Just one year after the amendments to Rule 10b5-1 executive trading plans were proposed, the Securities and Exchange Commission voted on Dec.14 to adopt the rule changes.
The changes are designed to eliminate any potential loopholes in the stock trading plans that could allow corporate insiders to “trade under the rule in ways that harm investors and undermine the integrity of securities markets,” to quote SEC Chair Gary Gensler.
Adopted more than 20 years ago, the 10b5-1 rule was designed to help executives avoid running afoul of the prohibitions on trading on material nonpublic information. It let corporate executives buy or sell company shares at a predetermined time on a scheduled basis, shielding them from insider trading liability.
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. — Gary Gensler, chair of SEC
However, according to the Council of Institutional Investors, “press reports and empirical studies [over the years] suggested that insiders were adopting, amending and canceling these plans easily and without disclosure — a recipe for fortuitously timed trades while in possession of material, nonpublic information.”
The 10b5-1 amendments:
Adopt cooling-off periods for section 16 officers and directors between the time they set up a plan and when trading can commence. The cooling off period is 90 days, or two days after the release of financial statements, whichever is longer, but no more than 120 days. "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,” said SEC Chair Gary Gensler in comments released on December 14. “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.”
Largely prohibit overlapping plans and limit single-trade plans to one every 12 months. The prohibition will prevent an executive from circumventing the cooling-off periods by setting up multiple plans “and deciding later which trades to execute and which to cancel after they become aware of material nonpublic information but before it is publicly released,” according to the SEC.
Establish some new disclosure requirements for issuers. The new reporting concerns officers’ and directors’ use of these plans, policies, and procedures, as well as the issuer's granting of spring-loaded options to executives. Previously, disclosure of 10b5-1 plans was not required, and companies that did disclose them did not give details. The changes also require companies to make certain tabular and narrative disclosures regarding awards of options close in time to the release of material nonpublic information.
In addition, directors and management will have to certify when adopting a new plan or modifying an existing one that they are not aware of any material nonpublic information about a company or its securities and that they are adopting the plan in good faith.
Said CII executive director Amy Borrus: “The SEC amendments will better protect public investors from misuse of these plans and strengthen confidence in corporate management teams and the capital markets generally.”
Section 16 officers and directors will have to comply with the amendments for reports filed on or after April 1, 2023. Issuers will have to comply with the new disclosure requirements on 10-Q, 10-K, and 20-F forms and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.
The compliance date for smaller reporting companies is deferred by six months.