The Securities and Exchange Commission (SEC) recently announced some changes to Rule 10b5-1 under the 1934 Securities Exchange Act. The changes will include disclosure requirements to better ensure investor protection and affirmative defense against insider trading. These updates will also enable the SEC to identify and understand how corporate insiders trade securities using information that is not public knowledge.
The Exchange Act’s Rule 10b5-1 was drafted 20 years ago to address concerns related to insiders who trade in the equities of their own companies. One effect of the rule was to provide a safe harbor from wrongdoing as long as the insider intended to conduct the trade before learning the non-public information. However, over the years comments from the courts, insiders and lawmakers indicated that companies were not acting in good faith. Instead, insiders often acted “opportunistically” with information, knowing they had liability protection under 10b5-1.
The amendment’s key details
It stipulates that all persons entering into a 10b5-1 plan must act in good faith. There will be cooling-off periods for non-issuers before trading can commence. It also restricts the use of multiple overlapping trading strategies and also places new restrictions on single-trade plans where a defense can be mounted only if there has been no other plan in the preceding 12-month period.
Directors and officers must include representation about their plans, which are certified at the time they begin a new or modified 10b5-1 plan. In those plans they should state that they are unaware of non-public information related to the issuer or the securities. They must also explicitly state that they created the plan in good faith and that it is not an effort to avoid 10b5-1 regulations. Everyone other than the issuers will now disclose plans quarterly instead of annually.
“I believe today’s amendments will help fill those potential gaps,” SEC Chairman Gary Gensler said in a released statement. “These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that is 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.”
Preparation should begin now
The changes go into effect on April 1, 2023, the standard 60 days after publication in the Federal Register. With this deadline just ahead, public companies must adjust best practices and plan for the expanded requirements and new disclosure obligations. They can start the process by reviewing existing trade policies, educating directors and officers and ensuring compliance teams are prepared. Boards will also face additional disclosure requirements, so companies should notify their directors.