SEC Approves New Insider Trading Rules

In December 2022, the Securities and Exchange Commission (SEC) voted unanimously to adopt amendments to rule 10b5-1 of the Securities and Exchange Act of 1934. The changes are intended to address concerns about insider trading abuse by executives based on material nonpublic information (MNPI) that harms investors and undermines the integrity of securities markets.

Specifically, the changes:

1. The good faith requirement has been expanded and directors and executives will now have to certify when they create or modify a plan that they are acting in good faith and have no MNPI.
2. Mandate periodic disclosures related to insider trading, including insider trading policies and procedures for directors and officers, and director and officer equity compensation awards made close in time to the company’s disclosure of MNPI.
3. Lengthy “cooling off periods: for directors and officers have been added between the time they establish a plan and the date a first trade can be made.

Changes to the Affirmative Defense Provision in SEC Rule 10b5-1

When the Commission adopted rule 10b5-1 in 2000, it included a safe harbor for companies and insiders that adopt trading plans in good faith and before becoming aware of MNPI. The rule recognized an affirmative defense to insider trading liability if the trade was made pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person’s account, or a written plan adopted when the trader was not aware of material nonpublic information.

Under new changes, the affirmative defense to insider trading liability was updated to include a cooling-off period for directors and officers. The new cooling-off period will be 90 days after a plan is adopted or modified, or two business days after periodic financial reports are disclosed, whichever is later. The cooling-off period is capped at a maximum of 120 days after the plan’s adoption.

The amended rule also requires a 30-day cooling-off period for trading arrangements between people other than issuers, officers, or directors.

Directors and officers who adopt a new plan or modify an existing one must certify that they are not aware of any MNPI about a company or its securities and that they are adopting the plan in good faith.

The new rule limits anyone other than issuers from using multiple overlapping rule 10b5-1 plans, and prohibits anyone other than issuers from relying on the affirmative defense for a single-trade plan more than once during any 12-month period.

The changes do not affect the affirmative defense available under a rule 10b5-1 plan that was entered into prior to the rule’s effective date, unless the plan is modified in a manner that it is treated as an adoption of a new plan.

Updated Disclosure Requirements

Under the new rule, issuers must make quarterly disclosures regarding their use of rule 10b5-1 plans and other written trading arrangements by a registrants’ directors and officers.

Issuers must also report whether they have adopted insider trading policies and procedures, or explain why they have not done so. Issuers will be required to comply with the new disclosure requirements in financial reports and information statements that cover the first full fiscal on or before April 1, 2023.

Officers and directors will also need to disclose whether a reported transaction was made under an affirmative defense arrangement.

Concerns About the New SEC 10b5-1 Rule

Even though the amendments were adopted unanimously, some SEC Commissioners nonetheless expressed concern over the new changes.

Commissioner Mark Uyeda noted that “good faith is an inherently subjective determination” and that "[t]he potential uncertainty of whether a person's actions after his or her adoption of a plan will be deemed—in hindsight—to not constitute good faith, may similarly render amended rule 10b5-1 to be difficult to implement."

Commissioner Hester Peirce expressed concern that the new rule is overly restrictive, noting that

• The cooling-off period is longer than necessary
• The good faith requirement is unnecessary
• Issuers are required to file insider trading policies on EDGAR, when instead they should have been allowed to publish them on their website
• The new rule lacks a hardship exemption
• The new rule fails to allow for subsequently disclosed MNPI.

Despite their concerns, the Commissioners believe the final rule will help bolster faith in the system.

Contact a Philadelphia Federal Defense Attorney

Hope Lefeber is a Philadelphia federal criminal defense attorney whose practice is focused on federal white-collar criminal defense, including financial and securities fraud, tax fraud, business and corporate fraud, criminal tax violations, and other serious crimes.

Ms. Lefeber is highly regarded by her colleagues and has lectured on federal criminal law topics and appeared on TV as a legal expert. She represents high-profile clients in high-stakes cases, including executives at Fortune 500 Companies, businessmen and women, doctors, lawyers, professors, healthcare professionals, and other people who have been charged with crimes in federal court.

If you need an experienced, tough, and tenacious federal white-collar criminal defense lawyer, Hope Lefeber should be your first call. Contact Ms. Lefeber by calling 610-668-7927 or completing the online form.