distortions are discussed in greater detail below.
    One incentive distortion is that an insider may prefer projects
that require less effort or that yield higher private benefits, even if
such projects have a negative net present value (NPV) and thus decrease
shareholder value.\101\ To mitigate agency conflicts and better align
insider incentives with those of shareholders, insiders are often
compensated with equity. The ability to sell shares in advance of
negative news (to the extent the compensation has vested) protects the
insider's equity position from the full effect of share price declines.
This weakens incentive alignment and exacerbates the agency conflicts
described above, increasing the likelihood that the insider would
pursue negative-NPV projects. Downside protection also incentivizes the
insider to choose riskier negative-NPV projects, due to the possibility
of profiting on the upside.\102\ Relatedly, if short-term investment
projects yield more profitable MNPI (while MNPI about long-term
projects arrives less frequently or is less definitive), an

insider may exhibit short-termism in investment decisions, at the
expense of shareholder value.\103\
---------------------------------------------------------------------------

    \101\ See, e.g., Antonio E. Bernardo, Contractual Restrictions
on Insider Trading: A Welfare Analysis, 18(1) Economic Theory 7-35
(2001) (showing in a model that ``[f]or many reasonable parameter
values, however . . . that managers may be too willing to take risky
projects. In fact, managers will often choose the risky investment
project when it has a lower expected return than the riskless
investment project.''). In some circumstances, insider trading may
remedy a manager's excess conservatism due to under diversification.
See also Lucian A. Bebchuk and Chaim Fershtman, Insider Trading and
the Managerial Choice among Risky Projects, 29(1) Journal of
Financial and Quantitative Analysis, 1-14 (1994). However, Bebchuk
and Fershtman (1994) similarly acknowledge that ``[t]he desire to
increase trading profits might lead the managers to prefer a very
risky project even if it offers a lower expected return than a safer
alternative.''
    \102\ See, e.g., Frank H. Easterbrook, Insider Trading, Secret
Agents, Evidentiary Privileges, and the Production of Information,
The Supreme Court Review, 309-366, 332 (1981) (stating that ``[t]he
opportunity to gain from insider trading also may induce managers to
increase the volatility of the firm's stock prices. . . They may
select riskier projects than the shareholders would prefer, because
if the risk pays off they can capture a portion of the gains in
insider trading and, if the project flops, the shareholders bear the
loss.''). But see Alexander P. Robbins, The Rule 10b5-1 Loophole: An
Empirical Study, 34 Review of Quantitative, Finance and Accounting,
199-224 (2010) (finding, in a sample of 10b5-1 plans of 81 NASDAQ-
listed companies from 2004 to 2006 that ``insiders do not appear to
increase the volatility of their own firms' shares in order to
profit by trading on the basis of material nonpublic information
under the protection of the 10b5-1 affirmative defense'').
    \103\ See M. Todd Henderson, Insider Trading and Executive
Compensation: What We Can Learn from the Experience with Rule 10b5-
1, Research Handbook on Executive Pay, 299 (2012) (stating that
short-termism is a cost of insider trading and that ``[e]xecutives
looking to maximize the value of their shares may engage in conduct
that increases the stock price in the short run at the expense of
the long term so that they can profit from trading in firm stock'').
Such managerial short-termism/myopia reduces shareholder value. See
generally, John R. Graham, Campbell R. Harvey, and Shiva Rajgopal,
The Economic Implications of Corporate Financial Reporting, 40(1-3)
Journal of Accounting and Economics, 3-73 (2005); Alex Edmans,
Blockholder Trading, Market Efficiency, and Managerial Myopia, 64(6)
Journal of Finance, 2481-2513 (2009).
---------------------------------------------------------------------------

    Being able to profit from MNPI also can distort insider incentives
with respect to other corporate decisions that can affect the share
price (for example, repurchases in cases where such a payout is not
efficient, motivated by the attempt to boost the share price in advance
of an insider's sale of shares).\104\ As another example, officers and
directors engaged in insider trading may be disincentivized from
sharing information efficiently within the firm if they can profit from
withholding it and personally trading on it, which leads to inefficient
corporate decisions and thus decreased shareholder value.\105\
---------------------------------------------------------------------------

    \104\ See, e.g., Konan Chan, David L. Ikenberry, Inmoo Lee, and
Yanzhi Wang, Share Repurchases as a Potential Tool to Mislead
Investors, 16 Journal of Corporate Finance 137 (2010) (finding in
1980-2000 data that a limited number of managers may have used
repurchases in a misleading way as ``cheap talk''); Alice A.
Bonaim[eacute] and Michael D. Ryngaert, Insider Trading and Share
Repurchases: Do Insiders and Firms Trade in the Same Direction?, 22
Journal of Corporate Finance, 35-53 (2013) (finding that repurchases
that coincide with net insider selling may be related to price
support and/or reasons related to option exercises); Peter Cziraki,
Evgeny Lyandres, and Roni Michaely, What do Insiders Know? Evidence
from Insider Trading Around Share Repurchases and SEOs, 66 Journal
of Corporate Finance 101544 (2021) (finding that, ``[h]igher insider
net buying is associated with better post-event operating
performance, a reduction in undervaluation, and, for repurchases,
lower post-event cost of capital. Insider trading also predicts
announcement returns and long-term abnormal returns following
events.'' Their results suggests that ``insider trades before
corporate events [repurchases and SEOs] contain information about
changes both in fundamentals and in investor sentiment''); Lenore
Palladino, Do Corporate Insiders Use Stock Buybacks for Personal
Gain?, 34(2) International Review of Applied Economics, 152-174
(2020) (finding increased insider selling in quarters where buybacks
are occurring); Waqar Ahmed, Insider Trading Around Open Market
Share Repurchase Announcements, University of Warwick Working Paper
(2017) (finding that ``insiders take advantage of higher post-
[repurchase] announcement price and sell more heavily'', and that
such selling is predictive of lower long-term returns). See also
Rulemaking Petition 4-746, Jun. 25, 2019, available at https://www.sec.gov/rules/petitions/2019/petn4-746.pdf, at 5 and note 17
(expressing concern and citing evidence of repurchases used to
increase share prices at the time when insiders sell shares); Alex
Edmans, Vivian Fang, and Allen Huang, The Long-Term Consequences of
Short-Term Incentives, Journal of Accounting Research, forthcoming
(2021) (finding that ``[v]esting equity is positively associated
with the probability of a firm repurchasing shares'' but that ``it
is also associated with more negative long-term returns over the 2-3
years following repurchases'' and that ``CEOs sell their own stock
shortly after using company money to buy the firm's stock, also
inconsistent with repurchases being motivated by undervaluation'').
But see, e.g., Harrison Liu and Edward Swanson, Is Price Support a
Motive for Increasing Share Repurchases?, 38 Journal of Corporate
Finance, 77 (2016) (finding that ``[c]orporate insiders do not sell
from personal stock holdings during the price support quarter.'');
Pascal Busch and Stefan Obernberger, Actual Share Repurchases, Price
Efficiency, and The Information Content Of Stock Prices, 30 Review
of Financial Studies, 324 (2017) (concluding, with respect to actual
share repurchases, that price support provided by repurchases
improves price efficiency, even when manipulation concerns might be
highest, such as those that occur prior to insider sales).
    \105\ See, e.g., Robert J. Haft, The Effect of Insider Trading
Rules on the Internal Efficiency of the Large Corporation, 80(5)
Michigan Law Review, 1051-1071, 1055 (1982).
---------------------------------------------------------------------------

    Another economic cost of insider trading is that it may incentivize
insiders to adjust the timing or content of corporate disclosure (e.g.,
delay the release of MNPI).\106\ Manipulation of corporate disclosure
causes price distortions and impairs the ability of investors to make
informed investment decisions. Less informed investment decisions
result in less efficient allocation of capital in investor portfolios,
compared to a setting with no disclosure distortions. To the extent
that investors anticipate such disclosure gaming, they may
commensurately increase their information gathering effort, resulting
in higher information gathering costs for investors. Investors,
however, have a limited ability to identify specific corporate
disclosures being manipulated or to obtain timely and accurate
information elsewhere.
---------------------------------------------------------------------------

