June 8, 2021

Rule 10b5-1: Gary Gensler Wants Some Changes

Last month, Lynn blogged about calls for changes to Rule 10b5-1, and it now looks like potential changes are officially in the works. In remarks to the WSJ’s CFO Network Summit yesterday, SEC Chair Gary Gensler said that 10b5-1 plans had led to “real cracks in our insider trading regime” and announced that he had asked the Staff to provide recommendations on how the SEC might “freshen up” Rule 10b5-1. Gensler detailed a number of specific areas of concern in his remarks. These include:

– The lack of a mandatory “cooling off period” between the time a 10b5-1 plan is adopted and the first trade, which he said might be perceived by some bad actors as a “loophole” to participate in insider trading. Gensler noted that the idea of a cooling off period of between 4 to 6 months had received bipartisan support and should be explored further.

– The ability of insiders to cancel 10b5-1 plans at any time, which allows them to exit a plan while they’re in possession of MNPI.

– The lack of mandatory disclosure requirements regarding the adoption, modification, and terms of Rule 10b5‑1 plans.

– The absence of limits on the number of 10b5-1 plans that insiders can adopt. The ability to adopt multiple plans and cancel them may lead the. With the ability to enter into multiple plans, and potentially to cancel them, Gensler says insiders might have the mistaken belief that they a “free option” to select the most favorable plan to sell under.

Gensler also indicated that the Staff will look into other possible reforms to the rule, “including the intersection with share buybacks.” None of the specific areas of concern that the Chair identified in his remarks comes as any great surprise, and all involve actions that run contrary to consensus “best practices” for 10b5-1 plans. In fact, since Jay Clayton touched on many of these concerns about 10b5-1 plans in a November 2019 speech, this may be one of those rare areas where we might have reason to hope that proposed rule changes might actually receive bipartisan support among the commissioners.

John Jenkins