Rule 10b5-1 formalizes a defense that has always been available to the corporate insider accused of trading on inside information – I ordered the sale of the stock before I knew of any such information, and therefore I could not have traded on the information. Of course, the Rule, and compliance with the Rule, is a bit more complicated.
In its simplest form, Rule 10b5-1 provides that a purchase or sale by an insider is not trading on inside information if before becoming aware of the information, the person had entered into written plan for the trading of the securities, which, either explicitly, or by a formula, algorithm or computer program, specifies the amount of securities to be purchased or sold, and the trades were executed pursuant to that plan. The 10b5-1 plans can therefore be very simple written instructions to a broker, or complex plans specifying exactly when trades will be executed.
Various commentators and regulators have argued that the rule is being abused by corporate insiders and the SEC has proposed amendments to Rule 10b5-1 to enhance disclosure requirements and investor protections against insider trading. The proposal includes updates to Rule 10b5-1(c), which provides an affirmative defense to insider trading for parties that frequently have access to material nonpublic information, including corporate officers, directors and issuers.
“Over the past two decades, we’ve heard concerns about and seen gaps in Rule 10b5-1 — gaps that today’s proposals would help fill,” said SEC Chair Gary Gensler. “These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that’s a good thing. It helps investors deciding where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation. I’m pleased to support today’s proposal and, subject to Commission approval, look forward to the public’s feedback.”
The proposed amendments to Rule 10b5-1 would update the requirements for the affirmative defense, including imposing a cooling off period before trading could commence under a plan, prohibiting overlapping trading plans, and limiting single-trade plans to one trading plan per twelve month period. In addition, the proposed rules would require directors and officers to furnish written certifications that they are not aware of any material nonpublic information when they enter into the plans and expand the existing good faith requirement for trading under Rule 10b5-1 plans.
The amendments also would elicit more comprehensive disclosure about issuers’ policies and procedures related to insider trading and their practices around the timing of options grants and the release of material nonpublic information. A new table would report any options granted within 14 days of the release of material nonpublic information and the market price of the underlying securities the trading day before and the trading day after the disclosure of the material non-public information. Insiders that report on Forms 4 or 5 would have to indicate via a new checkbox whether the reported transactions were made pursuant to a Rule 10b5-1(c) or other trading plan. Finally, gifts of securities that were previously permitted to be reported on Form 5 would be required to be reported on Form 4.
Collectively, these proposed amendments aim to address critical gaps in the SEC’s insider trading regime and to help shareholders understand when and how insiders are trading in securities for which they may at times have material nonpublic information.
The proposing release will be published on SEC.gov and in the Federal Register. The comment period will remain open for 45 days after publication in the Federal Register.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
