On June 29, 2022, the Wall Street Journal (WSJ) reported the results of its analysis of 75,000 trades by corporate insiders who executed transactions under Rule 10b5-1 plans. WSJ found that 20 percent of insiders sold shares within 60 trading days of adopting a Rule 10b5-1 plan and that those traders collectively earned $500 million more in profits than they would have if they sold stock three months later. WSJ also reported that these sales preceded a decrease in share price more often than when insiders waited to trade. On the other hand, the WSJ analysis suggests that insiders who waited 120 days or more to trade after adopting a Rule 10b5-1 plan did not earn any "unusual gains." 

Scrutiny of Rule 10b5-1 plans is not new. More than a year ago, Gary Gensler, U.S. Securities and Exchange Commission (SEC) Chairman, announced that such pre-set trading plans, which can provide an affirmative defense to insider trading allegations when entered into without the benefit of material non-public information, will be a focus of the SEC's regulatory agenda. Chair Gensler stated that Rule 10b5-1 plans have led to "real cracks in our insider trading regime," and faulted the current rules, which do not require cooling off periods or limitations on when plans can be cancelled, among other concerns. The SEC proposed amendments to the 10b5-1 rules to address these issues in December 2021, though revised rules have not yet been adopted.¹

At first glance, the trading patterns reported by WSJ suggest that a not insignificant number of insiders are making opportunistic use of their Rule 10b5-1 plans. Given the SEC's already stated interest, public companies and corporate insiders should anticipate heightened SEC scrutiny around trading of company stock by corporate insiders as well as sweep-style inquiries to assess the compliance of Rule 10b5-1 plans with existing SEC rules and best practices. We expect the SEC will make use of its sophisticated data analytics tools to apply heightened scrutiny to trades executed by corporate insiders and will be keenly focused on trades executed in advance of major corporate events. 

We urge public companies and corporate insiders to act now to review their Rule 10b5-1 plans to confirm compliance with SEC rules and best practices. We anticipate that SEC sweeps will focus on, among other factors, a company's controls related to the adoption, modification, and cancellation of Rule 10b5-1 plans including its assessment of whether company insiders possess material non-public information and whether the company requires a cooling off period after adoption. 

For more information, please contact:

Sandra M. Hanna, shanna@milchev.com, 202-626-5902

Margot Laporte, mlaporte@milchev.com, 202-626-5861

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¹Rule 10b5-1 and Insider Trading, 87 Fed. Reg. 8686 (proposed Dec. 15, 2021).

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