SEC Adopts Amendments To Rule 10b5-1 Insider Trading Plans

Insider trading has been one of the major focuses of the Securities and Exchange Commission (SEC) for a long time, and the SEC recently announced that it has adopted amendments to Rule 10b5-1. This rule is found under the Securities and Exchange Act of 1934, and the goal of the amendments to rule Rule 10b5-1 is to increase the disclosure requirements to provide investors with more protection against insider trading.

Since rule Rule 10b5-1 was originally adopted, numerous commentators, analysts, congressional members, and courts have stated that an affirmative defense under section Rule 10b5-1(c)(1)(i) gave too much of an opportunity for traders to use the liability protections found in the rule to take advantage of opportunistic trading based on nonpublic information. In addition, studies have routinely shown that corporate insiders outperform other traders, indicating that changes were required to level the playing field.

What Is Defined as Material Non-Public Information?

Insider trading is generally defined as an individual executing trades using information that is not available to the public. Under Rule 10b5-1(c), non-public information generally includes:

  • After reviewing information not available to the public, the individual executing the trade entered into a contract to purchase or sell the security.
  • After reviewing non-public information, the individual instructed somebody else to purchase or sell the security.
  • The purchase or sell order must have included a specific number of securities to be purchased or sold.

One of the most common defenses against insider trading is called an affirmative defense. This means that individuals and companies may be able to say that they were acting in good faith and only became aware of the material not available to the public after they had a contract in place.

The Amendment To Affirmative Defense of the Rule 10b5-1

Under the amendments to rule Rule 10b5-1, the requirements for adopting an affirmative defense have changed. For example, a cooling-off period is imposed before trading can take place under a plan. In addition, it would prohibit overlapping trading plans and limit single-trade plans to only one per 12-month cycle.

The directors and officers will be required to provide written certifications that they were not aware of any non-public material or information when they entered into the plan. More comprehensive disclosures will be required surrounding the procedures and policies that companies follow to prohibit insider trading.

Rule Changes

The exact rule changes are as follows:

  • Rule 10b5-1 trading plans involving corporate officers and directors would require a 120-day “cooling off” period before trading can commence under its plan.
  • Rule 10b5-1 for companies must include a similar 30-day cooling-off period.
  • Officers and directors will be required to certify that they were not aware of any material non-public information before the plan was written.
  • Rule 10b5-1 trading plans that include only a single trade can only take place once per 12 months.

Furthermore, some of the new disclosures that could be required include:

  • Companies are required to disclose whether they have insider trading policies and procedures as a part of their annual reports.
  • Companies must disclose the adoption or termination of all Rule 10b5-1 trading plans in their quarterly reports.
  • Companies must also disclose their option grant policies and practices as a part of their annual reports.

Forms 4 and 5 are updated to include a new checkbox to allow filers to identify whether the reported transaction was intended to satisfy the affirmative defense conditions and the date of adoption of the Rule 10b5-1(c) plan. Additionally bona fide gift of equity  must now be reported on Form 4 within two business days.

As a stock transfer agent, Colonial Stock Transfer can help put safeguards and protocols in place to accommodate your 10b5-1 trading plan.

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