    \106\ See, e.g., Ranga Narayanan, Insider Trading and the
Voluntary Disclosure of Information by Firms, 24(3) Journal of
Banking and Finance, 395-425 (2000) (stating that ``[s]tringent
enforcement of insider trading regulations induces more disclosure
by firms''); Qiang Cheng and Kin Lo, Insider Trading and Voluntary
Disclosures, 44(5) Journal of Accounting Research, 815-848 (2006)
(finding that when ``managers plan to purchase shares, they increase
the number of bad news forecasts to reduce the purchase price . . .
insiders do exploit voluntary disclosure opportunities for personal
gain, but only selectively, when litigation risk is sufficiently
low''); Frank H. Easterbrook, Insider Trading, Secret Agents,
Evidentiary Privileges, and the Production of Information, Supreme
Court Review 1981, 309-366, 333 (1981) (stating that ``[t]he
prospect of insiders' gains may lead the firm to delay the release
of information''). Some studies also note that an opposite effect is
possible--managers concerned about litigation may provide higher-
quality disclosure before selling shares. See Jonathan L. Rogers,
Disclosure Quality and Management Trading Incentives, 46(5) Journal
of Accounting Research, 1265-1296 (2008) (Finding that
``[c]onsistent with a desire to reduce the probability of litigation
. . . managers provide higher quality disclosures before selling
shares than they provide in the absence of trading'' but also
finding that ``[c]onsistent with a desire to maintain their
information advantage, . . . some, albeit weaker, evidence that
managers provide lower quality disclosures prior to purchasing
shares than they provide in the absence of trading.''). In the
context of Rule 10b5-1 plans, see, e.g., Stanley Veliotis, Rule
10b5-1 Trading Plans and Insiders' Incentive to Misrepresent, 47(2)
American Business Law Journal, 313-360, at 330 & nn. 77-78 (2010)
(stating that ``Rule 10b5-1 plans give insiders an incentive to
accelerate the release of good news ahead of planned stock sales and
to delay the release of bad news until after the sales are completed
. . . As a practical matter, manipulation of the announcement's
timing would be extremely difficult to prove because insiders are
not required to disclose their 10b5-1 plans and firms seldom
disclose a schedule for corporate announcements in advance . . .'');
Karl T. Muth, With Avarice Aforethought: Insider Trading and 10b5-1
Plans, 10(1) U.C. Davis Business Law Journal, 65-82, at 71 & nn. 32-
33 (2009) (stating that ``executives can participate in the timing
of news . . . about the company. Withholding or `timing' news allows
the executive to (imperfectly) time market response to news . .
.''); John Shon and Stanley Veliotis, Meeting or Beating Earnings
Expectations, 59(9) Management Science, 1988-2002 (2013) (finding
that ``firms with insider sales executed under Rule 10b5-1 plans
exhibit a higher likelihood of meeting or beating analysts' earnings
expectations (MBE) . . . [that] this relation between MBE and plan
sales is more pronounced for the plan sales of chief executive
officers (CEOs) and chief financial officers (CFOs) and is
nonexistent for other key insiders,'' and concluding that ``[o]ne
interpretation of [their] results is that CEOs and CFOs who sell
under these plans may be more likely to engage in strategic behavior
to meet or beat expectations in an effort to maximize their proceeds
from plan sales'').
---------------------------------------------------------------------------

    Investor recognition of the potential incentive distortions and the
risk of lower-quality corporate disclosures resulting from insider
trading, as well as the risk of buying shares from a better informed
inside seller, is likely to decrease investor confidence in the issuer
and make investors less willing to buy or hold the issuer's shares
(trading against informed insiders generates what is known as ``adverse
selection'').\107\ This in turn could have negative effects on capital
formation and the ability to fund investments, due to challenges in
raising the required amount of capital.
---------------------------------------------------------------------------

    \107\ See, e.g., Lawrence M. Ausubel, Insider Trading in a
Rational Expectations Economy, 80(5) American Economic Review 1022-
1041 (1990) (showing in a rational expectations model that ``[i]f
`outsiders' expect `insiders' to take advantage of them in trading,
outsiders will reduce their investment. The insiders' loss from this
diminished investor confidence may more than offset their trading
gains. Consequently, a prohibition on insider trading may effect a
Pareto improvement.''). Further, informed trading by insiders can
reduce the incentive for outside investors to acquire information.
See Michael J. Fishman and Kathleen M. Hagerty, Insider Trading and
the Efficiency of Stock Prices, 23(1) RAND Journal of Economics,
106-122 (1992).
---------------------------------------------------------------------------

    Turning to the effects on the market as a whole, the risk of
trading against informed insiders trading on MNPI negatively affects
market integrity and erodes investor confidence in the

secondary trading market, deterring traders that do not have the
advantage of MNPI. Insider trading is also likely to adversely affect
price efficiency \108\ and liquidity.\109\
---------------------------------------------------------------------------

    \108\ A number of studies demonstrate adverse effects of insider
trading on market efficiency. See, e.g., Michael J. Fishman and
Kathleen M. Hagerty, Insider Trading and the Efficiency of Stock
Prices, 23(1) RAND Journal of Economics, 106-122 (1992) (showing
that ``under certain circumstances, insider trading leads to less
efficient stock prices. This is because insider trading has two
adverse effects on the competitiveness of the market: It deters
other traders from acquiring information and trading, and it skews
the distribution of information held by traders toward one
trader.''); Zhihong Chen and Yuan Huang, Yuanto Kusnadi, and K.C.
John Wei, The Real Effect of the Initial Enforcement of Insider
Trading Laws, 45 Journal of Corporate Finance, 687-709 (2017)
(finding evidence that the initial enforcement of insider trading
laws ``improves capital allocation efficiency by increasing price
informativeness and reducing market frictions''); Robert M. Bushman,
Joseph D. Piotroski, and Abbie J. Smith, Insider Trading
Restrictions and Analysts' Incentives to Follow Firms, 60(1) Journal
of Finance, 35-66 (2005) (arguing that ``insider trading crowds out
private information acquisition by outsiders'' and showing that
``analyst following increases after initial enforcement of insider
trading laws'' in a cross-country sample); Nuno Fernandes and Miguel
A. Ferreira, Insider Trading Laws and Stock Price Informativeness,
22(5) Review of Financial Studies 1845-1887 (2009) (finding that
price informativeness increases with the enforcement of insider
trading laws, but only in countries with a strong ``efficiency of
the judicial system, investor protection, and financial
reporting''). See also Alexander P. Robbins, The Rule 10b5-1
Loophole: An Empirical Study, 34 Review of Quantitative Finance and
Accounting, 199-224 (2010) (finding, in a sample of 10b5-1 plans of
81 NASDAQ-listed companies from 2004 to 2006 that ``10b5-1 plans
have a significant negative effect on the liquidity of a firm's
shares, and therefore the firm's cost of capital''). Some studies
argue that insider trading improves price efficiency. See, e.g.,
Hayne E. Leland, Insider Trading: Should It Be Prohibited?, 100(4)
Journal of Political Economy, 859-887 (1992) (showing in a model
that ``stock prices better reflect information'' when insider
trading is permitted.); Utpal Bhattacharya, Hazem Daouk, Brian
Jorgenson, and Carl-Heinrich Kehr, When an Event is Not an Event:
The Curious Case of An Emerging Market, 55(1) Journal of Financial
Economics, 69-101 (2000) (suggesting ``that unrestricted insider
trading causes prices to fully incorporate the information before
its public release''); see generally Henry G. Manne, Insider Trading
and the Stock Market (1966). A reduction in insider trading can have
nuanced effects on market efficiency. For example, the conclusions
about the effect on insider trading on market efficiency may depend
on whether the framework is static or dynamic. See David Easley,
Soeren Hvidkjaer, and Maureen O'Hara, Is Information Risk a
Determinant of Asset Returns? 57(5) Journal of Finance, 2185-2221
(2002).
    \109\ Various studies show that insider trading negatively
impacts liquidity. For example, see Raymond P.H. Fishe and Michel A.
Robe, The Impact of Illegal Insider Trading in Dealer and Specialist
Markets: Evidence From a Natural Experiment, 71(3) Journal of
Financial Economics, 461-488 (2004); Louis Cheng, Michael Firth,
T.Y. Leung, and Oliver Rui, The Effects of Insider Trading on
Liquidity, 14(5) Pacific-Basin Finance Journal 467-483 (2006); Hayne
E. Leland, Insider Trading: Should It Be Prohibited? 100(4) Journal
of Political Economy, 859-887 (1992) (showing in a model that
``markets are less liquid'' and ``outside investors and liquidity
traders will be hurt'' when insider trading is permitted); Laura N.
Beny, Do Insider Trading Laws Matter? Some Preliminary Comparative
Evidence, 7(1) American Law and Economics Review, 144-183 (2005)
(finding that ``countries with more prohibitive insider trading laws
have more diffuse equity ownership, more accurate stock prices, and
more liquid stock markets''); Lawrence R. Glosten, Insider Trading,
Liquidity, and the Role of the Monopolist Specialist, 62(2), Journal
of Business 211-235 (1989) (showing in a model that insider trading
reduces liquidity). However, another study does not find a negative
effect of insider trading on liquidity. See e.g., Charles Cao, Laura
C. Field, and Gordon Hanka, Does Insider Trading Impair Market
Liquidity? Evidence from IPO Lockup Expirations, 39(1) Journal of
Financial and Quantitative Analysis, 25-46 (2004).
---------------------------------------------------------------------------

    2. Certain Rule 10b5-1 plan \110\ trading practices may raise
concerns about potential insider trading.
---------------------------------------------------------------------------

    \110\ For purposes of this economic analysis, the terms ``Rule
10b5-1 trading arrangements'' and ``Rule 10b5-1 plans'' are used to
refer to the trading arrangements reliant upon the affirmative
defense of Rule 10b5-1(c)(1), in line with the use of these terms in
the academic research on this topic.
---------------------------------------------------------------------------

    Over the years concerns have been raised that persons have engaged
in securities trading based on MNPI while availing themselves of the
Rule 10b5-1(c)(1) affirmative defense.\111\ Examples of practices that
have raised concerns include the strategic cancellation of previously
adopted plans or individual trades on the basis of MNPI,\112\ as well
as initiation or resumption of trading close in time to plan adoption
or modification.\113\
---------------------------------------------------------------------------

