Officers and directors of public companies run a risk, in trading their company shares, that they will be liable to injured buyers or sellers of their shares if, shortly after the trade, the stock price moves and makes clear that the trading officer or director received an unusual economic advantage.  Since it is always possible that a trader will at a given moment know something more than the general public, how can officers and directors safely trade their company shares without risking accusations of insider information?

About two decades ago the SEC adopted Rule 10b5-1 which, in concept, allowed officers and directors to set up a plan by which at certain future dates their broker would buy or sell shares, or would buy or sell if certain price points were hit; the Rule required a written Plan that worked automatically at such later time so that there was little chance that the transaction reflected inside information; after all, the transaction was set a long time before (and was set up at a moment when the trader stated that they did not then have any insider information unknown to the general public).

Certain practices became common over time which “gamed” the system, the result no doubt of failure to define the permitted behavior properly and thus allowing corporate lawyers to, shall we say, stay within the letter if not the spirit of the law.  For the last year the SEC has been considering closing loopholes and the SEC last month issued final Rules doing just that, effective early 2023.

As with much SEC regulation, it is both technical and precise; as always, these posts are general and are not legal advice and should not be relied upon; if you are an officer or director, you have your own lawyer and you should consult there.  Generally speaking, aside from heightened disclosure about these plans, the major substantive changes are set forth below. I note that for once, all five SEC Commissioners, regardless of party, voted in favor.

• Once a plan is set up, no trading can occur earlier than between 90 and 120 days (details control), making doubly sure no non-public information is being used by the trader
• trading executives and directors must assert they are setting up the plan in good faith and not to circumvent regulation (this will assist regulators in penalizing those who later abuse the system)
• Control use of multiple plans which can be maneuvered to in fact effect trades under the plan based on inside information (for example, under plans a proposed transaction can be cancelled and then a trade that is benefited by then-current information can be “automatically” effected under a different over-lapping plan)
• limitations on single-trade plans.

All this becomes effective shortly. Officers and directors are well advised to consult promptly with their own counsel.