A long-time insider expert shares the important Rule 10b5-1 changes and their impacts.
Beginning April 1, 2023, companies will begin following the SEC’s largest overhaul to Rule 10b5-1 since the rule’s inception in 2000. The rule changes will have meaningful impacts both on the level of disclosure around 10b5-1 plans and transactions and on insider behavior.
In this article, I’ll dive into upcoming changes to Rule 10b5-1 and share the impacts they may have.
To boil it down to a simple rule, 10b5-1 plans allow insiders to enter into a pre-arranged trading plan when their trading window is open. The intent is to execute future transactions in an automated fashion, when the trading window may be closed.
Rule 10b5-1 was adopted by the Securities and Exchange Commission in 2000 as a result of years of efforts to clarify insider trading regulations related to an insider’s legal liability with regards to stock trades when they are in possession of and not in possession of material, non-public information.
To set up a 10b5-1 plan, insiders enter into a binding contract with a third party, usually a broker, with specific instructions on when to execute trades.
There are several changes around disclosure and trading rules coming. We’ve outlined them below in broad strokes. Our interpretation of the impact of the rule changes is based on our longstanding expertise in Rule 10b5-1 selling, but to a certain extent, we will have to wait and see how company and insider behavior changes before we understand the full impact.
On Form 4s, insiders must indicate if a 10b5-1 plan is being used and disclose the adoption date.
Old Rule: Insiders did not have to indicate if a transaction was conducted via a 10b5-1 plan. Even if they did indicate 10b5-1 plan use, they did not have to disclose when the plan was adopted.
New Rule: Insiders will be required to note if a transaction was conducted via a 10b5-1 plan and will be required to disclose the plan’s adoption date.
VerityData was already capturing 10b5-1 plan adoption dates wherever they were disclosed and databasing them. We are thus well positioned to immediately begin capturing all of the new data as soon as the rule change goes into effect. We already use 10b5-1 adoption dates to contextualize insider activity, and mandated disclosure of plan adoption dates will remove some of the gaps that currently exist in this data set.
In 10Ks/Qs, companies will be providing a quarterly disclosure of 10b5-1 plans adopted or terminated during the quarter. The disclosure will include adoption date, termination date, and the number of shares to be sold.
Old Rule: Disclosure of the details of a 10b5-1 plan was not required and was very rare.
New Rule: We will be getting a snapshot of key data related to 10b5-1 plans each quarter.
As noted above, VerityData was already capturing 10b5-1 plan adoption dates and other related data wherever it was disclosed and then databasing it. This new rule will allow us to considerably expand the number and quality of datapoints associated with each plan. Of particular interest will be the disclosure of each plan’s duration and shares to be sold as this will give new insights into insider behavior.
Old Rule: Insiders could adopt a 10b5-1 plan and sell via that plan effective immediately.
New Rule: Insiders must wait 90 days from plan adoption to first sale.
The new mandatory cooling-off period brings the rule more in line with its intended purpose as quick-triggering 10b5-1 plans afforded insiders the protections of the rule without putting enough time between the decision to trade and the trade itself. 30-day waiting periods are very common under the old rule, so we will see those pushed out to 90 days. Nonetheless, under the old rule, insiders frequently embedded opportunistic selling behaviors in plans that first triggered 90 days or more after adoption. We don’t expect this to change.
Old Rule: Insiders could have as many 10b5-1 plans running simultaneously as they wanted.
New Rule: Insiders may only have a single 10b5-1 plan running at a time (excluding tax withholding-related transactions which can be executed via a second concurrent plan).
In practice, it has been rare for insiders to deploy multiple concurrent trading plans, and they are most often used to manage transactions from different entities (i.e. one plan sells from direct holdings and another sells from a trust.) We do not expect a big impact on insider behavior from this change.
Old Rule: Because disclosure of insider trading policies and procedures was not mandated, actual disclosure of insider trading policy information was highly inconsistent.
New Rule: Companies will now be required to annually disclose policies and procedures related to insider buying and selling.
Due to the incomplete and haphazard nature of this information, it has previously been difficult to make clear comparisons between companies to see if their policies deviated from one another. With this new rule, we will have much greater visibility into these policies and will be able to capture them and glean insights.
Old Rule: No rule existed. This is completely new.
New Rule: Companies will now be required to disclose a table quarterly listing any equity awards that closely coincided with the release of material non-public information (e.g. earnings).
The SEC has clearly been concerned that companies may be tempted to time equity awards in order to benefit from material announcements. In practice, we believe that this rule will likely scare companies off from doing this, resulting in the table being rarely used, though we will monitor with interest.
Given our longstanding expertise around 10b5-1 selling and the fact that our platform captures key information around 10b5-1 plans, including 10b5-1 plan adoption dates and algorithmically derived 10b5-1 price triggers, we will be monitoring the rollout of these changes closely and are well-positioned to continue providing the cleanest and richest 10b5-1-related data and insights available.
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