Firms should be prepared for increased regulatory scrutiny around material nonpublic information (MNPI) and insider trading under the administration of SEC Chair Gary Gensler. In a recent speech at the CFO Network Summit, Gensler noted that 10b5-1 trading plans have led to “real cracks” in the SEC’s insider trading regime. The SEC’s Annual Agenda for 2021 includes a proposed amendment to address concerns about the use of the affirmative defense provisions of Rule 10b5-1.
SEC Rule 10b-5 targets securities fraud, prohibiting the employment of manipulative and deceptive practices, by act or omission, in connection with the purchase or sale of any security. SEC Rule 10b5-1 was enacted in 2000 to address the issue of when insider trading liability arises in connection with a trader's "use" or "knowing possession" of MNPI.
Rule 10b5-1 provides affirmative defenses to allow persons to trade in certain circumstances where it is clear that material non-public information was not a factor in the decision to trade. To satisfy the affirmative defense provision, a person must:
- Be able to demonstrate that they entered into a binding contract, provided trade execution instructions, or adopted a written plan prior to becoming aware of any insider information.
- Be able to demonstrate that the contract, instructions, or plan either specified the purchase amount, price, and date, provided a formula or algorithm for obtaining the amount, price and date, or did not provide the person any subsequent influence over purchase and sale.
- Be able to demonstrate that the purchase or sale that occurred was pursuant to the prior contract, instruction, or plan.
Critics have claimed that Rule 10b5-1 is easily circumvented due to a lack of clarity, regulation, and enforcement. Gensler has indicated that his administration is looking to “freshen up” Rule 10b5-1 and address these concerns, potentially by:
Requiring a cooling off period. Currently there is no waiting period between the adoption of a plan and the first trade—a loophole that Gensler thinks could allow “bad actors” to participate in insider trading.
Putting limits on when plans can be canceled. Right now insiders can cancel a plan even when they are in possession of MNPI.
Mandating disclosures. While some firms and individuals disclose the use of 10b5-1 plans via press releases, or SEC reports or filings, the current rule does not require any disclosure regarding adoption, modification, or terms. Read more about the SEC’s focus on disclosure in their 2021 Annual Agenda.
Imposing 10b5-1 plan limits. The rule has no limits on how many plans a person may create and cancel, leaving a “free option” for insiders to pick and choose the most favorable plan.
Firms can expect greater scrutiny of 10b5-1 plans even as these amendments to the rule are being considered. According to Gensler, “as the rule stands today, cancelling or amending any 10b5-1 plans calls into question whether they were entered into in good faith. If insiders don’t act in good faith when using 10b5-1 plans, those plans will not offer them an affirmative defense.”
Accountability for senior level employees is a global priority. Mandates including the Senior Managers and Certification Regime in the UK, the Banking Executive & Accountability Regime in Australia, the Senior Executive Accountability Regime in Ireland, and the Manager-In-Charge Regime in Hong Kong are putting regulatory focus on individual responsibility. Learn how MCO's Role Monitoring and Assurance solution can help firms of all sizes track roles, functions, responsibilities and activities in compliance with role assurance regimes and regulatory guidelines on individual accountability.
Managing MNPI and Insider Trading is a concern across all levels of the organization, not just for the C-Suite. Section 204A of the Advisers Act requires firms to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by the firm or any of its associated persons. Read more about how MNPI remains a high-risk area for compliance.
To stay compliant and mitigate risk it’s critical that firms keep an accurate record of MNPI and insider information. Firms need to track what information is off limits, and whom that info should be off limits to. That information will constantly shift based on what’s going on in the market and the business. Static spreadsheets won’t help – compliance teams need a dynamic solution that can keep up with the rapid pace of change.
Organizations must maintain insider lists and be prepared to supply the lists to regulators upon request. MCO’s Insider and MNPI Management solution makes insider list management easier by enabling users to create insider lists including individuals and roles/rights assignments, individual accessibility timeframes, and a cross-referenceable hierarchical database of securities listings and company information covering tens of thousands of entities.
The powerful MyComplianceOffice platform facilitates the surveillance and monitoring of potential conflicts of interest across multiple legal entities, business lines and jurisdictions. Firms can reduce their risk of misconduct by identifying and mitigating conflicts of interest across firm transactions, employees and third-party relationships. Contact us today to learn more.