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Volume XI, Number 168

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SEC Chairman Requests Recommendations on Restricting Rule 10B5-1 Plans

At a June 7, 2021, conference, Securities and Exchange Commission (SEC) Chairman Gary Gensler shared plans to “freshen up” Exchange Act Rule 10b5-1. He directed SEC staff to consider and recommend certain restrictions on the use of 10b5-1 trading plans.

Corporate executives and insiders are frequently exposed to insider information, which can make it difficult for them to buy and sell company shares without the risk of insider trading. To address this problem, the SEC enacted the Rule 10b5-1 safe harbor. The rule allows corporate insiders—acting in good faith and while not in possession of material nonpublic information (MNPI)—to create a formal trading plan for future stock transactions. The use of a 10b5-1 plan provides an affirmative defense against allegations of insider trading.

IN DEPTH


During the conference, Chairman Gensler said he believes tightening restrictions on the use of 10b5-1 trading plans would increase investor confidence and ensure a level playing field in the market.

Chairman Gensler discussed the following potential adjustments to Rule 10b5-1:

  • Establishing a four- to six-month “cooling-off” period before trading can occur under a new 10b5-1 plan. At present, 39% of plans begin trading within the first 60 days of establishing a 10b5-1 plan, according to figures cited by Chairman Gensler. He expressed concern that the lack of a cooling-off period is viewed by “some bad actors…as a loophole to participate in insider trading.”

  • Restricting the ability to cancel 10b5-1 plans. Currently, insiders may cancel 10b5-1 plans whenever they wish, even if they possess MNPI. SEC staff have been directed “to consider limitations on when and how plans can be canceled.” Chairman Gensler emphasized that even under the current rule, “cancelling or amending any 10b5-1 plans calls into question whether they were entered into in good faith. If insiders don’t act in good faith when using 10b5-1 plans, those plans will not offer them an affirmative defense (to insider trading).”

  • Mandating “more disclosure regarding the adoption, modification, and terms of 10b5-1 plans.” As it stands, there is no mandated public disclosure when a 10b5-1 plan is established.

  • Limiting the number of 10b5-1 plans an insider may adopt. There are currently no limits to the number of 10b5-1 plans that an insider can adopt. Chairman Gensler noted that “insiders might mistakenly think they have a ‘free option’ to pick amongst favorable plans as they please.”

The forcefulness of Chairman Gensler’s remarks may also portend SEC Division of Enforcement inquiries into “good faith” factors, with the focus on whether plans have been entered into, amended or cancelled while in possession of MNPI. For example, a waiting period (e.g., 14-30 days) during which no trades can occur under the plan can help prevent the appearance that the person designed the plan as a cover for trades based on MNPI. SEC rulemaking often identifies the need for investor protection and enforcement actions that address perceived abuses; these abuses are often cited to support the need for regulatory action.

As a prophylactic measure, we recommend that chief legal officers “freshen up” the review of their executives’ plan documentation and other compliance mechanisms.

© 2021 McDermott Will & EmeryNational Law Review, Volume XI, Number 160
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About this Author

Eric Orsic, corporate, securities, attorney, McDermott Will, law firm
Partner

Eric Orsic is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. Eric focuses his practice in the areas of mergers and acquisitions, and securities transactions and compliance.   Eric works with both public and privately-held companies to structure and negotiate business acquisitions/dispositions.  His public company transactional experience includes public equity and debt offerings, tender offers and going-private transactions.  Eric also serves as outside securities counsel to several public companies and advises on SEC compliance...

312-984-7617
Thomas P. Conaghan, Mcdermott Will Emery law Firm,  (M&A), joint ventures, strategic investments, spin-offs,
Partner

Thomas P. Conaghan is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s Washington, D.C., office.  Tom represents both publicly held and closely held businesses, underwriters and other sources of capital, corporate boards and board committees and corporate executives.  He advises both U.S. and foreign-based public companies on issues relating to public and private offerings of securities, disclosure, periodic reporting, corporate governance, executive compensation, the rules of the New York Stock Exchange and the Nasdaq Stock Market and compliance with the...

202-756-8161
Partner

Eugene Goldman is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C., office.  He is a senior member of the Firm’s White-Collar and Securities Defense practice group.  Eugene represents domestic and international clients before the SEC in financial fraud, false disclosure, insider trading and other securities enforcement proceedings. Eugene also represents clients in shareholder litigation, cross-border FCPA, whistleblower and other internal investigations, and FINRA...

202 756 8057
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