Center Comments on SEC-Proposed Changes to Rule 10b5-1 and Insider Trading

The Center submitted comments this week on the SEC’s proposal to amend Rule 10b5-1. The Center supports guardrails intended to prevent illicit insider trading. However, in our comments we noted that new regulations must not be so restrictive and cost-prohibitive that they disincentivize individuals from using 10b5-1 plans that were created to strengthen insider trading law and boost transparency. 

The Center’s comments, informed by member input, included the following: 

• Existing Rules. There are existing insider trading laws and regulations to prohibit illegal insider trading activities. Individuals and companies already go to considerable lengths to comply with Rule 10b5-1 and ensure that trading plans are compliant with all SEC regulations.
    
• Cooling Off Period Too Long. The proposed 120 day “cooling off period” is unnecessarily long and would create unintended consequences for users of 10b5-1 plans. The Commission should consider current market practices and a shorter timeframe. According to a 2019 Center survey the most common cooling off period was 30 days but responses ranged from 14 to 60 days, or the next open trading window.
    
• Overlapping Plans. A broad prohibition on overlapping plans is misguided and will negatively impact legitimate trading practices of 10b5-1 plan users. Instead, we provide the Commission with several legitimate, benign reasons for why an individual may wish to establish more than one 10b5-1 plan.
    
• Single-Trade Plans. The proposal would limit the availability of the affirmative defense for single-trade arrangements to one single-trade plan during any 12-month period. We believe this limitation on single-trade plans would prohibit legitimate trades and likely push more trading activity outside of 10b5-1 plans. The proposed rule does not take into consideration certain scenarios that could arise which could cause an individual to establish more than one single-trade plan.
    
• Good Faith. The expanded requirement that 10b5-1 plans be “operated” in good faith will present users with difficult compliance questions and encourage regulators to scrutinize decisions made with the best interests of shareholders in mind. This will create the potential for the Commission to make inaccurate or inappropriate inferences about an individual’s trading activity.
    

Looking ahead, the Commission will review all comments submitted and is expected to adopt a final rule this summer. In the meantime, companies may want to assess existing Rule 10b5-1 plans and insider trading policies in preparation for the Commission’s adoption of the rule as currently drafted or some form of the proposed rule.