Dec. 14, 2022
By virtue of their positions, executives and certain other corporate insiders are routinely exposed to material nonpublic information (MNPI) —unpublished financial results, advanced merger discussions, unannounced business risks that have materialized. Trading on that information ahead of the public undermines confidence in our markets.
In light of that, but also with the understanding that there will be times when executives need to sell some portion of their holdings for personal reasons, roughly 20 years ago the Commission allowed for what are known as “Rule 10b5-1 plans,” which enable corporate insiders to establish a formal plan setting forth a pre-established formula that would trigger stock sales. If this plan was established while the insider had no material nonpublic information, the rule would provide an affirmative defense for the planned trades against allegations of insider trading.
Once those plans were put into place, however, under the original 10b5-1 rules, they could be modified with ease, and without public disclosure. Because the plans were so flexible, executives could avail themselves of the affirmative defense, while at the same time amending their plans in advance of corporate announcements that would likely move stock prices. As written, those rules have ceased to provide appropriate investor protection and, data show, have routinely been abused.
As I noted in March of last year, it was well past time to revisit these insider trading rules. So I am pleased that after a data-driven, deliberative process, including a proposal in December, 2021, we are doing just that.
Today, the Commission adopts new rules for insiders that prohibit single-trade plans, with a limited exception to provide for unexpected liquidity needs; prohibit overlapping plans; require a cooling-off period and officer and director certifications; establish an amended good faith condition; mandate new disclosures of the registrant’s policies and procedures, of certain options awarded to named executive officers, and of the plans used by officers and directors; and require a checkbox on Form 4 clearly indicating when transactions are made pursuant to a 10b5-1 plans.
These protections should help limit the scope of 10b5-1 plans to situations where insiders are truly trading without the unfair benefit of material non-public information, and protect against opportunistic trading. And, in so doing, they should help bolster confidence to the public and the market that the proverbial deck is not stacked in favor of the house.
As always, thank you to the staff in the Division of Corporation Finance for the hard work and late night hours. Thank you also to Enforcement for their counsel and advice on this one, and, finally, the Office of the General Counsel, the Divisions of Economic and Risk Analysis, Exams, and my fellow Commissioners and their staff for their hard work on this rule and their dedication to the public and the markets.
 See 17 C.F.R. 240.10b5-1(c) (2022)
 In a recent study that analyzed more than 20,000 10b5-1 plans and associated trades, the evidence suggests that these plans are susceptible to abuse because they could be adopted and implemented on a short timetable. More than one-third of the plans adopted in a given quarter executed a trade before that quarter’s earnings announcement, avoiding considerable losses. Loss avoidance appeared concentrated among plans that executed a single trade within 60 days of plan adoption. David Larcker et al., Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse, Stan. Closer Look Series (Jan. 2021). See also Tom McGinty & Mark Maremont, CEO Stock Sales Raise Questions about Insider Trading, Wall St. J. (June 29, 2022)