    \111\ See, e.g., See Recommendations of the Investor Advisory
Committee Regarding Rule 10b5-1 Plans (Sept. 9, 2021), at https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf; Letter from David Larcker, March 10,
2021, available at https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf; Letter from Council of Institutional Investors
(CII), April 22, 2021, available at https://www.sec.gov/comments/s7-14-20/s71420-8709408-236962.pdf; Letter from CII, March 18, 2021,
available at https://www.sec.gov/comments/s7-24-20/s72420-8519687-230183.pdf; Letter from CII, September 25, 2020, available at
https://www.sec.gov/comments/s7-06-20/s70620-7843308-223819.pdf;
Letter from CII, December 13, 2018, available at https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf; Letter from
CII, July 11, 2018, available at https://www.cii.org/files/July%2011%202018%20SEC%20Reg%20Flex%20Letter%20Final.pdf; Letter
from CII, February 12, 2018, available at https://www.sec.gov/comments/s7-07-17/s70717-3025708-161898.pdf; Letter from CII to The
Honorable Jay Clayton, January 18, 2018, available at http://www.cii.org/files/issues_and_advocacy/correspondence/2018/January%2018%202018%20Rule%2010b5-1%20(finalI).pdf; Letter from CII,
July 8, 2016, available at https://www.sec.gov/comments/s7-06-16/s70616-49.pdf; Letter from CII to The Honorable Mary Jo White, May
9, 2013, available at http://www.cii.org/files/issues_and_advocacy/correspondence/2013/05_09_13_cii_letter_to_sec_rule_10b5-1_trading_plans.pdf; CII Rulemaking Petition.
    \112\ See, e.g., Jill E. Fisch, Testimony before the Investor
Protection, Entrepreneurship, and Capital Markets Subcommittee, U.S.
House Committee on Financial Services, Insider Trading and Stock
Option Grants: An Examination of Corporate Integrity in the Covid-19
Pandemic, September 17, 2020, available at https://docs.house.gov/meetings/BA/BA16/20200917/111013/HHRG-116-BA16-Wstate-FischJ-20200917.pdf, at p. 5; Alan D. Jagolinzer, SEC rule 10b5-1 and
Insiders' Strategic Trade, 55(2) Management Science, 224-239 (2009)
(finding ``for a sample of 54 firms for which there is public
disclosure of early sales plan terminations'' that ``early sales
plan terminations are associated with pending positive performance
shifts, reducing the likelihood that insiders' sales execute at low
prices''); Stanley Veliotis, Rule 10b5-1 Trading Plans and Insiders'
Incentive to Misrepresent, 47(2) American Business Law Journal, 313-
360, at 328-30 (2010) (discussing concerns related to selective
cancellations); Taylan Mavruk and Nejat H. Seyhun, Do SEC's 10B5-1
Safe Harbor Rules Need to Be Rewritten, Columbia Business Law
Review, 133-183, at 165, 168-71 (2016) (discussing selective
cancellation concerns, providing indirect evidence, and concluding
that its findings are ``consistent with the hypothesis that insiders
intervene in their planned transactions to increase
profitability''). See also Stephen L. Lenkey, Cancellable Insider
Trading Plans: An Analysis of SEC Rule 10b5-1, 32(12) Review of
Financial Studies, 4947-4996 (2019) (concluding, in a theoretical
framework, that ``[b]ecause the conditions under which the insider
elects to adopt a plan often coincide with the conditions under
which the termination option reduces welfare, an alternative
regulatory framework wherein the insider could adopt a non-
cancellable plan (and, thereby, credibly commit to execute his
planned trade) would improve the investors' welfare under a wide set
of circumstances.'')
    \113\ For a discussion of the evidence of returns following
insider trades occurring close to plan adoption, see infra notes
123-131 and accompanying and preceding text. But see infra notes
132-138 and accompanying and following text. Existing disclosure
does not provide data on plan cancellations or plan modifications
(including cancellations of planned trades).
---------------------------------------------------------------------------

    As discussed in detail in Section II above, the Commission is
proposing several amendments to address these practices, including
additional disclosure requirements for insider and issuer trading plans
under Item 408 of Regulation S-K; additional disclosure of Rule 10b5-1
plan use in beneficial ownership forms; and modifications to the
conditions of the affirmative defense under Rule 10b5-1(c)(1)
(introducing cooling-off periods following the adoption of a new or
modified plan; certification requirements; and restrictions on single-
trade plans and multiple overlapping plans for open market trades in
the same class of securities and single-trade plans). Disclosure
requirements significantly affect the underlying behavior of insiders
and issuers by drawing scrutiny of investors and other market
participants to insider trading practices.\114\
---------------------------------------------------------------------------

    \114\ Studies have found evidence that changes in mandatory
disclosure affect behavior. See, e.g., Elizabeth C. Chuk, Economic
Consequences of Mandated Accounting Disclosures: Evidence from
Pension Accounting Standards, 88(2) Accounting Review, 395-427
(2013); Alice Adams Bonaim[eacute], Mandatory Disclosure and Firm
Behavior: Evidence from Share Repurchases, 90(4) Accounting Review,
1333-1362 (2015).
---------------------------------------------------------------------------

    Combined, the proposed amendments are expected to reduce the
potential for insider trading through Rule 10b5-1

plans and other trading arrangements by insiders and companies. As
discussed above, deterring insider trading would result in benefits for
investor protection, capital formation, and orderly and efficient
markets. By deterring insider trading, the amendments would
disincentivize insider behavior that is likely to harm the securities
markets and undermine investor confidence.
    3. Current levels of disclosure about insider and issuer trading
plans limit the ability of investors to identify the risk of insider
trading and consider the associated incentive conflicts and information
asymmetries in their investment decisions.
    Existing gaps in the disclosure framework limit the information
currently available to investors and other market participants
regarding the use of insider and issuer trading plans, and the extent
to which trading based on MNPI potentially distorts insider incentives
with respect to corporate decisions (and thus shareholder value).
Besides limiting the ability of investors to correctly value the
company's shares, and thus make informed investment decisions, such
disclosure gaps limit the ability of the Commission staff to perform
market surveillance with regard to Exchange Act Section 10(b) and Rule
10b-5, with the associated adverse consequences for investor
protection.
    The proposed disclosure amendments would provide greater
transparency to investors and decrease information asymmetries between
insiders and outside investors about insiders' and companies' trading
arrangements and associated policies and procedures, enabling more
informed decisions about whether to invest in the company's shares and
at what valuation. This might result in more efficient capital
allocation and more informationally efficient pricing. The proposed
additional disclosure requirements might also indirectly yield
potential capital formation benefits if they increase investor
confidence in the company's governance.
    4. The economic effects of the proposed amendments are in some
cases uncertain.
    The discussed economic effects of the proposed amendments may be
uncertain or difficult to generalize.
    An important factor contributing to the uncertainty about the
magnitude of the benefits of the proposed amendments to Rule 10b5-1 is
the potential for substitution between Rule 10b5-1 plans and other
trading arrangements. The use of the Rule 10b5-1(c)(1) affirmative
defense is voluntary. Insiders and companies may elect to pursue other
trading arrangements if they perceive the costs of relying on that
affirmative defense are too high. For example, companies may instead
rely on the Rule 10b5-1(c)(2) affirmative defense. The application of
the proposed disclosure requirements of new Item 408 of Regulation S-K
to all officer, director, and company trading plans (including plans
not under Rule 10b5-1) is expected to partly mitigate this concern.
    The considerations presented above are generally applicable to the
proposed amendments as a whole. In the sections that follow we provide
a more detailed discussion of economic effects of the particular
proposed amendments, including the expected costs and benefits relative
to the market baseline, as well as reasonable alternatives.

B. Amendments to Rule 10b5-1(c)(1)

    The Commission is proposing additional conditions that must be
satisfied for a trading arrangement to be eligible for the Rule 10b5-
1(c)(1) affirmative defense. These amendments are intended to protect
investors by decreasing opportunities for officers, directors, and
companies to profit from MNPI through such trading arrangements.
    The proposed amendments would narrow the conditions under which the
Rule 10b5-1(c)(1) affirmative defense would be available. First, the
proposed amendments would establish mandatory cooling-off periods
before any trading could commence under a Rule 10b5-1 trading
arrangement by an officer, director, or issuer after the adoption of a
new or modified trading arrangement. Second, the proposed amendments
would eliminate the availability of the affirmative defense for
multiple overlapping trading arrangements for open market transactions
in the same class of securities, as well as limit single-trade plans to
a maximum of one in a 12-month period. Third, the proposed amendments
would impose a certification requirement as a condition of the Rule
10b5-1(c)(1) affirmative defense for trading arrangements of officers
and directors. In addition, the proposed amendments would broaden the
good faith provision, which is a condition of the 10b5-1(c)(1)
affirmative defense.
1. Baseline and Affected Parties
    We consider the economic effects of the proposed amendments in the
context of the regulatory and market baseline. A lack of comprehensive
disclosure of Rule 10b5-1 trading arrangements makes it more difficult
to provide complete data on existing Rule 10b5-1 practices and affected
plan participants. Our estimates are limited by the voluntary nature of
the Rule 10b5-1 disclosure in beneficial ownership filings, where
insider trades are reported, as well as the limited scope of Rule 10b5-
1 trades for which Form 144 reporting is required.\115\ Based on
beneficial ownership filings (Forms 3, 4, and 5) during the 2020
calendar year, approximately 4,900 natural persons at approximately
1,400 companies reported trades under Rule 10b5-1 trading arrangements.
This figure includes approximately 4,800 officers and directors at
1,400 companies; narrowing it to officers yields an estimate of
approximately 3,900 officers at 1,200 companies.\116\ Due to the data
limitations mentioned above, the actual number of affected parties is
likely to be larger.
---------------------------------------------------------------------------

