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E-MailMark T. Uyeda is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Commissioner Uyeda, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.
Thank you, Chair Gensler. The Commission initially adopted rule 10b5-1 under the Securities Exchange Act of 1934 in the year 2000[1] and has not revised it since. In the past 22 years, thousands of public company employees, directors, and officers have entered into written plans designed to satisfy rule 10b5-1’s affirmative defenses.[2] These “10b5-1 plans” have received much scrutiny because of concerns that corporate insiders have claimed reliance on an affirmative defense while possibly trading on the basis of material nonpublic information.[3] Today’s amendments are intended to address these concerns, attempting to strike the right balance between (1) eliminating opportunistic behavior and (2) providing a rule that can be implemented on a practical basis. While I support the final amendments, which have been reached through discussions among the commissioners, I hope that market participants will provide the Commission with feedback on whether the right balance was struck.
As noted by some commenters, having a 10b5-1 plan as a viable option for trading is beneficial to public companies and their shareholders and employees.[4] For example, by using 10b5-1 plans, insiders can spread their trades over time, which can decrease market volatility. In contrast, without 10b5-1 plans, insiders may concentrate a high volume of trades within a short period, such as during a company’s trading window. Equity compensation is an important component of employees’ pay packages and align the interests of employees with shareholders. 10b5-1 plans allow employees to monetize equity compensation while complying with the insider trading laws. However, making it difficult for employees to sell their shares of company stock means making that form of compensation less valuable. If so, equity compensation might increase to compensate for increased liquidity risk.
The final amendments provide for a cooling-off period for directors and officers that will be between 90 and 120 days. The cooling-off period is the most effective mechanism to ensure that an insider is not trading “on the basis” of material nonpublic information. An unnecessarily long period may discourage insiders from relying on 10b5-1 plans because of their need for more immediate liquidity.
The final amendments prohibit, with limited exceptions, multiple plans that are overlapping, as well as plans designed to effect the purchase or sale of all securities covered by the plan in a single transaction. For the overlapping plan prohibition, the provision aims to address concerns that insiders are adopting multiple plans and selectively cancelling the unfavorable plans.[5] For the single-trade plan prohibition, the rationale seems to be an academic study that found that single-trade plans consistently outperform the market.[6] But the final rule’s use of prophylactic prohibitions to address both situations may unnecessarily restrict the use of overlapping plans or single-trade plans established for legitimate reasons.
The final amendments introduce the broad concept of “good faith” for an insider’s actions with respect to a 10b5-1 plan after adoption. Good faith is an inherently subjective determination. The 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.
The final amendments require some of the new reporting to be made using structured data. While I support the use of structured data for material disclosure in SEC filings – making them far more useful than a static HTML or ASCII filing – I am concerned about the lack of a plan to implement structured data reporting on a more thoughtful and comprehensive basis. Instead, the Commission’s implementation has been random and piecemeal – largely for new executive compensation and proxy voting rules.[7] The Commission has not given any consideration as to what material, existing disclosures ought to be prioritized for reporting as structured data, like management’s discussion and analysis. This lack of an overall plan is a shortcoming of the Commission and one that should be rectified.
With respect to today’s amendments to Item 402 of Regulation S-K, this will be the third change to that item since I became a commissioner five-and-a-half months ago.[8] The addition of paragraph (x) to Item 402 is puzzling because (1) the required narrative disclosure is arguably already required by the Commission’s existing compensation discussion and analysis rules[9] and (2) the information required by the tabular disclosure is otherwise publicly available. Before we reach the end of the alphabet for Item 402, I hope that the Commission carefully weighs the effectiveness of future executive compensation disclosure versus its costs.
Despite these concerns, I support the recommendation and look forward to any feedback on the final amendments. I thank the staff of the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their work, as well as Chair Gensler’s corporation finance counsel. I would like to specifically acknowledge Felicia Kung, Sean Harrison, John Fieldsend, and Pearl Crawley from the Corporation Finance rulemaking office for the many hours they have worked over the last few days to bring this recommendation to a conclusion. The process started with a detailed comment summary, which allowed me to more fully understand the issues raised by commenters. This facilitated thoughtful conversations with the Chair, my fellow commissioners, and their staff, to help outline a final rule that the Corporation Finance staff could further develop. So, thank you on a process that worked quite well.
Endnotes
1Selective Disclosure and Insider Trading, Release No. 33-7881 (Aug. 15, 2000) [64 FR 51716 (Feb. 15, 2022)], available at https://www.sec.gov/rules/final/33-7881.htm. (go back)
2In 2021, alone, at least 5,800 directors and officers at 1,600 companies traded pursuant to a rule 10b5-1 plan. See Section V.B.1 of Insider Trading Arrangements and Related Disclosures, Release No. 33-11138 (Dec. 14, 2022), available at https://www.sec.gov/rules/final/2022/33-11138.pdf (the “Adopting Release”).(go back)
3See Section I of the Adopting Release.(go back)
4See, e.g., letters from Simpson Thacher & Bartlett LLP and Davis Polk & Wardwell LLP.(go back)
5See Section II.A.3.a of the Adopting Release.(go back)
6Id.(go back)
7See Enhanced Reporting on Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Release No. 33-11131 (Nov. 2, 2022), available at https://www.sec.gov/rules/final/2022/33-11131.pdf; Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-11126 (Oct. 26, 2022), [87 FR 73076 (Nov. 28, 2022)] (“Clawbacks”), available at https://www.sec.gov/rules/final/2022/33-11126.pdf; and Pay Versus Performance, Release No. 34-95607 (Aug. 25, 2022) [87 FR 55134 (Sept. 8, 2022)] (“Pay Versus Performance”), available at https://www.sec.gov/rules/final/2022/34-95607.pdf.(go back)
8Pay Versus Performance, supra note 7, added paragraph (v) to Item 402 and Clawbacks, supra note 7, added paragraph (w) to Item 402.(go back)
9See 17 CFR 229.402(b)(2)(iv) and Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158, 53163-53164 (Sept. 8, 2006)], available at https://www.sec.gov/rules/final/2006/33-8732a.pdf.(go back)
