(Article from Registered Funds Regulatory Update, January 2022)
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The SEC voted to propose amendments to Exchange Act Rule 10b5-1. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit purchasing or selling securities on the basis of material non-public information (MNPI). Rule 10b5-1 states that a purchase or sale constitutes trading “on the basis of” MNPI where the person purchasing or selling the security was aware of the MNPI at the time the purchase or sale was made. Rule 10b5-1(c) also added an affirmative defense against allegations of insider trading for corporate insiders and companies themselves to purchase and sell securities provided they adopted trading plans in good faith before becoming aware of the MNPI. Since its adoption in 2000, many have expressed concern that these trading plans could allow traders to wrongfully take advantage of the liability protections set forth in Rule 10b5-1(c), including SEC Chair Gary Gensler who, in a speech in June 2021, stated that these trading plans have led to “real cracks in our insider trading regime.”
The proposed amendments would apply to any person relying on the Rule 10b5-1(c), including registered funds and BDCs. Among other things, the proposed amendments:
- require a 120-day cooling-off period in which officers and directors must wait between entering into or modifying a Rule 10b5-1 trading plan and executing trades under the adopted arrangement. With regards to company trading plans, the SEC proposed a 30-day cooling-off period;
- require officers and directors to certify that they are not aware of any MNPI about the issuer or the security when adopting a new or modified Rule 10b5-1 trading arrangement and that the trading plan is being entered into in good faith;
- further require that officers and directors asserting the affirmative defense under Rule 10b5-1(c)(1) enter the trading arrangement in good faith and not as a plan to evade insider trading prohibitions;
- provide that the Rule 10b5-1(c)(1) affirmative defense does not apply to multiple overlapping Rule 10b5-1 trading plans for open market trades in the same class of securities; and
- limit the availability of the affirmative defense for single trade plans (i.e., permitting only one trading event) to one single trade plan per 12-month period.
Additionally, the proposed amendments would require more comprehensive disclosures from operating companies and BDCs, including quarterly disclosure of trading arrangements, annual disclosure of insider trading policies and procedures and disclosure of changes in beneficial ownership pursuant to a trading plan, detailed below:
- On a quarterly basis, disclose whether, in the last fiscal quarter, the issuer and/or its officers or directors have adopted or terminated any trading plans to trade the issuer’s securities, and if so, disclose the material terms of such.
- Annually disclose whether the issuer has adopted insider trading policies and procedures designed to promote compliance with the insider trading regulatory regime. If it has not, the issuer must explain why it has not; if it has, it must disclose such policies and procedures with sufficient detail so investors can assess the sufficiency of such policies and procedures.
- Disclose when changes in beneficial ownership of the issuer’s securities (as required to be disclosed on a Form 4 or 5 filing) are the result of a Rule 10b5-1(c) trading plan.
The proposed disclosures would not apply to registered investment companies.
The proposed amendments are subject to comment for 45 days after publication in the Federal Register.
Rule 10b5-1 and Insider Trading, SEC Release Nos. 33-110133 and 34-93782 (Dec. 15, 2021), available at https://www.sec.gov/rules/proposed/2021/33-11013.pdf.
Gary Gensler, SEC Chair, Speech, Prepared Remarks CFO Network Summit (June 7, 2021), available at https://www.sec.gov/news/speech/gensler-cfo-network-2021-06-07.