    \115\ Form 144 must be filed with the Commission by an affiliate
as a notice of the proposed sale of (restricted) securities when the
amount to be sold under Rule 144 during any three-month period
exceeds 5,000 shares or units or has an aggregate sales price in
excess of $50,000. See https://www.investor.gov/introduction-investing/investing-basics/glossary/form-144. Thus, Rule 10b5-1 plan
trades below that threshold are not required to be reported on Form
144 and thus may not be in our data. Further, because the vast
majority of Form 144 filings are made in paper form during the
considered period, we rely on information from such paper filings
extracted and processed by the vendor for the Thomson Reuters/
Refinitiv insiders dataset.
    \116\ The estimate is based on the data from filings on Forms 3,
4, and 5 for trades during calendar year 2020 that reported Rule
10b5-1 plan use (obtained from Thomson Reuters/Refinitiv insiders
dataset). The estimate only captures natural persons with Rule 10b5-
1 plans that have Section 16 reporting obligations, and thus likely
represents a lower bound on the number of affected plan
participants. Officers and directors are identified based on the
role code (beneficial owners and affiliates are not included in the
count). Combining data from Form 144 filings with planned sale dates
in calendar year 2020 that reported Rule 10b5-1 plan use (also
obtained from Thomson Reuters/Refinitiv insiders dataset) and the
data from filings on Forms 3, 4, and 5 cited above, we estimate that
approximately 5,800 natural persons at approximately 1,500 companies
(which includes 5,000 officers and directors at 1,400 companies; or
when limited to officers only, approximately 4,100 officers at 1,300
companies) reported trades under Rule 10b5-1. Due to gaps in the
reporting regime, we cannot be certain whether the higher prevalence
of plans reported for officers is due to their higher prevalence in
general or due to greater disclosure of such plans.
---------------------------------------------------------------------------

    Below we discuss the available evidence on Rule 10b5-1 plans of
officers, directors, and other natural persons. A recent academic study
analyzed Form 144 data on insider trades under Rule 10b5-1 plans during
January 2016-May 2020.\117\ The study

documents ``[t]he mean (median) cooling-off period is 117.9 (76) days.
Approximately 14 percent of plans commence trading within the first 30
days, and 39 percent within the first 60 days. These represent very
short cooling-off periods. 82 percent of plans commence trading within
6 months.'' \118\ As a caveat, the available data do not indicate
whether the trading time frames are due to an issuer's policies (i.e.,
whether there is a ``cooling-off period'' is not known--only the time
between plan adoption and the first trade, which could be viewed as the
``effective cooling-off period'', is calculated).
---------------------------------------------------------------------------

    \117\ See David F. Larcker, Bradford Lynch, Philip Quinn, Brian
Tayan, and Daniel J. Taylor, Gaming the System: Three Red Flags'' of
Potential 10b5-1 Abuse, Stanford Closer Look Series, January 19,
2021 (``Larcker et al. (2021)'') (2021). The study presents novel
data ``on all sales of restricted stock filed on Form 144 between
January 2016 and May 2020 and the adoption date of any corresponding
10b5-1 plans. . . In total, we have data on 20,595 plans, which
covers the trading activity by 10,123 executives at 2,140 unique
firms. These plans are responsible for a total of 55,287 sales
transactions totaling $105.3 billion during our sample period.
Average (median) trade size is $1.9 million ($0.4 million) . . .''
The analysis based on Form 144 data has the advantage of not being
subject to voluntary reporting bias. However, as a caveat, planned
resales reported on Form 144 represent a subset of all trades and
may not be representative of all Rule 10b5-1 trades by insiders
(e.g., of purchases, or of sales of unrestricted stock). By
comparison, Mavruk and Seyhun (2016) examine a larger sample of plan
trades identified by a voluntary Rule 10b5-1 checkbox on beneficial
ownership forms. They examine transactions for ``an average of
14,211 insiders in 3875 firms for each year between 2003 and 2013.''
See Taylan Mavruk and Nejat H. Seyhun, Do SEC's 10B5-1 Safe Harbor
Rules Need to Be Rewritten, Columbia Business Law Review, 133-183
(2016). Relatedly, Hugon and Lee (2016) utilize a sample of
``voluntary disclosures of 10b5-1 plan participation in SEC Form 4
filed between October 2000 and December 2010.'' See Artur Hugon and
Yen-Jung Lee, SEC Rule 10b5-1 Plans and Strategic Trade around
Earnings Announcements, Arizona State University and National Taiwan
University (Working Paper) (2016). See also See Rik Sen, Are Insider
Sales Under 10b5-1 Plans Strategically Timed?, New York University
(Working Paper) (2008); Eliezer M. Fich, Robert Parrino, and Anh L.
Tran, When and How Are Rule 10b5-1 Plans Used for Insider Stock
Sales?, Drexel University, University of Texas at Austin, and City
University of London (Working Paper) (2021) (also utilizing Form 4
data). Data on Rule 10b5-1 trades by issuers is not available.
    \118\ See Larcker et al. (2021).
---------------------------------------------------------------------------

    Using Form 144 data provided by The Washington Service for a more
recent period (January 2, 2018-October 19, 2021), we find that the
median (mean) cooling off period is 72 (105) days, with 13.5 percent of
first trades pursuant to a plan occurring within thirty days of the
plan date and 40.7 percent occurring within 60 days of the plan
date.\119\ Shorter cooling off periods are also associated with higher
trade sizes as trades occurring within 90 days of plan adoption have a
median size of $670,000 compared with a median size of $378,000 for
those trades occurring more than six months after plan adoption.
Further, single-trade plans constitute approximately 40% of plans
during the time period examined.
---------------------------------------------------------------------------

    \119\ 13.5 percent of trades occur within 0-30 days. 27.2
percent of trades occur within 31-60 days, and 22.6 percent within
61-90 days. In total, 63.3 percent of trades occur within 90 days of
the plan date and 83.7 percent of plans commence trading within six
months.
---------------------------------------------------------------------------

    A 2016 industry survey also examined Rule 10b5-1 plan practices at
public companies.\120\ In the survey (i) 77 percent of the respondents
had a mandatory cooling-off period of 60 days or less and a cooling-off
period of 30 days was the most common cooling-off period among
respondents (41 percent); (ii) 98 percent of the respondents reviewed
and approved insiders' Rule 10b5-1 plans to some degree; (iii) 55
percent of the respondents allowed termination of plans and 40 percent
of the respondents allowed modification of plans; and (iv) 18 percent
of respondents allowed insiders to maintain multiple overlapping plans,
while 82 percent disallowed multiple overlapping plans.\121\
---------------------------------------------------------------------------

    \120\ See Defining the Fine Line: Mitigating Risk with 10b5-1
Plans, Morgan Stanley/Shearman & Sterling LLP, available at https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf. The survey included public
company members of the Society of Corporate Secretaries & Governance
Professionals. The respondents and their practices related to Rule
10b5-1 plans are not necessarily representative of all companies
subject to the proposed amendments and their Rule 10b5-1 plan
policies and practices. Separately, the survey stated that that 51
percent of S&P 500 companies had Rule 10b5-1 plans in 2015.
    \121\ Id.
---------------------------------------------------------------------------

    Various studies have sought to examine the potential use of MNPI
for trading under Rule 10b5-1 by looking at the returns around trades
under such plans (with the caveats about data availability). Larcker et
al. (2021) document abnormal profits following some Rule 10b5-1(c)(1)
trades, which is indicative of potential informed trading by insiders
under such plans. For example, the study shows abnormal industry-
adjusted returns over a six-month period following the first sale to be
-2.5 percent for plans with a cooling-off period of less than 30 days
and -1.5 percent for plans with a cooling-off period of between 30 and
60 days, but no evidence of such a post-insider sale price drop when
the cooling-off period was longer than 60 days. The study also finds
that the abnormal return is between -2 percent and -3 percent for plans
that execute a sale in the window between when the plan is adopted and
that quarter's earnings announcement, but no price drop is found
following sales after the earnings announcement. Similarly, they find
that insider sales under all single-trade plans are associated with a
share price decrease after the sale.\122\ Negative abnormal returns
after insider sales under Rule 10b5-1(c)(1) plans indicate potential
informed trading by insiders ahead of negative news. A lack of such
negative returns after insider sales under plans with longer cooling
off periods is suggestive of inside information becoming stale during
the cooling off period, though it could also indicate low statistical
power. Similarly, a lack of negative returns when insider sales occur
after the quarter's earnings announcement may suggest less potential
for informed selling once the earnings information has been made
public; while this result could also indicate low power, it is
intuitive that information is more evenly shared following the earnings
announcement.\123\
---------------------------------------------------------------------------

    \122\ The data does not show the dates of all scheduled trades,
only the dates of executed trades. Thus, some ``single-trade'' plans
may be multi-trade plans in progress, or multi-trade plans with all
but one trade cancelled.
    \123\ As a caveat, the tests of statistical significance of the
differences are not shown, so we cannot assess whether the economic
differences discussed above have statistical significance.
---------------------------------------------------------------------------

