Representative Waters Introduces Bill to Study Rule 10b5-1 Plans

Representative Maxine Waters (D-CA) introduced a bill to require that the SEC conduct a study on the operation of Rule 10b5-1 plans and modify Exchange Act Rule 10b5-1 in accordance with the results of the study. The bill was co-sponsored by Representative Patrick McHenry (R-NC).

A Rule 10b5‐1 plan is a written plan for trading securities that is adopted by an insider to an issuer, or sometimes by an issuer, and which conforms to Rule 10b5‐1(c). Any person executing pre‐planned transactions pursuant to such a plan established in good faith at a time when that person was unaware of material non‐public information has an affirmative defense against accusations of insider trading, even if actual trades made pursuant to the plan are executed at a time when the individual may be aware of material, non‐public information.

If the bill is adopted, the SEC would be obligated to conduct a study of whether Exchange Act Rule 10b5-1 should be changed to:

  • limit the ability of issuers and issuer insiders to create a plan that specifies “a time when the issuer or issuer insider is permitted to buy or sell securities during issuer-adopted trading windows”;
  • restrict the ability to create multiple trading plans;
  • mandate a delay between the adoption of a trading plan and the execution of the first trade;
  • regulate the number of times that trading plans can be changed or canceled;
  • mandate notifications to the SEC regarding any adoptions, amendments, terminations, and transactions to trading plans; and
  • require boards of issuers that have adopted a trading plan to (i) devise policies covering trading plan practices, (ii) monitor trading plan transactions and (iii) ensure that “issuer policies discuss trading plan use in the context of guidelines or requirements on equity hedging, holding, and ownership.”

Upon completion of the study, the SEC would be required modify Exchange Act Rule 10b5-1 consistent with any findings of the study.

Lofchie Comment: While there is general consensus that the concept behind Rule 10b5-1 plans is very sensible (insiders should be given a means to liquidate their holdings in a controlled fashion without becoming subject to Rule 10b-5 liability), there have also long been been assertions that insiders seem to effect their trading with results that are some materially better than would result from a random walk down Wall Street.  This is a material issue that has the potential to create real distrust as to the operation of the capital markets and merits the undertaking of a study as proposed by the bill.  See, e.g, Letter to SEC Chair Elisse Walter from the Council of Institutional Investors (Dec. 28, 2012).

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