NEW! Are Rule 10b5-1 plans controversial? How does the SEC view them?
As part of its activities to root out insider-trading violations, the SEC has been looking into potential abuses of Rule 10b5-1 trading plans for several years. The agency is suspicious about whether some plan-holders truly did not know confidential inside information when they created plans. The SEC has also focused on plan modifications or terminations that may have been made in bad faith.
In 2021, SEC Chair Gary Gensler stated during a speech that abuses of Rule 10b5-1 trading plans "have led to real cracks in our insider-trading regime." The SEC's proposed rulemaking agenda for 2021 makes it clear that new requirements are coming. These may include:
- cooling-off period before an initial sale under the plan can happen
- limits on ability to cancel plans
- formal disclosure about adopting, modifying, and canceling plans
- limit on the number of plans
Alert: While best practices for 10b5-1 plans have developed over time, as detailed in another FAQ, the SEC does not seem to believe these voluntary practices are enough to prevent abuse.
Research Suggests Plan Abuses
Potential abuses of 10b5-1 plans are a subject of academic research and have helped to prompt the SEC's push for rule changes. For example, an academic paper published in 2021 identifies suspicious patterns of behavior that may indicate abuses of 10b5-1 plans (see Gaming the System: Three "Red Flags" of Potential 10b5-1 Abuse). The paper is summarized and assessed in a commentary from the law firm Cooley.
Journalists have also spotted suspicious patterns. See, for example, two articles in The Wall Street Journal: "Executives' Good Luck in Trading Own Stock" and "Trading Plans Under Fire". In these articles, and in others they wrote later, the authors weigh examples and data that raise questions about the timing of trades by some executives before the announcement of good or bad corporate news.
Pressure From Congress
Legislative pressure also underlies the SEC's renewed scrutiny of 10b5-1 plans. In 2019, the US House of Representatives passed the Promoting Transparent Standards for Corporate Insiders Act, which requires the SEC to study specific features in Rule 10b5-1 trading plans and revise the rule based on its results. As stated in a commentary from the law firm Cahill Gordon & Reindel, the proposed law seeks to order the SEC to address perceived gaps and abuses in Rule 10b5-1.
In 2021, a letter from three Democratic members of the Senate Committee on Banking, Housing, and Urban Affairs urged the SEC to adopt specific reforms to prevent what they perceive as abusive 10b5-1 plan practices and to improve disclosure.
Example Of SEC Enforcement Involving 10b5-1 Plan
In 2009, the SEC charged the former CEO of Countrywide Financial, Angelo Mozilo, with insider trading. The SEC alleged that he "established four executive stock sale plans for himself in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide's increasing credit risk and the expected poor performance of Countrywide-originated loans." He then later exercised options and sold company stock under these written trading plans.
Eventually, in 2010, Mr. Mozilo agreed to pay the largest-ever SEC penalty by a public company executive, along with a $45 million disgorgement of these ill-gotten gains to settle the disclosure violation and the insider-trading charges.
Legal Experts Consider SEC's Next Moves