House Passes Bill Directing SEC to Review Commonly Used Executive Trading Tool

July 20, 2018

In a nearly unanimous 406 to 4 vote, the House adopted the JOBS & Investor Confidence Act, a package of 32 bipartisan financial services reform bills including the Promoting Transparency Standards for Corporate Insiders Act, which would require the SEC to study 105b-1 plans “to ensure that corporate insiders are not able to indirectly engage in illegal insider trading.”

10b5-1 plans allow executives and insiders to trade without fear of insider trading liability by automatically executing stock trades on a pre-determined schedule, pursuant to current SEC rules.

Bipartisan political scrutiny of executive 10b5-1 plans has exploded over the last 18 months, given the timing of some 10b5-1 stock trades relative to the internal discovery and/or public announcement of major scandals by multiple companies.

H.R. 6320, the “Promoting Transparency Standards for Corporate Insiders Act,” sponsored by Rep. Maxine Waters (D-CA), would continue to allow 10b5-1 plans but would require the SEC to study potential amendments to the 10b5-1 rules.  Specifically, the bill would require the SEC to examine the impact of the following changes to the 10b5-1 rules:

  • Limits on creating 10b5-1 trading plans during insider trading windows;
  • Prohibit multiple, overlapping 10b5-1 plans;
  • Implement a mandatory delay between the adoption of the plan and the first trade;
  • Create rules as to the frequency with which insiders may adopt, modify, or cancel plans;
  • Require insiders to file trading plan adoptions, amendments, terminations, and transactions with the SEC; and
  • Require board oversight of 10b5-1 plans, including corporate policies, adoption, and monitoring.

The impact of the above limitations to 10b5-1 plans would be significant, given the prevalence of blackout periods that significantly restrict the ability of key corporate executives and insiders to execute trades.

Heavy bipartisan support in the House may spur Senate activity on the "JOBS & Investor Confidence Act."  Republican leadership in the Senate will not act on bills without significant bipartisan support—especially for financial services issues.  Given the almost unanimous nature of the House vote, Senate activity on the "JOBS & Investor Confidence Act" is likely.

The Association’s Center On Executive Compensation plans to engage policymakers on the 10b5-1 issue to ensure the importance and use of 10b5-1 plans are understood and appreciated.