number 356