Statement on Rule 10b5-1 and Insider Trading Proposing Release
Dec. 15, 2021
Thank you, Chair Gensler. Given our many policy disagreements and—spoiler alert—my resulting dissents on various matters today, I was beginning to feel a bit like the Grinch this holiday season. Singing in Whoville on Christmas morning caused the Grinch’s heart to grow three sizes that day, but it was my fellow Commissioners’ willingness to collaborate and engage on this release with the help of Renee Jones and her staff and Corey Klemmer on the Chair’s staff that won me over and led me to support this proposal.
I support today’s proposal to address potential abuses of Rule 10b5-1(c) trading arrangements. The proposed cooling-off periods of 120 days for officers and directors and 30 days for issuers, and restrictions on multiple overlapping plans strike me as reasonable changes designed to ward off abuses in this context. The proposed limitation of one single-trade plan during any twelve-month period also seems narrowly tailored to address problematic behavior while preserving the need of insiders to seek liquidity in an emergency or one-off situation.
At the risk of sounding like a seasick crocodile, other aspects of the proposal raise concerns for me and I am eager to hear commenters’ views on these matters. First, the proposed certification requirement would require a director or officer to certify at the time of the adoption of a plan that she is not aware of material nonpublic information about the issuer and that she is adopting the plan in good faith. The director or officer would be expected to retain this certification for ten years. Is the minimal benefit of reinforcing existing obligations under Rule 10b5-1 outweighed by the burdens associated with this requirement? The release notes that the proposed certification would not be an independent basis for liability, but should we specify that in the text of the rule itself?
Second, the proposed condition that the plan be “operated” in good faith may raise an unintended incentive for directors or officers to consider their Rule 10b5-1 plans in connection with corporate actions long after establishing their plans. The general idea behind a Rule 10b5-1 plan is for the director or officer to “set it and forget it” to ensure that she is not trading on the basis of material nonpublic information. Are we inadvertently rendering the safe harbor a “sort-of safe harbor” by making its availability contingent on ongoing good faith to be judged in hindsight?
Third, are the proposed disclosure requirements relating to insider trading policies and procedures necessary? Fourth, the proposed disclosure requirements relating to spring-loaded options seem designed to discourage the use of such equity-based compensation. I do not support the indirect regulation of corporate activity through our disclosure rules and hope that commenters will provide insights on the materiality of the proposed disclosures and how it will affect executive compensation decision-making.
Thank you again to the Chair and his staff, the staff of the Division of Corporation Finance, the Division of Economic and Risk Analysis, the Office of General Counsel, and others throughout the building for your hard work on this release.