SEC Open Meeting

Securities and Exchange Commission

Open Meeting

Wednesday, December 15, 2021 

10b5-1 and Insider Trading
The Division of Corporation Finance said Rule 10b5-1 currently allows issuers to abuse and take advantage of the trading plans, and as such are proposing amendments to the Rule, new disclosures regarding 10b5-1 trading arrangements and insider trading policies and procedures, as well as amendments regarding the disclosure of the timing of certain equity compensation awards and reporting of gifts on Form 4.

Sean Harrison explained the recommendations in more detail. He said the Commission should amend rule 10b5-1 to 1) require a mandatory cooling off period before any trading can begin, more specifically, officers and directors would be subject to a period of at least 120 days; 2) impose a requirement that a director or officer certify at the time of adoption of the trading arrangement that they are not aware of material non-public information (MNPI) about the issuer’s securities; 3) prohibit multiple overlapping trading arrangements and limit single-trade plans to one trading plan per twelve-month period; 4) expand the current good faith requirement; 5) require insiders that report on Forms 4 or 5 would to indicate via a new checkbox whether the reported transactions were made pursuant to a Rule 10b5-1(c) or other trading plan; and 6) require gifts of securities that were previously permitted to be reported on Form 5 to be reported on Form 4.

Jessica Wachter explained the economic analysis behind the recommendations and said the main goal is to decrease opportunities for insiders to profit off material nonpublic information. She added that the cooling off period would lessen the time of a purchase or sale to make use of MNPI. Wachter also said the disclosure requirements aim to provide transparency around insider trading policies procedures and incentives.

Commissioner Discussion and Vote
Commissioner Hester Pierce said she supports the proposal to address the potential abuses of 10b5-1 trading arrangements, but she had concerns about the certification requirement and the recommendation that the plan be operated in good faith, arguing it may have unintended consequences. She added that the insider trading disclosure requirements might not be necessary. Commissioner Elad Roisman said he supports the proposal solely for the recommended cooling off period, but he supports none of the other recommendations in the proposal. Commissioner Allison Herren Lee also supports the proposal and said 10b5-1 plans have been subject to abuse due to a lack of related disclosure requirements. Lee added that the rule should offer a safe harbor and enhance transparency around the use of 10b5-1 plans, and she looks forward to reviewing public comments on the proposal. Both Commissioner Caroline Crenshaw and Chair Gary Gensler also supported the proposal. Gensler said it builds trust in our capital markets and addresses the means by which CEOs and CFOs trade in their company shares, who typically have MNPI when the public does not. He said there has been less support for the new disclosures about trading plans adopted during the last quarter, but argued that this is good practice and procedure for the companies with these “spring-loaded options” to executives. The Commission voted unanimously in support of the proposals for Rule 10b5-1.

Money Market Fund Reforms (MMF)
Sarah ten Siethoff said MMFs are a popular cash management vehicle and provide an important source of short-term funding and that given the March 2020 redemption pressures, they asked the Commission to consider amendments to certain rules that govern money market funds under the Investment Company Act of 1940.

Pierce said she could not support the MMF proposal because it suffers from too much regulatory prescription and too little room for experimentation by funds. She praised the provision eliminating length between liquidity threshold and fees and gates but criticized raising the liquidity requirement levels and the swing pricing provision. Pierce also stressed a principles-based approach on fund resilience.

Roisman described the wide use of MMFs and said that any changes will ripple through the financial system. He said the proposal had redeeming qualities but that ultimately, he could not support it, adding that he was not sure that we should eliminate gates all together. He also stated that the release did a good job of exploring several ideas but expressed reservations about the proposal having all MMFs use a uniform approach to provide liquidity for investors, adding that investors may need different fee frameworks. He also expressed reservations about raising the liquidity threshold for all funds, adding that most already maintain high enough thresholds, especially retail funds. He also criticized the board notification provision and, lastly, the 60-day comment period, citing the holidays and many questions requiring feedback and said there is not enough time for adequate feedback.

Lee expressed support for the MMF reforms and discussed the growth of MMFs over time. She discussed the inherent structural vulnerabilities of MMFs and the 2010 reforms and stated that the proposal is necessary for addressing weaknesses of the funds. Lee also highlighted areas of interest including increasing the liquidity threshold, removing the gate requirement, board notification, her interest in the foreseeable impact of swing pricing, and board notification.

