UPDATED! Has the SEC proposed new requirements for 10b5-1 plans? Are these plans controversial?
myStockOptions Webinar: 10b5-1 Trading Plans & Other SEC Rules Advisors Need To Know, available on demand, covers basics, best practices, and SEC developments in 10b5-1 plans. Details on topics, featured experts, and continuing education credits are available at the webinar registration page.
On December 15, 2021, the SEC proposed new rules for 10b5-1 plans to combat suspected abuses. For corporate officers and directors seeking to use 10b5-1 plans as an affirmative defense against insider-trading liability, these proposals include:
- a 120-day cooling-off period before any trading can start after the plan's adoption or modification
- requirement to certify when adopting or modifying the plan that they are not aware of material nonpublic information about the company
- no overlapping 10b5-1 trading arrangements for open-market trades
- a limit on single-trade plans to one per 12-month period
The proposed rules are subject to a 45-day public comment period. Since these proposed rules received the rare unanimous bipartisan support of all five SEC commissioners, they are likely to be adopted in some form. Individual statements by the commissioners indicate that all of them support the addition of the four-month cooling-off period (for example, see separate statements by the two Republican appointees at that time: Hester Peirce and Elad Roisman).
The final rules are expected in the spring of 2023. For more details on the proposed requirements, including the need to check a box on SEC Form 4 and Form 5 when a reported stock transaction is made under a 10b5-1 plan, see the related SEC Fact Sheet and alerts from the following law firms:
The discussion below explains the background of this development, including the SEC's long-running scrutiny of 10b5-1 plans and academic research which presents evidence suggesting that abuses of 10b5-1 plans do occur.
SEC Suspects Misuse Of Rule 10b5-1 Trading Plans
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. 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. 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." Even before the proposed changes issued in December 2021, the SEC's proposed rulemaking agenda for 2021 made it clear that new requirements were coming.
In September 2021, the SEC Investor Advisory Committee came out with its own draft recommendations, which aligned with Gensler's concerns.
Research Infers Abuses Of 10b5-1 Plans
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, three articles in The Wall Street Journal:
- CEO Stock Sales Raise Questions About Insider Trading
- Executives' Good Luck in Trading Own Stock
- 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, 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.