The Securities Act of 1933 (“Securities Act”) strives to allow properly informed investors to safely circulate capital in the securities realm, which in effect permeates into our economy and society.[1] Safe circulation gives investors a sense of confidence in their investing activity, and more activity translates to a thriving economy.[2] Thus, it is imperative for securities laws “to prohibit fraudulent activities of any kind in connection with the offer, purchase or sale of securities.”[3] To curtail such activity, the Securities and Exchange Commission (“SEC”) regulates the securities industry by penalizing entities and persons whose activity violates the regulations of the Securities Act.[4] However, the reality is that fraudulent activity look like legal ordinary conduct.[5] Employees of a given corporation can benefit from insider information acquired during the course of their employment.[6] At first glance, there does not seem to be anything wrong with the idea.[7] However, the use of manipulative and deceptive devices by officers, directors, and other insiders of public companies exists.[8] In such cases, these insiders may purchase and sell their company’s stock while in the possession of material non-public information, which some believe is detrimental to traders without such information.[9] Accordingly, the Securities Act addresses these issues and Rule 10b5-1 covers trading on the basis of material nonpublic information in insider trading cases.[10]
Since the 1930s, there have been numerous attempts to improve securities regulations under the Securities Act.[11] However, in the past two decades, a number of reformative acts were passed to address current issues.[12] In an attempt to reduce fraud and raise the standard of corporate responsibility and financial disclosures, the Bush administration passed the Sarbanes-Oxley Act of 2002.[13] The Public Company Accounting Oversight Board (“PCAOB”) was created to monitor public company audits.[14] In 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act which aimed to “reshape the U.S. regulatory system,”[15] and focused on financial regulations, corporate responsibility and necessary disclosures.[16] However, the reform continued to transform its focus with the Jumpstart Our Business Startups Act (“JOBS Act”), which was passed in 2012 to help businesses acquire profitable funds in public markets by minimizing regulatory requirements.[17]
A current issue in need of reform concerns the adoption of trading plans. Depending on the asserted affirmative defense, not all trading is subject to penalties.[18] For example, a trade made with material nonpublic information may be justified if the trading transaction was established in writing prior to the knowledge of material nonpublic information.[19] Such trading plans must be made in good faith.[20] However, not all trades are made in such a manner and do evade Rule 10b5-1. Trade plans may be investment schemes allowing entities and persons to purchase and sell securities by securing an affirmative action defense to insider trading.[21] Thus, there is growing concern regarding efficiency of current regulations and changes to Rule 10b-5 may arise in the near future.[22]
In late 2012, the Council of Institutional Investors (“CII”) shared their concerns about the growing misuse of trading tactics, as public companies have strategically adopted plans not aligned with the spirit of Rule 10b5-1.[23] Further, the CII proposed its corporate governance practices, which require an early announcement or at least a 30-day advance notice to sell stock.[24] The CII practices also required immediate disclosure of any adopted 10b5-1 plans, amendments, terminations and transactions.[25] Moreover, where plans are adopted, the CII suggests the company’s board implement policies accordingly, monitor relevant transactions continuously, and include guidelines on equity hedging, holding and ownership.[26] However, these recommendations were not incorporated in Rule 10b5-1 and had minimal impact in the securities realm.[27] With that said, CII practices are now facing positive responses in trading plan reforms.[28]
The 116th Congress has proposed the Promoting Transparent Standards for Corporate Insiders Act (“Corporate Insiders Act”) which requires the SEC “to carry out a study of Rule 10b5-1 trading plans.”[29] Accordingly, the SEC is to determine whether Rule 10b5-1 should be amended to limit the ability to adopt plans, establish mandatory delays following a plan adoption, and require immediate disclosures of plans thus,[30] mirroring the CII practices.[31] The Act allots give the SEC one year to perform an extensive investigation to make this determination.[32] During the course of the investigation, the SEC must consider whether the amendments would add clarity to the existing limits or take away from the number of public companies or capital in the market, including desirability of executive positions.[33] Therefore, the SEC must carefully consider the effects of any changes.[34] There are three possible courses of action for the SEC: (1) advise Congress to adopt the proposed Rule 10b-5 amendments in the Corporate Insiders Act if a promising investigation is performed (2) advocate for inaction if the proposed amendments are ineffective in addressing regulatory concerns; or (3) propose potential alternative solutions or patterns that can be revealed in the course of the investigation.[35]
Regardless of the course of action that follows the SEC’s investigation, Congress will ultimately be able to make an informed decision of whether the Corporate Insiders Act will appropriately address the issues in current securities regulatory laws.[36] It is imperative to remember the primary goal of Rule 10b5-1 reform: to impede the use of insider trading inconsistent with the spirit of securities law.[37] Dedicated securities regulators are working to provide efficient regulations and strive to align the current regulatory system with the founding purposes of securities laws.[38] Thus, the potential of groundbreaking changes to securities regulatory laws are encouraging in the near future.[39]
[1] The Laws that Govern the Securities Industry, U.S. Sec. and Exch. Comm’n, https://www.sec.gov/answers/about-lawsshtml.html#secact1933 (last visited Feb. 1, 2019).