    Several other studies document abnormal returns following trading
by insiders who use Rule 10b5-1 plans. For example, a 2009 study of the
use of Rule 10b5-1 plans finds that ``[p]articipating insiders' sales
systematically follow positive and precede negative firm performance,
generating abnormal forward-looking returns larger than those earned by
nonparticipating colleagues,'' that ``a substantive proportion of
randomly drawn plan initiations are associated with pending adverse
news disclosures,'' and that ``early sales plan terminations are
associated with pending positive performance shifts.'' \124\ A 2016
study examined insider sales at financial institutions prior to the
2008 financial crisis and found that ``net insider sales in the 2001Q2-
2007Q2 pre-financial crisis quarters predict not-yet-reported non-
performing securitized loans and securitization income for those
quarters, and that net insider sales during 2006Q4 predict write-downs
of securitization-related assets during the 2007Q3-2008Q4 crisis
period'' and, crucially for this analysis, that ``insiders avoid larger
stock price losses through 10b5-1 plan sales than through non-plan
sales.'' \125\ A different 2016 study presents ``evidence consistent
with insiders using 10b5-1 plans to sell stock in

advance of disappointing earnings results.'' \126\ The study further
finds that some of the more aggressive insider trading on earnings
information shifted into Rule 10b5-1 plans after adoption of the
rule.\127\ The study also finds that ``these insiders make the
following types of trades: non-routine, infrequent, one-time, close to
the plan initiation date, and during traditional blackout periods.''
\128\ Another 2016 study presents evidence of ``insiders selling shares
prior to imminent bad earnings news through their Rule 10b5-1 trading
plans.'' \129\ A 2020 study finds that ``public companies
disproportionately disclose positive news on days when corporate
executives sell shares under predetermined Rule 10b5-1 plans,'' with
such disclosure of good news on Rule 10b5-1 selling days being most
prevalent ``in the health care sector and among mid-cap firms.'' \130\
The study further shows that ``stock prices reverse after high levels
of Rule 10b5-1 selling on positive news days, and that the price
reversal increases with the share volume of Rule 10b5-1 selling.''
\131\
---------------------------------------------------------------------------

    \124\ See Alan D. Jagolinzer, SEC Rule 10b5-1 and Insiders'
Strategic Trade, 55(2) Management Science, 224-239 (2009).
    \125\ See Stephen G. Ryan, Jennifer Wu Tucker, and Ying Zhou
Securitization and Insider Trading, 91(2) Accounting Review, 649-675
(2016).
    \126\ See Artur Hugon and Yen-Jung Lee, SEC Rule 10b5-1 Plans
and Strategic Trade around Earnings Announcements, Arizona State
University and National Taiwan University (Working Paper) (2016).
    \127\ Id.
    \128\ Id.
    \129\ See Jonathan A. Milian, Insider Sales Based on Short-term
Earnings Information, 47 Rev. Quant. Finan. Acc. (2016) 47, 109-128
(examining data on insider sales under Rule 10b5-1 based on
beneficial ownership filings from August 2004 through May 2010). As
a caveat, the study specifies that the plan identification may be
imprecise: it ``use[s] the timing of insiders' Rule 10b5-1 trades
relative to each other in order to infer a sales plan,'' ``[g]iven
the lack of disclosure requirements in SEC Rule 10b5-1 and the
nature of the data.''
    \130\ See Joshua Mitts, Insider Trading and Strategic
Disclosure, Columbia University (Working Paper) (2020).
    \131\ Id.
---------------------------------------------------------------------------

    However, a 2008 study finds ``no significant difference in stock
price performance following plan sales and non-plan sales.'' \132\ The
study shows that ``price contingent orders (e.g., limit orders), a
common feature in trading plans, give rise to empirical patterns that
have been taken as evidence of strategic timing of sales.'' \133\ A
different 2016 study finds negative abnormal returns after insider
sales under Rule 10b5-1(c)(1), as well as positive abnormal returns
after insider purchases under Rule 10b5-1(c)(1) (over a one-month
holding period).\134\ However, the study does not find significant
differences between the abnormal returns following insider trades under
Rule 10b5-1(c)(1) and other insider trades.\135\ Finally, a 2021 study
finds that ``non-plan sales are, on average, preceded by a larger price
run-up (3.0 percent versus 1.4 percent) and followed by a larger price
decline (-1.6 percent versus -1.0 percent) than plan sales . . .
consistent with greater opportunistic behavior by CEOs who trade
outside of Rule 10b5-1 plans.'' \136\ Further, focusing on ``the 25
percent of sales with the largest ratio of transaction value to the
CEO's most recent total annual compensation . . . the average
cumulative abnormal return (``CAR'') during the 40 trading days before
the sale is 3.68 percent for non-plan sales and 1.77 percent for plan
sales . . . the average CAR for the 40 trading days after the sale is -
2.24 percent for non-plan sales and -2.41 percent for plan sales.''
\137\ The study concludes that ``the overall level of opportunistic
behavior is smaller for sales within Rule 10b5-1 plans than for sales
outside of such plans'' but that ``CEOs who have a lot of money at
stake are able to trade opportunistically even if the transaction is
executed under a Rule 10b5-1 plan.'' \138\ The findings of these
studies differ in part because of differences in the sample used for
analysis (sample period and whether the data is based on beneficial
ownership forms or Form 144 filings) and methodology (including, among
other assumptions, whether insider trading under Rule 10b5-1(c)(1) is
examined in isolation or in comparison with other insider sales and
purchases). As noted above, the lack of data on Rule10b5-1 plans can
make it difficult to extrapolate from the available evidence to all
trading under Rule 10b5-1(c)(1). However, overall, the evidence on the
use of Rule 10b5-1 plans in the discussed studies raises concerns about
informed trading by insiders.
---------------------------------------------------------------------------

    \132\ See Rik Sen, Are Insider Sales Under 10b5-1 Plans
Strategically Timed?, New York University (Working Paper) (2008).
The study uses Form 4 data from January 2003--June 2006. As an
important caveat, reporting of 10b5-1 trades on Form 4 is voluntary.
Thus, trades classified as ``non-10b5-1'' trades in the study may
include 10b5-1 plan trades.
    \133\ Id.
    \134\ See Taylan Mavruk and Nejat H. Seyhun, Do SEC's 10B5-1
Safe Harbor Rules Need to Be Rewritten, Columbia Business Law
Review, 133-183 (2016).
    \135\ Id. As noted above, due to voluntary reporting of the Rule
10b5-1 flag on beneficial ownership forms, trades classified as
``non-10b5-1'' trades in the study may include Rule 10b5-1 plan
trades.
    \136\ See Eliezer M. Fich, Robert Parrino, and Anh L. Tran, When
and How Are Rule 10b5-1 Plans Used for Insider Stock Sales?, Drexel
University, University of Texas at Austin, and City University of
London (Working Paper) (2021). This study examines ``11,250 stock
sales by 1,514 CEOs at 1,312 different public firms during the 2013
to 2018 period. Of these stock sales, 6,953 are identified in SEC
Form 4 filings as executed through Rule 10b5-1 plans.'' As noted
above, due to voluntary reporting of the Rule 10b5-1 flag on
beneficial ownership forms, trades classified as ``non-10b5-1''
trades in the study may include Rule 10b5-1 plan trades.
    \137\ Id. Cumulative abnormal returns are returns in excess of
returns that would be expected given the security's systematic risk
over the period of time in question.
    \138\ Id.
---------------------------------------------------------------------------

    Data on companies' use of Rule 10b5-1 plans are very limited. Some
companies voluntarily disclose on Form 8-K their use of Rule 10b5-1
plans to carry out stock repurchases. One study examining different
repurchase methods documented ``at least 200 announcements of
repurchases using Rule 10b5-1 per year from 2011 to 2014. . . [In 2014]
29% [of repurchase announcements] included a 10b5-1 plan.'' \139\ While
the use of Rule 10b5-1 plans by issuers can fluctuate year to year, the
study suggests that approximately 200 companies could be affected by
the proposed amendments. Based on a textual search of calendar year
2020 filings, we similarly estimate that approximately 220 companies
disclosed share repurchase programs executed under a Rule 10b5-1
plan.\140\ Due to a lack of a trade reporting requirement similar to
that for officers and directors, we are not aware of data or studies on
companies' actual trading under Rule 10b5-1 plans.
---------------------------------------------------------------------------

    \139\ See Alice Bonaim[eacute], Jarrad Harford, and David Moore,
Payout Policy Trade-Offs and the Rise of 10b5-1 Preset Repurchase
Plans, 66(6) Management Science, 2762-2786 (2020). The study does
not provide evidence of companies' use of such plans for insider
trading through issuer repurchases. The study focuses on such plans
being less flexible and representing a stronger pre-commitment than
open market repurchases. The study finds that, ``[c]onsistent with
[such] plans signaling commitment, Rule 10b5-1 repurchase
announcements are associated with greater and faster completion
rates, with more positive market reactions, and with more dividend
substitution than open market repurchases.''
    \140\ The estimate is based on a textual search of calendar year
2020 filings of Forms 10-K, 10-Q, 8-K, as well as amendments and
exhibits thereto in Intelligize, using keywords ``10b5-1
repurchases'' or a combination of keywords ``repurchase plan'' and
``10b5-1''. Due to a lack of standardized presentation and the
unstructured (i.e., non-machine-readable) nature of the disclosure,
this estimate is approximate and may be over- or under-inclusive.
---------------------------------------------------------------------------

