There have been a lot of discussions lately concerning ways to restrict or improve disclosure and enforcement of executive trades made under 10b5-1 plans. In late 2019, I co-authored a series for Corporate Counsel discussing why public companies should consider updating their insider trading policies and training (see below with links to the article series). In part three of the series, I discussed the regulatory focus on 10b5-1 plans, the stock trading plans that corporate executives routinely rely on to trade company stock.

Despite the legitimacy and legality of 10b5-1 plans, they have come under scrutiny by the media, academics and government officials for being subject to manipulation by corporate insiders. My article summarized two pieces of legislation that had been introduced in Congress seeking to require the Securities and Exchange Commission (SEC) to formally review the regulations governing 10b5-1 plans and determine whether additional trading restrictions were warranted.

Executive Trades Under 10b5-1 Plans Scrutinized

While these bills have stalled in Congress, government officials have continued to scrutinize executive trades made under 10b5-1 plans and call for additional restrictions on the scope and use of these plans. Two seniors SEC officials recently took the time to express concerns about 10b5-1 plans shortly before leaving their posts. In a speech on November 19, 2020, outgoing SEC Chairman Jay Clayton expressed concern about situations where trading occurs (or does not occur) around times that 10b5-1 plans are implemented, amended or terminated.

Chairman Clayton recommended that companies “strongly consider requiring all Rule 10b5-1 plans for senior executives and board members to include mandatory seasoning, or waiting periods after adoption, amendment or termination before trading under the plan may begin or recommence.” Similar concerns were expressed the previous day by the outgoing head of the SEC’s Division of Corporation Finance, Bill Hinman. Hinman agreed with Chairman Clayton’s recommendation of a “cooling off period” and further commented that “Boards of directors and their compensation committees would be well-advised to consider the interplay between company share repurchase plans and trading by directors and senior executives generally when approving, amending or terminating Rule 10b5-1 plans.”

SEC Urged to Reform 10b5-1 Plan Regulations

A few weeks ago, a trio of Senate Democrats implored the SEC to review and reform the regulations governing 10b5-1 plans. In a February 10 letter to Acting SEC Chair Allison Herren Lee, Senators Elizabeth Warren, Sherrod Brown and Chris Van Hollen alleged that corporate executives were “abusing” 10b5-1 plans “to obtain huge windfalls at the expense of ordinary investors.” They urged the SEC to improve disclosure and enforcement of 10b5-1 plans and to consider other reforms to prevent abusive practices. The letter cited research suggesting that (1) initial trades set up by 10b5-1 plans often appear to be based on material, nonpublic information; (2) executives modify or cancel plans in response to inside information; and (3) 10b5-1 plans are modified days or hours before major company announcements.

The Senators recommended that the SEC pursue several courses of action to remedy problems with 10b5-1 plans, including the following:

  • Impose a 4-6 month “cooling off period” between the adoption of a plan before trading under the plan may begin or recommence (akin to Chairman Clayton’s recommendation).
  • Require disclosure to the public and SEC of trades made pursuant to 10b5-1 plans.
  • Mandate public disclosure of the content of 10b5-1 plans.
  • Enforce the filing deadlines on forms executives are already required to file to disclose their trades in company stock.

Takeaways for Corporate Counsel

In light of the continued scrutiny of 10b5-1 plans, in-house counsel should carefully monitor for the release of SEC guidance (and any rule changes) with respect to 10b5-1 plans and consider proactively reviewing company policies governing 10b5-1 plans to address the issues and concerns discussed above with respect to such plans.

If you have any questions about 10b5-1 plans, please contact the author. To read the prior Corporate Counsel three-article series authored by Michael Rivera and Abby Yi, click the links below.

  • Part One offered practical guidance on mitigating risks associated with employees who may inadvertently share confidential information with others.
  • Part Two discussed practical suggestions to comply with U.S. Securities and Exchange Commission (SEC) guidance to public companies that insider trading policies should address cybersecurity risks.
  • Part Three provided a primer on potential legislative changes involving stock trading plans (aka 10b5-1 plans) routinely relied on by corporate insiders to trade their company’s stock legally.