[2] Id.
[3] See id.
[4] See id.
[5] A Guide to Rule 10b5-1 Plans, Harvard L. Sch. F., https://corpgov.law.harvard.edu/2016/03/24/a-guide-to-rule-10b5-1-plans/ (last visited Feb. 1, 2019).
[6] Rule 10b5-1 Trading Plans in the Current Environment: The Importance of Doing It Right, Am. B. Ass’n., http://apps.americanbar.org/buslaw/blt/content/2013/02/article-06-scheer.shtml (last visited Feb. 1, 2019).
[7] Id.
[8] See id.
[9] See A Guide to Rule 10b5-1 Plans, supra note 5.
[10] 17 C.F.R.§ 240.10b5-1 (2000), https://www.law.cornell.edu/cfr/text/17/240.10b5-1.
[11] The Laws that Govern the Securities Industry, U.S. Sec. and Exch. Comm’n, https://www.sec.gov/answers/about-lawsshtml.html#secact1933 (last visited Feb. 1, 2019).
[12] Id.
[13] The Sarbanes-Oxley Act, Sarbanes-Oxley Act 2002, http://www.soxlaw.com/ 101 (last visited Feb. 9, 2019).
[14] Id.
[15] See 17 C.F.R.§ 240.10b5-1, supra note 10.
[16] Dodd-Frank Act, History, https://www.history.com/topics/21st-century/dodd-frank-act (last visited Feb. 9, 2019).
[17] See 17 C.F.R.§ 240.10b5-1, supra note 10.
[18] See U.S. Sec. and Exch. Comm’n, supra note 1.
[19] See Am. B. Ass’n.,supra note 6.
[20] Id.
[21] See A Guide to Rule 10b5-1 Plans, supra note 5.
[22] Institutional Investor Group Praises Reintroduced Bill on Rule 10b5-1 Trading Plans, Wolters Kluwer: Sec. Reg. Daily(Jan. 23, 2019), http://www.dailyreportingsuite.com/securities/news/SRD20190123.
[23] Letter from Jeffrey P. Mahoney, Gen. Counsel, Council of Institutional Invs., to Elisse B. Walter, Chairman, Sec. Exch. Comm’n. (Dec. 28, 2012), https://www.cii.org/files/issues_and_advocacy/correspondence/2012/12_28_12_cii_letter_to_sec_rule%20_10b5-1_trading_plans.pdf.
[24] Id.
[25] See id.
[26] See Wolters Kluwer: Sec. Reg. Daily, supra note 22.
[27] Letter from Jeffrey P. Mahoney, Gen. Counsel, Council of Institutional Invs.,to Maxine Waters and Patrick T. McHenry, Comm. on Fin. Servs./H.R. (Jan. 22, 2019), http://business.cch.com/srd/January222019Rule10b5-1Letterfinal.pdf. [hereinafter “Letter”]
[28] Id.
[29] Promoting Transparent Standards for Corporate Insiders Act, H.R.624, 116th Cong. (as reported by Comm. On Fin. Serv., 2019).
[30] Id.
[31] See Am. B. Ass’n., supra note 6.
[32] See A Guide to Rule 10b5-1 Plans, supra note 5.
[33] See Sec. Exch. Comm’n., supra note 23.
[34] Id.
[35] Promoting Transparent Standards for Corporate Insiders Act, H.R.624, 116th Cong. (as reported by Comm. On Fin. Serv., 2019).
[36] Id.
[37] See Sarbanes-Oxley Act 2002, supra note 13.
[38] See Letter, supra note 27.
[39] See A Guide to Rule 10b5-1 Plans, supra note 5.
