Today [December 14], the Commission will consider whether to adopt amendments to Rule 10b5-1, as well as new required corporate disclosures related to executive officers’ and directors’ trading. I am pleased to support these new requirements because, if adopted, they will help close potential gaps in our insider trading regime.
The amendments address the means by which companies and company insiders — such as chief executive officers, chief financial officers, other executives, directors, and senior officers — trade in company shares.
The core issue is that company insiders regularly have material information that the public doesn’t have. Stock-based executive compensation is an important way that boards and shareholders incentivize their senior leadership, aligning executives’ incentives with shareholders’ incentives. Selling this stock while in possession of material nonpublic information, however, can undermine that alignment. So how can executives sell and buy stock in a way that’s fair to the marketplace?
About 20 years ago, the SEC established Exchange Act Rule 10b5-1. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith — before becoming aware of material nonpublic information.
Over the past two decades, though, we’ve heard from courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information. I believe today’s amendments will help fill those potential gaps.
We are concerned that the affirmative defense is not being used as intended and that insiders may be trading under the rule in ways that harm investors and undermine the integrity of the securities markets. Today’s amendments to the affirmative defense will address these issues in four ways.
First, the amendments will impose a cooling-off period between when insiders adopt a 10b5-1 plan and when trading can begin under the plan. Why do such cooling-off periods matter? Academic research has identified abnormal returns for company insiders trading under 10b5-1 plans, particularly when those trades are close in time to the adoption of the plan. The required cooling-off period for so-called Section 16 officers and directors detailed in the release will last 90 days or two days after the release of financial statements, whichever is longer, but no more than 120 days. Thus, the public typically will have the benefit of seeing the next periodic report before the insider is able to trade under a 10b5-1 plan. A cooling-off period of 30 days will also apply to all persons entering into 10b5-1 plans, except the issuer.
Second, the updated conditions will largely prohibit overlapping plans and will limit single-trade plans to one every 12 months. Currently, with the ability to enter into multiple plans, insiders might seek to pick amongst favorable plans as they please.
Third, as a new condition of the affirmative defense, officers and directors will have to certify they’re not in possession of material non-public information when adopting or amending plans.
Fourth, to rely on the affirmative defense, all plans, whether for an issuer or an insider, will be subject to a good-faith condition. The insider or issuer must act in good faith with respect to the plan, not only when they enter the plan, but on an ongoing basis.
Additionally, today’s amendments establish a number of new disclosure requirements for issuers about officers’ and directors’ use of these plans, policies, and procedures with respect to trading by company insiders, as well as the granting of spring-loaded options to executives.
The rules also update Forms 4 and 5, forms that provide the public with insights into insiders’ transactions. Under the updates, filers must indicate if sales were intended to satisfy the affirmative defense. The amendments also provide more timely visibility into gifts of securities, as such gifts are subject to insider trading laws.
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 decide 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.
We benefited from more than 180 letters from the public. For example, based on feedback from the public, we have modestly changed the proposed cooling-off period for insiders, are not adopting a cooling-off period for issuers, and are providing a phased implementation for disclosures for smaller reporting companies.
I’d like to extend my gratitude to the members of the SEC staff who worked on this rule, including:
- Renee Jones, Erik Gerding, Brian Galle, Adam Turk, Todd Hardiman, Lindsay McCord, Betsy Murphy, Felicia Kung, Kat Bagley, Sean Harrison, John Fieldsend, and Pearl Crawley in the Division of Corporate Finance;
- Jessica Wachter, Erin Smith, Charles Woodworth, Angela Huang, Mariesa Ho, Robert Girouard, PJ Hamidi, Kathryn Schumann-Foster, Brandon Lacey in the Division of Economic and Risk Analysis;
- Dan Berkovitz, Megan Barbero, Bryant Morris, Dorothy McCuaig, David Lisitza, Lisa McCann, and Ken Alcé in the Office of the General Counsel;
- Melissa Hodgman and Rami Sibay in the Division of Enforcement; and
- Laurita Finch in the EDGAR Business Office.
This statement was issued on December 14, 2022, by Gary Gensler, chairman of the U.S. Securities and Exchange Commission.