SEC Chair Gensler and Rule 10b-5-1 Plans

Rule 10b-5-1 plans have been around for about 20 years. The theory of the plans is straight forward. Typically, a corporate executive not in possession of inside information constructs a plan, usually with his or her broker, for the automatic sale of employer securities in the future. Since the executive is not making any decisions regarding the purchase or sale of firm securities under the plan, it serves as a defense to insider trading claims. While there have been allegations that these plans have been manipulated and studies, on the question of abuse, few cases have been brought.

SEC Chairman Gensler recently declared, however, that “these plans have led to real cracks in our insider trading regime” in remarks delivered at the CFO Network Summit on Friday, June 7, 2021 (here). While he did not identify the “cracks,” he did direct the staff to study four key issues:

1) Cooling off: Currently there is no “cooling off” period when a plan is instituted. Those creating a plan are prohibited from doing so only if they are not then in possession of material non-public information. Once that requirement is met the plan can be implemented and trades under it executed.

2) Cancellation: There are currently no limitations on when a plan may be terminated.

3) Disclosure: There are no mandatory disclosure requirements for such plans.

4) Limits on numbers: There are no limits on the number of plans a person can create.

These points may have merit. For example, having a “cooling off” period of, for example, thirty to sixty days before transactions can be implemented under the plan can reinforce the requirement that the person is not in possession of insider information. Similarly, requiring that firm’s disclose the use of plans and that there should be a limit regarding the number of plans one executive can create also appear to have merit. On the other hand, canceling a plan does not appear to be nefarious absent other circumstances presenting questions – at that point the executive has no safe harbor.

With all of the questions facing the Commission, there is little apparent reason for all this new study. For years the plans have proven to be successful – they help simplify transactions for executives which encourages stock ownership by those individuals. Such ownership – having skin in the game – has long been considered beneficial for the firm and shareholders. If the Commission is going to institute additional “guard rails” on the plans it should take care not to undercut the long established benefits of the plans.