Updated insider trading regulations approved by the Securities and Exchange Commission (SEC), aiming to deter investors from exploiting existing Rule 10b5-1, take effect today. Here's what you need to know.
- SEC amendments to Rule 10b5-1 take effect today.
- Rule 10b5-1, originally enacted in 2000, enables insiders of publicly listed companies to sell a predetermined number of shares at a predetermined time.
- As part of an earlier proposal for the Rule 10b5-1 amendments, the SEC cited academic studies positing some corporate executives used 10b5-1 plans to avoid being accused of insider trading.
- The Rule 10b5-1 amendments include updates to Rule 10b5-1(c)(1) that add new conditions to the availability of the affirmative defense to insider trading liability.
What Is Rule 10b5-1?
Rule 10b5-1, established by the SEC in 2000, allows insiders of publicly traded corporations to set up a trading plan to sell their stocks. It's a clarification of Rule 10b-5 (sometimes written as Rule 10b5), created under the Securities and Exchange Act of 1934, which is the primary vehicle for the investigation of securities fraud.
Rule 10b5-1 permits major holders to sell a predetermined number of shares at a predetermined time. Some corporate executives have used 10b5-1 plans to avoid accusations of insider trading, according to the SEC.
In the SEC’s earlier proposal for the Rule 10b5-1 amendments, the commission cited academic studies that found corporate insiders trading pursuant to the rule consistently outperformed those who didn't use it. The studies raised concern that corporate insiders are abusing Rule 10b5-1, harming other investors and undermining the integrity of securities markets.
“We’ve heard from courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information,” SEC Chair Gary Gensler said in a release.
Amendments and Timelines
The updates to Rule 10b5-1(c)(1) make it harder to abuse the so-called affirmative defense, which protects insiders from accusations of insider trading. They also added requirements that companies include information about policies for how they handle insider trading when filing regular SEC reports, in addition to executive and director compensation from certain equity compensation awards.
People reporting under Section 16 will be required to comply with additional amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023. They will also be required to comply with new disclosure requirements in Exchange Act periodic reports on Forms 10-Q, 10-K, 20-F, and any proxy or information statements covering the first full fiscal period beginning on or after the same date. Smaller reporting companies have until Oct. 1, 2023, to comply with the additional disclosure requirements.