SEC Adopts Finalized Insider Trading Rules
Workspan Daily
December 22, 2022
Key Takeaways

  • New insider trading rules. The SEC has adopted final rules intended to prevent unethical executives from nefarious activity that undermines shareholder trust in the markets. 
  • Intended to guide executives. The regulations are intended to help executives, whose compensation is often tied up in company shares, generate income while eschewing insider trading accusations. 
  • Cooling off period adopted. The amendments adopt 30-day “cooling-off periods” for persons other than issuers before trading can commence under a Rule 10b5-1 plan. They also add a condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to the plan. 
  • Increased disclosure and transparency. Executives must include representations in their plans certifying at the time of the adoption of a new or modified Rule 10b5-1 plan that: (1) they are not aware of any material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5. 

The U.S. Securities and Exchange Commission (SEC) adopted final rules on Dec. 14 that restrict when top executives can unload company shares and require more disclosure of their planned stock sales.  

The rules are part of a revamped and “modernized” effort to combat insider trading, the SEC noted in its release. Specifically, company directors and officers will have to wait at least 90 days between when they schedule a trade and sell their shares. Companies will also have to report on their executives’ use of trading plans in quarterly reports.  

The rules are intended to give executives a defense against insider trading cases brought forth by the SEC. Existing regulations, which were implemented in 2000, don’t mandate waiting periods, opening the door for nefarious activity. The new rules are intended to prevent unethical executives from such activity that undermines shareholder trust in the markets, SEC Chair Gary Gensler said in the release.  

“Anytime we can increase investor confidence in the markets, that’s a good thing,” Gensler said. “It helps investors decide where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation.” 

The SEC’s updates to Rule 10b5-1 are in response to various reports and public complaints of company officials’ dubiously well-timed trades over the past several years.  

The Council of Institutional Investors, which represents state pension funds, first petitioned the SEC to tighten Rule 10b5-1 in 2012, asking for a multi-month cooling-off period and more disclosures. Similar calls by Sen. Elizabeth Warren (D-Mass.) and the SEC’s Investor Advisory Committee followed, Bloomberg Law reported.  

Rule 10b-5 Specifics and Compliance  

Executives must have plans that are made “in good faith and not as part of a plan or scheme to evade the prohibitions” against insider trading, according to the 2000 rules. The regulations are intended to help executives, whose compensation is often tied up in company shares, generate income while eschewing insider trading accusations.  

The changes to the rule update the conditions that must be met for the 10b5-1 affirmative defense. Specifically, the amendments adopt 30-day “cooling-off periods” for persons other than issuers before trading can commence under a Rule 10b5-1 plan. They also add a condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to the plan.  

The amendments further provide that directors and officers must include representations in their plans certifying at the time of the adoption of a new or modified Rule 10b5-1 plan that: (1) they are not aware of any material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5. 

Other key changes include:  

  • A limitation on the ability of anyone other than issuers to use multiple overlapping Rule 10b5-1 plans; and 
  • A limitation on the ability of anyone other than issuers to rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period. 
  • The final rules will become effective 60 days following publication of the adopting release in the Federal Register. Per the SEC, Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.  

Issuers will be required to comply with the new disclosure requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023. The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies. 

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