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The Rule on Insider Trading May Change

In a turnkey statement, the Investor Advisory Committee (IAC), a part of the SEC office, has recommended imposing trading plan disclosures that give executives the power to use “good faith” as a defense against insider trading allegations. This statement comes after SEC chairman Gary Gensler directed SEC executives to strategize on Exchange Act Rule 10b5-1. Both of these significant ideas are likely to work into one another in tightening the SEC restrictions.

Corporate executives and directors are constantly exposed to material non-public information, making it sometimes difficult for them to sell company shares without the risk of insider trading, or at least claims of insider trading. The premise for Rule 10b5-1 was to absolve an executive from being prosecuted as they trade shares in their company so long as it is according to a written plan that has been adopted while not being in possession of material and non-public information.

However, according to the IAC, the pre-written or defined plan could sometimes be skewed towards helping the executive seek opportunities that amount to insider trading in the end. They have cited research to prove how this contradicts the intention behind Rule 10b5-1, and hence the plans may not be in good faith. In line with this, the IAC recommends the;

Insider Trading Rules

  • To ensure that the exact plans are not put in motion within the same quarter in which trades are carried out, a “cooling off” period of at least four months is mandated between when the plan is being adopted and trading.
  • Setting a rule that allows only one active plan and prohibiting multiple plans could lead to overlap and breach of good faith.
  • As against hard copy mails of Form 144, which are destroyed in 90 days, the IAC recommends that it be moved to digital submissions so that spotting of insider trading is more accurate.
  • Mandating disclosure of share numbers scheduled for sale to each of the executives in Proxy statements.
  • Mandating disclosure of the adoption, modification, or cancellation of 10b5-1 plans in Form 8k along with the number of shares covered.
  • Form 4 to be filed by American Depository Receipts (ADRs) and American Depository Shares (ADS) that are filing Form 20-Fs
  • As the instances of trading plan abuse and insider trading rise, so does SEC scrutiny. Therefore, it is not surprising that the potential challenges to the good faith defense under Rule 10b5-1 plans have become an area of discussion.

With the IAC giving advisory to the SEC on regulatory priorities, the IAC has been tasked with approving these recommendations.

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