SEC Chairman Gensler has made it clear the commission will soon review and update the regulations of 10b5-1 plans. The
Wall Street Journal recently covered the issue, noting that the plans “accounted for 61% of all insider trades during 2020, up from 30% in 2004.” The article presented what it believes are the most likely targets for reform:
- Cooling off periods – The WSJ notes that Gensler has highlighted this issue in previous speeches. According to the article, nearly 50% of trades occur fewer than 60 days after a plan is implemented and such trades are more likely to avoid losses. Gensler has stated a preference for a 4-6 month cooling off plan after a plan is enacted.
- A 2020 National Association of Stock Plan Professionals study found that almost 80% of companies with plans have a cooling or waiting period. The most common period is 1-3 months with the next most common being a required wait until the next quarter or open trading window.
- Plan cancellation – Currently, regulations do not prohibit canceling a plan even when the executive has access to material non-public information. Given that Gensler has highlighted this as a risk, cancellation will likely be limited. That could mean a defined and limited window for when plans may be canceled, but it also likely means that companies will need to disclose the cancellation procedure.
- Single sale plans – Noting that nearly a third of plans are established for a single sale, the article highlights such plans as a likely target. The SEC may either prohibit limited sale plans, require plans to be active for a certain time period, or limit the number of active plans for a given participant.
- Mandatory disclosure – Currently, insiders are not required to disclose plan modifications. Given the SEC’s current focus on encouraging greater disclosure, this is likely to change. Companies may be required to disclose changes to volume, frequency, and/or price targets in the plans.
The issue is unfortunately dominated by “worst-case scenarios” where press coverage focuses on outlier cases of sales immediately prior to negative news or following positive news. The issue was recently highlighted in stories of pharmaceutical stock sales following contracts or announcements about COVID-19 vaccines.
Overall, the Center believes it likely that some form of all the points discussed will be present in updated regulations. The regulation may simply be amended, or the SEC may publish a proposed rule change and solicit public feedback.
