[authors: Carlos Juarez, Melissa Pfeuffer]
During its meeting on June 10, the Securities and Exchange Commission’s Investor Advisory Committee held a panel discussion regarding 10b5-1 plans, welcoming three market participants and academics. As we previously blogged, SEC Chair Gary Gensler asked for recommendations for the Commission’s consideration on how to “freshen up Rule 10b5-1.”
Dr. Dan Taylor, Associate Professor at the Wharton School of the University of Pennsylvania, provided an academic primer to kick off the panel discussion. While covering the mechanics of Rule 10b5-1 plans, Dr. Taylor highlighted the ability for Rule 10b5-1 plans to be cancelled while a holder was in possession of material non-public information (MNPI), and noted that there are no requirements for insiders to disclose the adoption, modification, or cancellation of trading plans. Dr. Taylor argued that these attributes undermine investor confidence and prevent proactive risk assessments and policing, while also limiting access to information by institutional investors. Further, he shed light on the outdated filing procedures of Form 144, which can contain disclosure of trading plans.
Dr. Taylor suggested that policy recommendations need to balance the needs of executives for liquidity, the value of giving executives an affirmative defense against insider trading claims (which is the primary purpose of a Rule 10b5-1 plan), and investors’ access to information relating to executives’ trades. With regard to trades, he recommended requiring all companies, including foreign issuers, to disclose trades of officers and directors on EDGAR; making Form 144 filings electronic, as proposed by the SEC (see our blog post); and modifying Form 4 to require disclosure of trades made pursuant to 10b5-1 plans. With regard to trading plans themselves, Dr. Taylor proposed that the SEC require the disclosure of the number of shares covered by a trading plan for each named executive officer in a company’s annual proxy statement; requiring disclosure of the adoption, modification, and/or cancellation of trading plans by insiders on a Form 8-K; and adopting former SEC Chair Clayton’s suggested four to six month cooling off period.
Keir Gumbs, Vice President, Deputy General Counsel and Deputy Corporate Secretary for Uber Technologies, provided a corporate and uniquely tech perspective on 10b5-1 plans. Mr. Gumbs argued that 10b5-1 plans are meant to provide clarity, rather than liquidity, for both companies and insiders. As information is more easily accessible and shared within emerging tech companies, Mr. Gumbs explained that more tech companies are instituting blackout periods for all employees, instead of just to executives and directors who have traditionally been subject to blackout periods. He also highlighted the increased equity exposure many employees are subject to, given the equity-heavy compensation structures primarily seen in tech companies. Adopting 10b5-1 plans allow for liquidity and regular payouts to employees that may need access for any number of reasons. Mr. Gumbs reiterated that adopting 10b5-1 plans allow companies and individuals to mitigate risks against insider trading charges. With regard to recommendations, Mr. Gumbs suggested that rulemaking relating to 10b5-1 plans should be data-driven.
Jeff Mahoney, General Counsel to the Council of Institutional Investors (the “Council”), echoed Dr. Taylor’s call for enhanced disclosure requirements. Strengthening the public disclosures would “lessen the overall lack of transparency in the plans,” according to Mr. Mahoney. Mr. Mahoney concluded by stating “…when insiders transact their own company stock through 10b5-1 plans, investors agree that the capital markets can become more eroded.”
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