It was a busy day for the Securities and Exchange Commission (SEC) on December 14 as the regulator published a slew of announcements covering the adoption of rule changes, proposals to amend existing regulations, and an attempt to establish a groundbreaking standard on best execution.

Amendments modernizing Rule 10b5-1 in order to enhance investor protection against insider trading were adopted. The SEC said that: “Collectively, the final rules aim to strengthen investor protections concerning insider trading and to help shareholders understand when and how insiders are trading in securities for which they may at times have material nonpublic information.”

The rule changes update conditions that must be met for the 10b5-1 affirmative defense. They;

• require cooling-off periods for persons other than issuers before trading can commence under a Rule 10b5-1 plan. Everyone entering into a Rule 10b5-1 plan must act in good faith with respect to the plan;
• require directors and officers to include representations in their plans certifying at the time of the adoption of a new or modified Rule 10b5-1 plan that: (1) they are not aware of any material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith;
• restrict the use of multiple overlapping trading plans and limit the ability to rely on the affirmative defense for a single-trade plan to one single-trade plan per 12-month period for all persons other than issuers;
• require more comprehensive disclosure about issuers’ policies and procedures related to insider trading;
• require disclosure of issuers’ policies and practices around the timing of options grants and the release of material nonpublic information;
• require bona fide gifts of securities that were previously permitted to be reported on Form 5 to be reported on Form 4.

Full details can be found on the SEC’s website. Chair Gary Gensler said: “insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information. I believe today’s amendments will help fill those potential gaps.

The SEC also announced it is proposing to update Rule 605 of Regulation NMS for order executions in national market system stocks. Amendments will aim to expand the scope of entities subject to Rule 605. It’s 22 years since the original rule was adopted and, said Gensler: “Current disclosures have not kept up with our markets and provide investors with an incomplete picture of execution quality.” The proposed changes would, he said, “increase transparency for investors and facilitate their ability to compare brokers. That helps make our markets more efficient, competitive, and fair”.

Enhance trading opportunities

Amendments to Rules 610 and 612 of Regulation NMS were also announced, with the SEC saying the intention was “to enhance trading opportunities for all investors and to help ensure that orders placed in the national market system reflect the best prices available for all investors”. The proposals aim to establish variable minimum pricing increments for quotations and orders in stocks of $1 and above, to reduce access fee caps for protected quotations in shares of $1 and above, and to make information about better-priced interest “more widely available on a faster timetable”.

A new rule that the SEC says “would require certain orders of individual investors to be exposed to competition in fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition” was also announced. Gensler said: ““Today’s markets are not as fair and competitive as possible for individual investors — everyday retail investors. This is in part because there isn’t a level playing field among different parts of the market. today’s proposal is designed to bring greater competition in the marketplace for retail market orders.”

Proposals to establish a best execution regulatory framework for brokers and dealers were also unveiled. If adopted, the rule would be the first SEC-established best execution rule. Gensler said: “I believe a best execution standard is too important, too central to the SEC’s mandate to protect investors, not to have on the books as Commission rule text.” We’ll be examining this important proposal in greater depth on GRIP in the coming days and weeks.