    Companies also may use Rule 10b5-1 plans for sales of securities.
Due to a lack of reporting, we cannot estimate the prevalence of such
plans.
2. Benefits
    The main benefit of the proposed amendments to Rule 10b5-1(c)(1) is
a reduction in the potential for insider trading based on MNPI by
officers, directors, and companies (discussed in greater detail in
Section IV.A above). Below we discuss how each of the proposed
amendments to Rule 10b5-1(c)(1) is expected to reduce such insider
trading. Crucially, we expect the

proposed provisions to work in tandem to substantially reduce or
eliminate insider trading through Rule 10b5-1 plans. In particular, the
safeguards provided by the proposed certification requirement are
expected to reinforce the effects of the proposed cooling-off periods
and the restrictions on multiple overlapping and single-trade plans.
The cooling-off period is expected to work in tandem with the exclusion
of multiple overlapping plans from Rule 10b5-1(c)(1) in addressing
opportunistic plan cancellations based on MNPI. Thus, while we
separately discuss below the benefits of each individual provision for
reducing insider trading, in combination the proposed amendments should
also generate synergies.
    As discussed in Section IV.A above, because the Rule 10b5-1(c)(1)
affirmative defense is elective, if officers, directors, or companies
find the provisions as amended to be overly burdensome, they may elect
not rely on it.\141\ To the extent the migration of trading outside of
Rule 10b5-1 plans results, in some instances, in an increase, or no
change, in the incidence of insider trading, the benefits of the
proposed amendments may be attenuated or offset. The magnitude of the
described effect would depend on the extent to which other mechanisms
(such as legal liability, enforcement actions, listing standards,
reputational concerns, as well as corporate governance mechanisms)
counteract insider trading incentives and any changes that companies
implement to their insider trading policies. Companies may make changes
in response to the proposed disclosure requirements of Item 408 of
Regulation S-K, discussed in detail in Section IV.C below.
---------------------------------------------------------------------------

    \141\ But see infra note 157.
---------------------------------------------------------------------------

    In the subsections below we discuss the individual benefits of
these proposed conditions. In Section IV.B.2.v below, we discuss the
proposed amendments as they apply to companies' plans.
i. Cooling-Off Period for Officers and Directors \142\
---------------------------------------------------------------------------

    \142\ The cooling-off periods proposed for Rule 10b5-1 trading
arrangements of issuers are discussed in Sections IV.B.2.v and
IV.B.3.v below.
---------------------------------------------------------------------------

    The Commission is proposing as a condition to the availability of
the affirmative defenses under Rule 10b5-1(c)(1) to officers and
directors a 120-day cooling-off period before any purchases or sales
under the trading arrangement may commence after the date of adoption
of a new or modified trading arrangement. The cooling-off period would
prevent officers and directors aware of MNPI from being able to trade
under the Rule 10b5-1 plan immediately after adopting or modifying such
a plan. This would substantially weaken insider incentives to enter or
modify Rule 10b5-1 plans based on any MNPI with a horizon that is
shorter than the proposed cooling-off period. The 120-day length of the
proposed cooling-off period would largely prevent officers and
directors from capitalizing on unreleased MNPI for the upcoming
quarter.\143\ It also is consistent with, or exceeds, several
recommendations regarding such cooling-off periods.\144\ To the extent
that MNPI may be time-sensitive, we expect such a cooling-off period to
effectively discourage officers and directors from adopting new or
modified plans on the basis of MNPI.
---------------------------------------------------------------------------

    \143\ See, e.g., Larcker et al. (2021); see also supra note 126
and accompanying text.
    \144\ See, e.g., Council of Institutional Investors, Request for
rulemaking concerning amending Rule 10b5-1 or further interpretive
guidance regarding the circumstances under which Rule 10b5-1 trading
plans may be adopted, modified, or cancelled, December 28, 2012, at
p. 3, available at https://www.sec.gov/rules/petitions/2013/petn4-658.pdf (recommending a minimum three-month waiting period); Yafit
Cohn and Karen Hsu Kelley, Simpson Thacher, Discusses Combating
Securities Fraud Allegations With10b5-1 Trading Plans, August 10,
2017, available at https://clsbluesky.law.columbia.edu/2017/08/10/simpson-thatcher-discusses-combatting-securities-fraud-allegations-with10b5-1-trading-plans/ (recommending that ``insiders wait 30 to
90 days before selling stock under the trading plan for the first
time''); David B.H. Martin, Keir D. Gumbs, David L. Kornblau,
Matthew C. Franker, and Stephanie W. Bignon, Rule 10b5-1 Trading
Plans: Avoiding the Heat, Bloomberg BNA Securities Regulation & Law
Report, 45 SRLR 438, 2013 (referring to the three-month cooling-off
period recommended by the Council of Institutional Investors and
stating that ``[w]aiting periods of this duration, or those which
restrict trading until after issuance of the next regular earnings
release, may assist insiders in demonstrating good faith and that
trades under a Rule 10b5-1 plan were not designed to take advantage
of material nonpublic information.''). In a February 10, 2021
letter, Senators Warren, Brown and Van Hollen recommended the
Commission consider a four to six-month cooling-off period between
adoption, or modification of a plan and commencement or
recommencement of trading under the plan.
---------------------------------------------------------------------------

    Some evidence of the extent to which cooling-off periods could
prevent insider trading is presented in Larcker et al. (2021). In that
study, approximately 14 percent of insider Rule 10b5-1 plans have the
first trade within 30 days of plan adoption, 39 percent within the
first 60 days, and 82 percent within 6 months.\145\ Shorter periods
between plan adoption and first trade are associated with worse returns
after the sale, which implies that more insider trading occurs in cases
of trading commencing closer to plan adoption.\146\
---------------------------------------------------------------------------

    \145\ See Larcker et al. (2021), at p. 2.
    \146\ Id, at p. 2.
---------------------------------------------------------------------------

    The proposed 120-day cooling-off period for officer and director
Rule 10b5-1 trading arrangements would also help deter trades under a
newly adopted or modified plan before the release of that quarter's
earnings announcement. Trades under Rule 10b5-1(c)(1) prior to an
earnings announcement appear to be more likely to involve insider
trading behavior. For example, Larcker et al. (2021) find that ``38
percent of plans adopted in a given quarter also execute trades before
that quarter's earnings announcement (i.e., in the 1 to 90 days prior
to earnings [sic]. . . Sales occurring between the adoption date and
earnings announcement are about 25 percent larger than sales occurring
more than six months after the earnings announcement . . . plans that
execute a trade in the window between when the plan is adopted and that
quarter's earnings announcement anticipate large losses and foreshadow
considerable stock price declines.'' \147\
---------------------------------------------------------------------------

    \147\ Id., at pp. 2-3.
---------------------------------------------------------------------------

    The proposed cooling-off periods would apply to directors and Rule
16a-1(f) officers but not to other natural persons. Directors and Rule
16a-1(f) officers (1) are generally more likely to be involved in
making or overseeing corporate decisions about whether and when to
disclose information; and (2) are generally more likely to be aware of
MNPI.\148\ Given the significant loss of flexibility associated with a
cooling-off period, the proposed approach of exempting natural person
insiders that are not officers or directors from the proposed cooling-
off period would tailor the application of the additional conditions of
the affirmative defense in a way that better balances the additional
costs to insiders with the investor protection benefits.
---------------------------------------------------------------------------

    \148\ See, e.g., Mavruk and Seyhun (2016), at p. 179.
---------------------------------------------------------------------------

ii. Restricting Multiple Overlapping and Single-Trade Rule 10b5-1
Trading Arrangements
    The Commission is proposing as a condition to the affirmative
defense to disallow the use of multiple overlapping Rule 10b5-1 plans
for open market trades in the same class of securities. This means that
an insider or company would not be able to use the affirmative defense
of Rule 10b5-1(c)(1) to maintain two or more Rule 10b5-1 plans for open
market trades in the same security class. In combination with the
proposed cooling-off period, this provision is expected to reduce the
likelihood that insiders or companies would enter into multiple,
overlapping plans and selectively cancel some of the plans at a later
time based on MNPI, while

availing themselves of Rule 10b5-1(c)(1)'s affirmative defense.\149\
The effects of this provision may be modest to the extent that
companies already prohibit multiple Rule 10b5-1 plans,\150\ or to the
extent that companies may allow a trading plan not reliant on Rule
10b5-1(c)(1) to exist in conjunction with a trading plan reliant on
Rule 10b5-1(c)(1).\151\
---------------------------------------------------------------------------

    \149\ As a result, the benefit of strategically canceling an
existing plan based on MNPI would be significantly reduced for many
insiders or issuers, compared to a scenario in which an insider or
issuer has multiple plans without cooling off periods, which is
permitted today. Under the proposal, an insider or issuer that
cancels a plan would be subject to disclosure obligations, as well
as a cooling-off period with respect to any new plan, which makes a
strategically planned cancellation significantly less attractive for
an insider or issuer that plans to continue trading. As proposed,
this cooling-off period could not be effectively shortened or
eliminated by having multiple plans with similar or staggered
adoption dates, because of the proposed restriction on multiple
overlapping plans for open-market trades in the same class of
securities.
    \150\ A 2016 industry survey found that 82 percent of
respondents do not allow multiple, overlapping Rule 10b5-1 plans.
See Defining the Fine Line: Mitigating Risk with 10b5-1 Plans,
Morgan Stanley/Shearman & Sterling LLP, available at https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf, supra note 120. The data
is based on the responses of the surveyed public company members of
the Society of Corporate Secretaries and Governance Professionals
and may not be representative of other companies.
    \151\ But see infra note 157 and accompanying text. Also,
trading under a plan not reliant on Rule 10b5-1 could entail
additional legal costs and limitations.
---------------------------------------------------------------------------

