The new SEC chair believes that 10b5-1 plans “have led to real cracks in our insider trading regime” and has asked the SEC Staff to make recommendations for the Commission’s consideration on how they might “freshen up” Rule 10b5-1.
In his comments to the CFO Network Summit, he made a number of comments about 10b5-1 plans, and pointed to areas that he believes need to be addressed.
- There is no cooling-off period required before they make their first trade. The Chairman correctly points out that this is a loophole for insider trading. Assuming one had information that he wanted to trade on, adopt a 10b5-1 plan, and trade. Legalized insider trading? According to the Chairman proposals to mandate four- to six-month cooling-off periods have received public, bipartisan support from former SEC Chair Jay Clayton and current Commissioners Caroline Crenshaw and Allison Herren Lee.
- There currently are no limitations on when 10b5-1 plans can be canceled. As a result, according to the Chairman, insiders can cancel a plan when they do have material nonpublic information. Of course, this means that an insider was willing to commit fraud by canceling his plan and then trading on material nonpublic information. That is a bit of a stretch.
- Third, there are no mandatory disclosure requirements regarding Rule 10b5‑1 plans. I agree with the Chairman that more disclosure regarding the adoption, modification, and terms of Rule 10b5‑1 plans by individuals and companies could enhance confidence in our markets.
- There are no limits on the number of 10b5-1 plans that insiders can adopt. According to the Chairman, given the ability to enter into multiple plans, and potentially to cancel them, insiders might mistakenly think they have a “free option” to pick amongst favorable plans as they please.
These concerns are all well and good, but as the Chairman points out, abusing Rule 10b5-1, and in particular canceling a plan in order to trade on inside information is already a violation and a crime. He makes a few good points, but let’s keep in mind that the insider trading law has become extremely overbroad already, and while tweaking 10b5-1 plans may be in order, they are only an affirmative defense to an insider trading allegation and one that is sorely needed in this overly regulated environment.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.