Dec. 14, 2022
Today, the Commission adopts reforms designed to tackle insider trading by corporate insiders. These reforms will strengthen investor protection and the integrity of our securities markets.
The Commission first adopted Rule 10b5-1 over 20 years ago. Since then, courts, several academic studies, Members of Congress on a bipartisan basis, the SEC’s Investor Advisory Committee, and other stakeholders have all raised concerns about flaws in the rule’s original design that have enabled corporate insiders to trade securities opportunistically while enjoying the liability protections of Rule 10b5-1.
The common sense, targeted amendments proposed for adoption today are borne out of the 20-plus years of Commission experience with executive trading plans and are designed to fulfill the intent of the original rule to meaningfully prevent insider trading by corporate insiders.
Insider trading is not a victimless crime. It erodes trust in our markets, undermines market integrity, distorts shareholder value, and harms investors. When ordinary investors see that corporate executives can legally manipulate the rules for their own benefit and, in doing so, misuse material, non-public information without consequences, it raises valid questions about whether these practices undermine fairness and transparency in our markets.
Why would investors devote considerable time to gathering information about a company, and investing in the stock market, if they’re having to compete against insiders who have access to a cheat-sheet with the correct answers? That isn’t fair competition. Closing some of the rule’s loopholes, as we’re doing today, will provide investors with the confidence that there’s a level playing field.
Overall, today’s amendments are designed to significantly reduce opportunities for corporate insiders to misuse 10b5-1 plans.
The amended rule adopts new cooling-off periods as a condition of using these plans – the later of 90 days or after the release of the next quarterly earnings for directors and officers, and 30 days for all other insiders. This will deter insider trading based on material, non-public information about quarterly earnings, as well as other types of material events such as mergers or acquisitions, management changes, or regulatory approvals.
Cooling-off periods by themselves aren’t sufficient, however. To avoid situations where directors and officers can intentionally game the timing of disclosures after entering into a 10b5-1 plan, corporate insiders are required to act in good faith not just when they enter into a plan, but through the life of the plan as well.
The amended rule also provides for limits on multiple overlapping plans, which prevents insiders from selectively canceling unfavorable plans based on material, non-public information.
Similarly, the amended rule limits single-trade plans to one every 12 months. Research shows that trades under these sorts of one-and-done plans may be particularly profitable, even if there is a cooling off-period.
Finally, the amended rule provides for enhanced disclosures of insider trading policies, the material terms of 10b5-1 plans for directors and officers, and certain options disclosures that occur immediately before public filings.
The rule in place currently does not require disclosure of a company’s use of 10b5-1 trading plans. This information gap prevents investors from assessing whether corporate insiders may be misusing material, non-public information for personal gain, which undercuts the rule’s effectiveness.
To be clear, the confidential information of issuers belongs to the company and its shareholders, not to insiders, so investors have a right to understand how issuers protect material, non-public information from being misused.
I’m pleased to support the adoption of today’s rule and would like to thank all of the Commission staff, particularly in the Division of Corporation Finance, for their hard work.