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SEC updates rules on insider trading

On Behalf of | Jan 10, 2023 | Government Regulation

On December 14, 2022, the Securities and Exchange Commission (SEC) adopted amendments to rule 10b5-1 under 1934’s Securities Exchange Act. The updates include new disclosure requirements to enhance investor protections and affirmative defense against insider trading liability. The changes aim to strengthen investor protections and enable the SEC to recognize and understand how insiders are trading securities using material nonpublic information.
The original spirit of Exchange Act Rule 10b5-1 was to defend corporate companies and insiders who buy and sell company stock as long as they did it in good faith on plans created before they became aware of the information not yet available to the public. Unfortunately, feedback from lawmakers, the courts and others highlighted concern about how the companies and insiders have tried to benefit “opportunistically” from their information, knowing that they had liability protections.
According to SEC Chairman Gary Gensler:
“I believe today’s amendments will help fill those potential gaps. These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that’s a good thing. It helps investors decide where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation.”

The changes

The amendments add cooling-off periods for people other than issuers before trading commence under a Rule 10b5-1 plan. There is also language that all directors and officers must include representation of their plans, which are then certified at the time of the plan. They state that:

  • They are unaware of any nonpublic information regarding the issuer or its securities.
  • They are adopting the plan in good faith and not part of a fraudulent scheme to avoid 10b5-1 rules.

The new modifications go into effect on April 1, 2023, 60 days after publication in the Federal Register.