Crenshaw explained the benefits of MMFs and how they are an important source of short-term financing for different parties but are vulnerable to runs during times of market stress. She discussed the gate provision, increasing the liquid asset requirements, and swing pricing policies and procedures designed to reduce incentives to run during market stress, adding that this last area deserves careful consideration.

Gensler expressed support for the proposal and discussed the first-mover advantage and history of regulatory change in the MMF market. He said the proposal to increase liquidity requirements for MMFs is particularly important for prime MMFs. He added that the proposal would prevent MMF from imposing limits on redemptions (gates, fees, etc.) and that the ability to limit redemptions may have encouraged first-mover run concerns. The Commission voted 3-2 to release the proposal to the Federal Register for public comment.

Security-Based Swaps
David Saltiel said the Division of Trading and Markets recommends the Commission to re-propose Rule 9j-1 prohibiting fraud, manipulation, or deception in connection with security-based swaps, as well as propose new rules prohibiting undue influence over the Chief Compliance Officers of security-based swap dealers (SBSD) and major security-based swap participants and requiring reporting of large security-based swap positions.

Carol McGee explained the recommendations in more detail. First, Rule 9j-1 would prohibit a range of misconduct and provide that a person cannot escape liability for trading on MNPI. Second, they recommend the creation of new rules to prohibit actions that intend to influence a CCO of SBSDs. Third, to increase transparency they recommend requiring any person with large security-based swap positions to file a 10B-1, and for it to be made public.

Wachter said these rules are designed to prevent fraud and manipulation and that the ability to tailor exposures affect an investor’s incentives. She said these amendments address conflicts of interest, reduce the risk of fraud, and could enhance trust in the capital markets.

Commissioner Discussion and Vote
Pierce said these changes will enhance the confidence and quality of the market but that proposed rules 9j-1 and 10B-1 take a maximalist approach and may exceed the SEC’s statutory authority. Pierce said she cannot support a proposal that would produce so little at such a high cost. Roisman said he cannot support the proposed rules in their current form. He added that the re-prosed rule would lead to confusion for market participants and that it is simply just doubling down on a past approach. Lee said the proposed antifraud rules are crucial as well as protect the independence and objectivity of security-based swap CCOs, and as such supports the proposals. Crenshaw said the three actions being considered impact a market that was the heart of the 2008 financial crisis and supports the proposals to help strengthen and safeguard the market. Gensler also supported the proposals. The Commission voted 3-2 to release the proposals to the Federal Register for public comment.

Public Company Accounting Oversight Board (PCAOB) 2022 Budget
Paul Munter said a few areas at the PCAOB warrant continued focus, including the PCAOB’s performance of an assessment of its strategic plan, detailing the plan and priorities from the assessment, and opportunities for efficiency and improvement in operations. Paul recommended that the Commission support PCAOB’s 2022 budget and accounting support fee. Caryn Kauffman explained the budget’s $310.3 million size and said this increase over last year’s budget is attributable to personnel, travel, administrative, and other costs. She added that the PCAOB needs more staff and recommended approval of the budget. Duane DesParte, the PCAOB Acting Chair, emphasized investments in optimizing programs for efficiency and commitment to engagement. He also said the budget accounts for inflation and that personnel accounts for three quarters of total spending. He added that the PCAOB needs more staff for inspection and standard setting programs and that the agency plans to devote greater attention to firms’ quality control systems for inspections and improvement of the PCAOB’s timeliness of inspection reports.

Pierce discussed the PCAOB Board’s credibility deficit but added that the Board should stick to the PCAOB’s mandate and stay away from social issues, like ESG. Roisman expressed concern for the lack of transparency with change of leadership but concluded that the budget is reasonable. Lee discussed the dropped enforcement actions in recent years and dozens of audit standards in need of modernization and added that increased staffing levels in the budget are positive. Crenshaw was happy to see resources for engagement and activities, and Gensler supported the budget and annual support fee, an 8% increase over FY2021. The Commission voted unanimously to approve the budget.

For more information on this hearing, please click here.