CII Welcomes New SEC 10(b)5-1 Rule

From the Council of Institutional Investors:

CII applauds the SEC’s unanimous approval today of final rules that will close loopholes and enhance the transparency of executive trading plans in company stock. The adoption comes after CII pressed the commission for 10 years to reform these Rule 10b5-1 trading plans.

“The new rules close gaps in the SEC’s enforcement regime that allow executives to use 10b5-1 plans as cover for insider trading,” said CII Executive Director Amy Borrus. “The SEC amendments will better protect public investors from misuse of these plans and strengthen confidence in corporate management teams and the capital markets generally.”

Under the new requirements, executives will have to wait a specified period of time after adopting a Rule10b5-1 trading plans before they can execute trades.

The rules also restrict the use of multiple overlapping trading plans. In addition, directors and management must certify when adopting a new plan or modifying an existing one that: (1) they are not aware of any material nonpublic information about a company or its securities; and (2) they are adopting the plan in good faith. More comprehensive disclosure of companies’ policies and procedures related to insider trading also will be required.

More than 20 years ago, the SEC implemented Rule 10b5-1 to let executives buy or sell company shares at a predetermined time on a scheduled basis. Although it was intended to prevent executives from running afoul of the prohibition on trading on material non-public information, over the years loopholes in the rule’s coverage emerged. Press reports and empirical evidence suggested that insiders were adopting, amending and canceling these plans easily and without disclosure—a recipe for fortuitously timed trades while in possession of material, non-public information.

In 2008 after CII members became concerned about these practices, CII adopted a member-approved policy on Rule 10b5-1 plans, specifying that plans should be publicly disclosed; adopted when the participant is not in possession of material, non-public information; and inactive for at least three months following adoption. To prompt SEC action on the issue, CII then submitted a rulemaking petition in 2012 urging the commission to adopt amendments that would place restrictions on the trading that companies and company insiders could conduct under the rule. More recently, CII General Counsel Jeff Mahoney testified in June 2021 before the Investor Advisory Committee on 10b5-1 plans, urging the commission to close existing loopholes.

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