As noted in blog, the Chair of the House Financial Services Committee, Maxine Waters, has introduced H.R. 624, the “Promoting Transparent Standards for Corporate Insiders Act,” which could require some significant tweaks to Rule 10b5-1 plans and disclosure about them. Co-sponsored by the Ranking Republican Member on the Committee, Patrick McHenry, the legislation would require the SEC to conduct a study of whether specified amendments to the rules governing 10b5-1 plans should be adopted, report back within a year and then adopt rule amendments consistent with the findings of the study. The high-level bipartisan sponsorship of the legislation suggests that there is a reasonable chance that it could move forward, but certainly does not guarantee that it will survive in the Senate.  You might recall that the JOBS and Investor Confidence Act of 2018 (the erstwhile JOBS Act 3.0), which included similar provisions regarding Rule 10b5-1, passed the House by a vote of 406 to 4, but made no progress in the Senate. (See this PubCo post.) The new leadership must think that the chances for enactment are better with a standalone bill.

In general, Rule 10b5-1 allows an insider, when not in possession of material non-public information, to establish a formal trading contract, instruction or plan that specifies pre-established dates or formulas or other mechanisms—that are not subject to the insider’s further influence—for determining when the insider can sell shares, without the risk of charges of insider trading. To be effective, the contract, instruction or plan must also conform to the specific requirements set forth in the Rule.  In effect, the Rule provides an affirmative defense designed to demonstrate that a purchase or sale was not made “on the basis of” material nonpublic information.  If a 10b5-1 contract, instruction or plan is properly established, in theory at any rate, the issue is not whether the insider had material non-public information at the time of the purchase or sale of the security; rather, that analysis is performed at the time the instruction, contract or plan is established.

Under the new bill, the amendments to be considered by the SEC in its study include:

  • Limiting issuers and insiders to adopting 10b5-1 plans only in permitted open trading windows;
  • Limiting the ability to adopt multiple overlapping trading plans;
  • Establishing mandatory delays between plan adoption and first trades (including consideration of whether the delay should be the same if the plan was adopted during an open window and any appropriate exceptions to the delay rule);
  • Limiting the frequency of plan modifications and cancellations;
  • Requiring that plans, amendments, terminations and transactions be filed with the SEC; and
  • For issuer plans, requiring that boards monitor plan transactions and adopt relevant policies, including policies that address trading in the context of guidelines or requirements on equity hedging, holding and ownership.

In conducting the study, the SEC would be required under the bill to consider how any amendments to the Rule might “clarify and enhance existing prohibitions against insider trading,” as well as the impact of any amendments on capital formation, willingness to retain public company status, the ability of companies to attract executives, directors and other insiders  and any other consideration the SEC considered necessary and appropriate for investor protection.

Posted by Cydney Posner