    The proposed unavailability of the affirmative defense for multiple
overlapping trading arrangements would not apply to transactions in
which directors, officers, or employees acquired or sold for themselves
securities as participants in ESOPs or DRIPs. This provision is
expected to preserve the benefits of flexibility for participants in
such plans. The proposed exclusion of multiple overlapping plans would
not apply to trades in different classes of securities. For example, a
plan for Class A common stock and an overlapping plan for Class B
common stock or for preferred stock would still be eligible for the
affirmative defense under the proposed amendments, provided that the
other conditions are met. Because different classes of shares can have
significantly different cash flow and voting rights, this provision is
expected to preserve the benefits of flexibility for those plan
participants that seek to implement independent purchase or disposition
strategies for different share classes through separate, overlapping
plans.
    The Commission is also proposing to limit the number of single-
trade trading arrangements under the Rule 10b5-1(c)(1) affirmative
defense to a maximum of one such trading arrangement in the prior 12-
month period. This is expected to reduce the likelihood that plan
participants would be able to repeatedly profit from ``one-off,'' ad
hoc trades based on previously undisclosed MNPI while availing
themselves of the protections of the Rule 10b5-1(c)(1) affirmative
defense.\152\ The incremental benefit of the proposed limitation may be
somewhat attenuated if insiders relying on single-trade plans are
largely driven by one-time liquidity needs, or if they are effectively
deterred from using MNPI by the cooling-off period or certification and
good faith provisions also being proposed. The benefit would also be
attenuated to the extent that some multi-trade plans may combine a
single trade based on MNPI with additional liquidity trades.
Nevertheless, there could be some benefit to limiting the frequency of
single-trade arrangements to the extent that some MNPI has a longer
horizon than the cooling-off period.
---------------------------------------------------------------------------

    \152\ For instance, some suggestive evidence is presented in
Larcker et al. (2021) (finding that, for single-trade plans, share
prices decreased following insider sales under Rule 10b5-1). As a
caveat, the data does not show the dates of all scheduled trades,
only the dates of executed trades. Thus, some ``single-trade'' plans
may be multi-trade plans in progress, or multi-trade plans with all
but one trade cancelled. See also Milian (2016), supra note 129
(finding that sales under Rule 10b5-1 plans with few trades are
associated with more negative subsequent returns than sales under
plans with more trades). As a caveat, the Milian (2016) study does
not specifically compare single-trade to multi-trade plans. Further,
the number of trades in the plan is highly correlated with the
duration of the plan in the study, giving rise to potential
confounding.
---------------------------------------------------------------------------

iii. Director and Officer Certifications
    The Commission is also proposing certification requirements as a
condition of the amended Rule 10b5-1(c)(1) affirmative defense for
trading arrangements of officers and directors. The proposed
certification requirement would reinforce their awareness of their
legal obligations under the Federal securities law related to the
trading in the issuer's securities. Thus, the proposed certification
requirement is expected to act as a deterrent to insider trading based
on MNPI by officers and directors through such plans.
iv. Requiring That Trading Arrangements Be Operated in Good Faith
    The proposed amendments would expand the good faith provision to
specify that all Rule 10b5-1 plans must be operated in good faith, as a
condition to the availability of the affirmative defense. The amended
good faith requirement is expected to further deter potential insider
trading as part of operating such plans, and thus alleviate associated
incentive distortions. For instance, by making clear that both the
initial entry into the plan as well as the operation of the plan,
including the circumstances surrounding any trading under the plan,
must be conducted in good faith, the proposed amendment might
discourage insiders from improperly influencing the timing and content
of disclosure motivated by an attempt to profit from MNPI while a plan
is ongoing (one of the economic costs of insider incentive distortions
due to insider trading discussed in Section IV.A above).\153\ The
proposed amendments are expected to benefit investor protection by
helping deter fraudulent and manipulative conduct throughout the
duration of the trading arrangement.
---------------------------------------------------------------------------

    \153\ See supra note 106 and accompanying and following text.
---------------------------------------------------------------------------

v. Issuer Trading Arrangements Under Rule 10b5-1(c)(1)
    Issuers would be subject to the proposed 30-day cooling-off period;
restrictions on single-trade and multiple overlapping Rule 10b5-1
trading arrangements; and the proposed requirement that trading
arrangements be operated in good faith. These proposed conditions would
apply to trading plans adopted by companies, including, for example,
those designed to facilitate repurchasing equity to return cash to
shareholders.
    Companies' attempts to make use of MNPI through Rule 10b5-1 plans
may have economic costs, and limiting such trading may benefit
investors and markets.\154\ Companies' efforts to use MNPI can
incentivize delays and distortions in disclosure, which exacerbate
information asymmetries between companies and outside investors.
Discovery of a company's insider trading based on MNPI may lead to
reputational costs for companies and decreased confidence of investors
in purchasing the shares offered by the issuer. The risk of adverse
selection due to trading against an informed trader that is the company
itself may discourage uninformed traders from secondary trading in the
issuer's shares. Thus, reducing the opportunity for insider trading by
companies under Rule 10b5-1(c)(1) may result in benefits for investor
protection and capital

formation and may promote fair, orderly, and efficient markets.
---------------------------------------------------------------------------

    \154\ See Jesse M. Fried, Insider Trading via the Corporation,
162(4) University of Pennsylvania Law Review, 801-840 (2014).
---------------------------------------------------------------------------

    Several factors make it more difficult to predict with certainty
the overall extent of the investor protection benefits of the proposed
amendments as they apply to issuers. As noted in Section IV.B.1 above,
there are only limited data on trading by companies under Rule 10b5-1
plans. Further, some of the economic effects of issuer trades differ
from those of natural person insiders. In particular, insider trading
by the issuer may benefit existing shareholders, albeit at the expense
of other investors.\155\
---------------------------------------------------------------------------

    \155\ In addition, it is somewhat less clear if insider trading
by the company will result in corporate investment distortions
discussed in Section IV.A; the effect would depend, in large part,
on whether the interests of insiders that make the actual corporate
decisions are aligned with those of the company in conjunction with
such trading (i.e., whether the insider has the same MNPI and either
trades in the same direction as the company, or abstains from
trading in the opposite direction of the trading by the company
based on MNPI). For example, a 2014 article argues that insiders
indeed profit from companies' MNPI-based trading. See Jesse M.
Fried, Insider Trading via the Corporation, 162(4) University of
Pennsylvania Law Review, 801-840 (2014).
---------------------------------------------------------------------------

3. Costs
    The proposed amendments will impose additional conditions on the
use of the Rule 10b5-1(c)(1) affirmative defense by insiders and
companies. All else equal, the proposed conditions on the use of Rule
10b5-1 plans would make it more complicated for insiders and companies
to sell or buy shares under such plans. The proposed conditions that
would impose additional barriers to sales of company stock under Rule
10b5-1(c)(1) could result in decreased liquidity of the insider's
holdings, including reduced ability to meet unanticipated liquidity
needs (such as emergency or unplanned expenses), as well as potential
constraints on portfolio rebalancing and achieving optimal portfolio
diversification and tax treatment. Greater difficulty of selling shares
under Rule 10b5-1 plans would impose illiquidity costs on insiders and
potentially reduce the value of their compensation.\156\
---------------------------------------------------------------------------

    \156\ See Lisa Meulbroek, The Efficiency of Equity-Linked
Compensation: Understanding the Full Cost of Awarding Executive
Stock Options, 30 (2) Financial Management, 5-44 (2001). See also
infra note 159 and accompanying and following discussion.
---------------------------------------------------------------------------

    In general, the economic costs of the proposed amendments to Rule
10b5-1(c)(1) might be partly mitigated by the voluntary nature of the
Rule 10b5-1(c)(1) affirmative defense. However, although Rule 10b5-
1(c)(1) is voluntary, some companies' insider trading policies may
require officers and directors to rely on Rule 10b5-1.\157\ Insiders
and companies that find the proposed conditions to be too restrictive
might elect not to rely on the affirmative defense for their trading.
However, insiders and companies that choose not to rely on Rule 10b5-
1(c)(1) in conducting their trading may incur other costs (e.g.,
additional cost of counsel or other experts to evaluate whether trades
conducted pursuant to a plan not reliant on Rule 10b5-1(c)(1) or
conducted without a trading plan are compliant with the Exchange Act
and Commission regulations, and a potential increase in legal liability
risk), as well as the loss of the ability to schedule execution of
trades during blackout periods (whereas trades under Rule 10b5-1 plans
generally can be executed during blackout periods). The effect of the
proposed conditions on the Rule 10b5-1(c)(1) affirmative defense for
companies may be less significant because companies may be able to rely
on the Rule 10b5-1(c)(2) affirmative defense, which is not available to
natural persons.\158\ To the extent insiders and companies are not
aware of MNPI, they may also elect to trade without a plan outside of a
blackout window.
---------------------------------------------------------------------------

    \157\ A 2016 industry survey found that 17 percent of surveyed
companies required the use of Rule 10b5-1 plans for trading. See
Defining the Fine Line: Mitigating Risk with 10b5-1 Plans, Morgan
Stanley/Shearman & Sterling LLP, available at https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf, supra note 120.
    \158\ See supra note 11.
---------------------------------------------------------------------------

    Faced with the additional conditions on the use of Rule 10b5-1
plans, some insiders may seek to reduce holdings of company shares in
general (through buying fewer shares, selling shares more quickly when
eligible, and negotiating for cash pay in lieu of equity pay), to the
extent feasible given companies' share ownership guidelines and
compensation policies.\159\ The proposed amendments also would make it
more difficult for insiders to purchase company shares if they wish to
do so under a Rule 10b5-1 plan.\160\ Reduced insider equity ownership
would in turn tend to reduce incentive alignment between insiders and
shareholders (to the extent such incentive alignment existed in the
first place and was not undermined by existing agency conflicts
discussed in greater detail in Section IV.A above), potentially
resulting in less efficient corporate decisions. In some cases,
insiders facing illiquidity risk may seek higher total pay to
compensate for the trading restrictions.\161\ The cost to issuers of
potential shifts in executive compensation in response to the proposed
conditions (whether in the form of additional compensation for
insiders, or changes in compensation structure that weaken insider
incentives) would be borne by existing shareholders, who are also the
primary beneficiaries of the added protections afforded by these
changes.
---------------------------------------------------------------------------

