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Center On Executive Compensation Warns SEC Against Over-Regulating 10b5-1 Plans

Published on: April 8, 2022

Authors: Chatrane Birbal

Topics: Executive Pay Legislation and Regulation

In comments submitted to the Securities and Exchange Commission, HR Policy Association’s Center On Executive Compensation noted that we support enhanced guardrails to prevent illicit insider trading, but the SEC’s new proposed regulations on 10b5-1 stock trading plans must not be so restrictive and cost-prohibitive that they disincentivize use of such plans.  

Background: Rule 10b5-1, established by the SEC in 2000, allows insiders of publicly-traded corporations to set up a trading plan for selling company stocks they own at specific times or intervals. Many corporate executives use 10b5-1 plans to set up stock sales in accordance with insider trading laws and avoid any appearance of insider trading.  

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

  •  Existing rules provide substantial protections: 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 comply with all SEC regulations.
      
  • The cooling off period is too long: The Center agreed with implementation of a “cooling off period” before plans take effect, but the proposed lengthy 120-day “cooling off period” 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. 

Outlook: The Commission is expected to adopt a final rule this summer. In the meantime, companies should 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.  

Chatrane Birbal

Vice President, Government Relations, HR Policy Association

Detailed Bio

Contact Chatrane Birbal LinkedIn

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