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Newly Passed House Bill Calls for SEC Study of and Potential Restrictions on Rule 10b5-1 Trading Plans

The House of Representatives has passed a bipartisan bill to require the SEC to carry out a study of Rule 10b5-1 trading plans (plans that allow executives of publicly traded companies to sell their shares without violating insider trading laws) and report on possible revisions to Rule 10b5-1 consistent with the study’s findings.  Passed by the House in late January 2019, the legislation is aimed at addressing  perceived abuses of 10b5-1 trading plans by corporate insiders.

Rule 10b5-1 trading plans are adopted by many companies and company insiders in order to allow the purchase and sale of company securities without violating insider trading laws.  Specifically, purchases and sales of securities are deemed to be not on the basis of material nonpublic information if, at a time when the person did not possess material non-public information, the insider making the purchase or sale entered into a binding contract, instructed another person to purchase or sell the security, or adopted a written plan for trading securities.  The contract, instruction or plan must either (1) specify the amount of securities to be purchased or sold and the price and date of the purchase or sale, (2) include a written formula or algorithm for determining the amount of securities to be purchased or sold and the price and date on which the transaction would occur, or (3) not permit the person to exercise any influence over how, when or whether to effect purchase or sales.

The SEC’s study is meant to determine whether Rule 10b5-1 should be amended to include the following limitations on permissible trading:

  • Limit the ability of issuers and issuer insiders to adopt trading plans to a time when the issuer or issuer insider is permitted to buy or sell securities during issuer-adopted trading windows;
  • Limit the ability of issuers and issuer insiders to adopt multiple trading plans;
  • Establish a mandatory delay between the adoption of a trading plan and the first sale of shares pursuant to such a plan and, if so,
    • Whether any such delay should be the same for trading plans adopted during an issuer-adopted trading window (as opposed to outside of such a window); and
    • Whether there are any appropriate exceptions to such a delay;
  • Limit the frequency that issuers or issuer insiders can modify or cancel trading plans;
  • Require issuers and insiders to file with the SEC any trading plan adoptions, amendments, terminations and transactions; or
  • Require boards of companies that have a trading plan to:
    • Adopt policies covering trading plan practices;
    • Periodically monitor trading plan transactions; and
    • Ensure that issuer policies discuss trading plan use in the context of guidelines or requirements on equity hedging, holding and ownership.

In carrying out its study, the SEC is also being asked to consider how any possible amendments may clarify existing prohibitions against insider trading, the impact any such amendments may have on the ability of companies to attract senior leaders, capital formation and the company’s willingness to operate as a public company and any other considerations that may be necessary to protect investors.

Since Rule 10b5-1 was adopted in 2000, various allegations have been made in the media that Rule 10b5-1 permits insider trading abuses by corporate insiders.  The SEC’s enforcement division has reportedly looked at potential abuses.  A study published by a Stanford University School of Business Professor found that trades by executives through Rule 10b5-1 plans had outperformed other trades by executives over the period of the study. In December 2012 the Council of Institutional Investors, a pension fund trade association, urged the SEC to adopt amendments to Rule 10b5-1 – similar to those proposed in the House legislation – that would (1) permit Rule 10b5-1 trading plans to be adopted only during open trading windows under a company's insider trading policy, (2) prohibit multiple, overlapping Rule 10b5-1 trading plans, (3) prohibit trades from occurring for at least three months after the adoption of a Rule 10b5-1 trading plan, (4) prohibit frequent modifications or terminations of Rule 10b5-1 trading plans, (5) require the immediate disclosure of the adoption, modification, or termination of any Rule 10b5-1 trading plan and (6) impose direct responsibility for the oversight of Rule 10b5-1 trading plans on boards of directors.  However, Rule 10b5-1 has never been amended in order to curb the potential abuses.

Having passed the House, the legislation has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. If approved by the Senate and signed by the President, the SEC will have one year from the enactment date to issue its report to Congress.  Following the completion of such study, the SEC would be required to submit proposed rule amendments to Rule 10b5-1 for public notice and comment consistent with the results of the study.