Back in December 2022, the Securities and Exchange Commission (SEC) adopted amendments to Rule 10b5-1. This is the SEC regulation that governs the use of pre-arranged trading plans by corporate insiders, such as company directors and officers.
The new amendments, in the words of the SEC, are “designed to address concerns about abuse of the rule to trade securities opportunistically on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets.” The new changes went into effect at the end of February 2023.
What does Rule 10b5-1 do?
Also called the Exchange Act Rule, Rule 10b5-1 provides an affirmative defense against accusations of insider trading for corporate officials, allowing them to trade company stock so long as they adopted their plans to buy or sell before they learned any nonpublic information that could affect stock values.
Unfortunately, multiple studies indicate that the rule was giving corporate insiders who used it an edge on their trades over those who did not. This has raised concerns that the affirmative defense was being manipulated into a sort of loophole that was undermining the market.
The changes to Rule 10b5-1 include:
- A mandatory “cooling-off period” once a plan is adopted or modified, which varies according to both the corporate insider’s position with their company and the type of action being taken
- New limitations on how many trading plans are allowed at once, which generally restrict corporate insiders from using multiple plans at the same time
- Extensive new disclosure requirements that have to be completed both quarterly and annually, as well as disclosures surrounding the timing of awards of stock options
In addition, directors and officers will now be required to personally certify that they are acting in good faith when they create their trading plans, and not using any material nonpublic knowledge to their benefit or to avoid the rule’s prohibitions.
Understanding your obligations under Rule 10b5-1 can be difficult without experienced legal guidance. Learning more can help you avoid unnecessary regulatory investigations.