As we head into 2023, Steve Brown, Managing Director at StarCompliance, assesses the state of financial services compliance and provides an overview of the key regulatory developments that regulated firms need to be aware of and prepare to comply with in the year ahead. In the first of his two-part blog series, Steve takes a look at insider trading and what the amendments to SEC Rule 10b5-1 mean for publicly traded companies (i.e. corporate issuers of securities).
INSIDER TRADING
While compliance with market abuse regulations has long been a key focus for financial services firms, it has largely been in the peripheral vision of corporate issuers of securities, which have typically been more concerned with bribery, data protection, and supply chain compliance issues, among others.
In December 2022, the SEC adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934. Rule 10b5-1 was adopted over two decades ago to provide an affirmative defense against allegations of insider trading for engaging in transactions in securities, even while in possession of material nonpublic information at the time of trading, through plans that are set up in advance.
Since the adoption of the rule, academic studies have suggested that insiders with Rule 10b5-1 plans may achieve better returns than those not trading pursuant to Rule 10b5-1 plans. Those studies, as well as situations where insiders appeared to conduct especially profitable transactions pursuant to Rule 10b5-1 plans, created regulatory questions about the use of Rule 10b5-1 plans by issuers and insiders, which resulted in calls for change to the rule.
The following newly adopted amendments are designed to address those concerns and prevent corporate insider trading through 10b5-1 plans opportunistically on the basis of MNPI:
1. New cooling-off periods
Previously under Rule 10b5-1 plans, a corporate insider was not required to wait between adopting a new 10b5-1 Plan and making the first trade under such plan. The amended rule now mandates a “cooling-off” period between the adoption of a 10b5-1 plan and when trades may begin, although no cooling-off period is required for issuers.
2. Limitations on overlapping plans
Interestingly, the affirmative defense under Rule 10b5-1(c)(1) will not be available for any trades by persons, other than the issuer, that have established multiple overlapping trading arrangements. The rule precludes separate, overlapping arrangements even where each relates to a different class of securities of the same issuer. The rule will not restrict a person from maintaining separate trading arrangements at the same time, so long as trades under the later-commencing plan do not commence until the completion or expiration of the earlier plan.
3. New representations
Directors and officers are required to certify at the time of the adoption of a new or modified 10b5-1 Plan, that: (1) they are not aware of MNPI about the issuer or its securities, and (2) they are adopting the 10b5-1 Plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5. All other persons entering into a 10b5-1 plan must also certify they are acting in good faith when entering into such a 10b5-1 plan.
4. Enhanced disclosure
5. Reporting transactions and gifts
In the proposing release, the SEC noted that the delayed reporting of gifts on Form 5 may allow Section 16 reporting persons to engage in what it perceives as problematic practices involving gifts of equity securities, such as making stock gifts while in possession of MNPI or backdating stock gifts to maximize the tax benefits associated with such gifts. The SEC sought to address these practices by requiring that all "bona fide" gifts of stock by Section 16 directors and officers be reported on Form 4 by the end of the second business day following the date of any such gift.
PUBLIC COMPANY CONSIDERATIONS AND BEST PRACTICES
The amendments to Rule 10b5-1 significantly expand the requirements for public companies and insiders. As such, public companies may wish to consider taking the following actions:
HOW CAN FINANCIAL COMPLIANCE SOFTWARE HELP YOU IN 2023?
Automating as many manual compliance processes as possible is pivotal to remaining compliant in the evolving regulatory landscape. Compliance teams increasingly need to ‘do more with less’, which makes financial compliance software invaluable for increasing efficiency and driving growth, eliminating errors, reducing costs, and freeing up compliance officers to focus on critical tasks.
A technology solution designed to meet the stringent compliance requirements of regulated firms can effectively monitor and track employee compliance with the firm’s key policies. It will automate tedious, time-consuming, and error-prone manual processes and allow you to understand if the business is complying with regulatory requirements.
In addition to providing a 360-degree view of employee activity – with nothing falling through the cracks – financial compliance software helps ensure the security of sensitive information, ultimately protecting the firm’s reputation.
Interested in learning more? Join Steve Brown, Gary Muchmore, and Terry Dawson for a virtual fireside chat and interactive Q&A on Wednesday, February 15, 2023, at 9AM ET, for a deeper dive into these topics and to address the latest regulatory shifts in 2023.