New Amendment on the Horizon for Section 10(b)

The Securities and Exchange Commission (“SEC”) will likely amend 17 CFR § 240.10b5-1 (“Rule 10b5”). (Peter Rasmussen and Preston Brewer, Bloomberg Law). The SEC introduced Rule 10b5 more than twenty years ago to provide clarity on insider trading. Id.

Section 10(b) of the Securities Exchange Act of 1934 (“Section 10”) strictly prohibits “manipulative and deceptive devices,” but what are manipulative and deceptive devices? According to the SEC, the term includes “the purchase or sale of a security of any issuer on the basis of material nonpublic information.” Id. However, there is an exception. (Richard Satran, Thomson Reuters).  

An insider can sell or purchase a security while aware of material non-public information if an insider can prove that he or she sold or purchased the security in good faith and in accordance with a previously approved written plan or instruction that was instituted before the insider was aware of any material nonpublic information (“10b5 Plan”). (Peter Rasmussen and Preston Brewer, Bloomberg Law). The 10b5 Plan “must either expressly specify the amount, price, and date” of every transaction or provide a formula to calculate. Id. However, despite the requirements already imposed, SEC Chairman Gary Gensler and others believe that Rule 10b5 still contains several loopholes. This belief prompted an SEC subcommittee to recommend the following amendments: (1) a four  month “cooling-off” period that will begin when the plan is implemented; (2) additional cancellation disclosures; and (3) a prohibition of concurrent or simultaneous 10b5 Plans. (Richard Satran, Thomson Reuters). 

The SEC subcommittee is of the opinion that a four-month cooling-off period will help prevent insider trading. (Peter Rasmussen and Preston Brewer, Bloomberg Law). Presumably, the four month period will inhibit a trade before financial statements for the current quarter are published. Id. Opponents claim that a uniform approach is not the best solution because, in part, many public companies already have periods where trading is prohibited. (Richard Satran, Thomson Reuters). If the two conflict, then an insider may be excluded from trading all together. Id.

Disclosure is also a key component. (Peter Rasmussen, Bloomberg Law). The committee recommended that insiders be required to disclose when they cancel a 10b5 Plan. Id. There is currently no such requirement. Id. Proponents were hoping for an outright prohibition. Id. However, the SEC subcommittee believes that disclosure will be sufficient in this instance to adequately protect investors. Id.

Finally, the SEC subcommittee recommended that the SEC prohibit concurrent or simultaneous 10b5 Plans. (Richard Satran, Thomson Reuters). Currently, there is not a limit as to the number of concurrent 10b5 plans that an insider can produce. Id. Therefore, an insider can adopt several conflicting 10b5 plans without any risk and cancel a 10b5 plan at a later date when it is clear which 10b5 Plan will be profitable. (Peter Rasmussen and Preston Brewer, Bloomberg Law).

The SEC will amend Rule 10b5 in one way or another. Id. Adopting the subcommittee’s recommendation is the most prudent and practical approach. It will all but eradicate insider trading without barring an insider from trading all together.