    \159\ Compensation committees may continue to award incentive
pay even if insiders might prefer to reduce exposure to the
company's equity. See, e.g., Darren T. Roulstone, The Relation
Between Insider-Trading Restrictions and Executive Compensation,
41(3) Journal of Accounting Research, 525-551 (2003) (showing that
firms restricting insider trading ``use more incentive-based
compensation and their insiders hold larger equity incentives
relative to firms that do not restrict insider trading''). Companies
may also impose share ownership guidelines and holding requirements.
See, e.g., Bradley W. Benson, Qin Lian, and Qiming Wang, Stock
Ownership Guidelines for CEOs: Do They (Not) Meet Expectations?, 69
Journal of Banking and Finance, 52-71 (2016); see also, e.g.,
Equilar, Executive Stock Ownership Guidelines, March 9, 2016,
available at https://www.equilar.com/reports/34-executive-stock-ownership-guidelines.html (finding that the percentage of Fortune
100 companies that disclose ownership guidelines or holding
requirements in any form was 87.6 percent in 2014); John R. Sinkular
and Don Kokoskie, Stock Ownership Guideline Administration, Harvard
Law School Forum on Corporate Governance, June 11, 2020, available
at https://corpgov.law.harvard.edu/2020/06/11/stock-ownership-guideline-administration/; NASPP, 5 Trends in Stock Ownership
Guidelines, December 15, 2020, available at https://www.naspp.com/Blog/December-2020/5-Trends-in-Stock-Ownership-Guidelines (finding
that ``[e]ighty-five percent of respondents to the 2020 survey
currently impose ownership guidelines on executives'').
    \160\ However, the likelihood of choosing a Rule 10b5-1 plan for
a purchase is much lower than the likelihood of electing to use Rule
10b5-1(c)(1) for a sale (with the caveats about data availability).
One study noted that approximately 2.3 percent of purchases versus
22.4 percent of sales were reported to be undertaken using Rule
10b5-1 plans. See Taylan Mavruk and Nejat H. Seyhun, Do SEC's 10B5-1
Safe Harbor Rules Need to Be Rewritten, Columbia Business Law
Review, 133-183 (2016).
    \161\ See Darren T. Roulstone, The Relation Between Insider-
Trading Restrictions and Executive Compensation, 41(3) Journal of
Accounting Research, 525-551 (2003) (finding that ``firms that
restrict insider trading pay a premium in total compensation
relative to firms not restricting insider trading, after controlling
for economic determinants of pay.''); see also M. Todd Henderson,
Insider Trading and CEO Pay, 64(2) Vanderbilt Law Review, 503-556
(2011) (finding that ``executives whose trading freedom increased
using Rule 10b5-1 trading plans experienced reductions in other
forms of pay to offset the potential gains from trading'').
---------------------------------------------------------------------------

    In the subsections below we discuss the individual costs these
conditions could impose on affected plan participants. In Section
IV.B.3.v below, we discuss the proposed amendments as they would apply
to companies' plans.
i. Cooling-Off Period for Officers and Directors
    The proposed 120-day cooling-off period condition for officers and
directors would restrict their ability to

purchase or sell shares pursuant to a Rule 10b5-1 plan for the duration
of the cooling-off-period. As a result of that condition, some insiders
may choose not to rely on a Rule 10b5-1 plan for future trading.\162\
Insiders that sell shares without relying on a Rule 10b5-1 plan are
likely to incur additional costs and limitations. The economic costs of
decreased liquidity due to Rule 10b5-1 plan restrictions were discussed
in detail in Section IV.B.3 above.
---------------------------------------------------------------------------

    \162\ But see supra note 157.
---------------------------------------------------------------------------

    Because trading during the four months following adoption of a Rule
10b5-1 plan appears to be common based on available data summarized in
Section IV.B.1 above, the proposed amendments are likely to have an
adverse impact on insiders, resulting in the economic costs associated
with the decreased ability to trade and, especially, divest holdings,
which were described in greater detail in Section IV.B.3 above.\163\
---------------------------------------------------------------------------

    \163\ See Larcker et al. (2021), supra note 118 and accompanying
text. A 2016 industry survey examining Rule 10b5-1 plan practices at
public companies found that 30 days was the most popular cooling-off
period among their respondents (41 percent) and that for 77 percent
of the respondents, the cooling-off period was 60 days or less. See
supra note 120.
---------------------------------------------------------------------------

ii. Restricting Multiple Overlapping and Single-Trade Rule 10b5-1
Trading Arrangements
    The proposed exclusion from the Rule 10b5-1(c)(1) affirmative
defense of multiple overlapping plans for open market trades in the
same class of securities would limit the flexibility of insiders in
using Rule 10b5-1 plans to purchase or sell their shares. The multiple-
plan exclusion might be less restrictive to the extent that insiders
can anticipate and combine all planned open-market purchases and sales
of securities of the same class into a single plan. The focus of the
proposed exclusion on multiple plans for open-market trades is expected
to reduce the cost of the proposed requirement for insiders with
purchases and sales as part of an ESOP or DRIP, in addition to open-
market purchases or sales. The incremental costs of the proposed
amendment could be limited to the extent that companies already
disallow such plans,\164\ or may allow the existence of a trading plan
under Rule 10b5-1(c)(1) concurrently with a plan not reliant on Rule
10b5-1(c)(1).\165\ While insiders may seek to avoid the costs of the
prohibition on multiple Rule 10b5-1 plans by terminating an existing
plan and adopting a new plan, the proposed cooling off period would be
applicable to the modified plan and thus may result in other costs to
insiders.
---------------------------------------------------------------------------

    \164\ For example, see supra note 150 and accompanying text
(discussing company restrictions on multiple overlapping plans).
    \165\ See supra note 151 and accompanying text.
---------------------------------------------------------------------------

    The proposed limitation on single-trade Rule 10b5-1 plans could
make it costlier for insiders with repeated sporadic or ad hoc
liquidity needs to divest equity holdings.\166\ At the same time, the
proposed approach of limiting the number of single-trade Rule 10b5-1
plans in a 12-month period, rather than restricting them entirely,
would alleviate costs for insiders with occasional unexpected liquidity
needs that seek to avail themselves of the affirmative defense for such
a single-trade plan.
---------------------------------------------------------------------------

    \166\ Single-trade plans appear to be common. Based on
Washington Service data from January 2016--May 2020, Larcker et al.
(2021) note that 49 percent of the 10b5-1 plans in their sample
cover only a single trade. Using Washington Service data for a more
recent period (January 2, 2018-October 19, 2021), we estimate that
single-trade plans constitute approximately 40 percent of plans
during the time period examined. See supra note 119. The caveat
about classification of plans as ``single-trade'' plans in the
available data applies. See supra note 179.
---------------------------------------------------------------------------

iii. Officer and Director Certifications
    The Commission is proposing to require as a condition to the
affirmative defense that directors and officers must personally certify
that they were not aware of MNPI about the security or issuer when
adopting a Rule 10b5-1 trading arrangement, including a modified
trading arrangement.
    The proposed certification condition would result in increased
costs for insiders and companies, such as the cost of consulting with
legal or other experts to help analyze whether they have material
nonpublic information.
    Because officers and directors, but especially officers, may often
be aware of some MNPI, to the extent that officers and directors
perceive the certification requirement as increasing the legal cost of,
and legal risk associated with, adopting or modifying a Rule 10b5-1
plan, they may reduce their use of Rule 10b5-1 plans (and, as discussed
above, potentially seek other compensation terms with less equity
exposure in light of the associated illiquidity costs, which may result
in additional costs to the company and its shareholders).\167\
Relatedly, to the extent that companies view the proposed certification
condition as increasing the legal costs and risks to the company of
adoption or modification of Rule 10b5-1 plans by officers and
directors, they may implement additional restrictions on insider
trading under such plans, through insider trading policies and
procedures. Both potential effects could result in reduced liquidity of
insider holdings of company stock, the economic costs of which were
discussed in greater detail in Section IV.B.3 above.
---------------------------------------------------------------------------

    \167\ See supra note 159 and accompanying and following text.
---------------------------------------------------------------------------

iv. Requiring That Trading Arrangements Be Operated in Good Faith
    The proposed amendments specify that a trading plan must be
operated in good faith as a condition to the continued availability of
the affirmative defense may result in costs to obtain legal counsel and
potential loss of the affirmative defense if a plan is not operated in
good faith. The legal costs of the proposed amendments' requirement
that a Rule 10b5-1 plan be operated in good faith would be incremental
to the legal costs that plan participants already incur as a result of
the existing provision that requires that a Rule 10b5-1 plan be entered
into in good faith.
    Because insiders, but especially officers, may often be aware of
some MNPI, to the extent that they perceive the amended good faith
provision as increasing the legal cost of, and legal risk associated
with, adopting a new or modified Rule 10b5-1 plan, they may reduce
their reliance on Rule 10b5-1 plans.
v. Issuer Trading Arrangements Under Rule 10b5-1(c)(1)
    As discussed above, issuers' trading arrangements under Rule 10b5-
1(c)(1) would be subject to some of the proposed additional conditions,
including to the proposed restrictions on single-trade and multiple
overlapping Rule 10b5-1 trading arrangements; the proposed requirement
that trading arrangements be operated in good faith; and a 30-day
cooling-off period. To the extent companies do not already follow such
conditions as part of their existing best practices,\168\ these

amendments would result in additional costs to companies of conducting
purchases and sales under such plans and could decrease some companies'
reliance on Rule 10b5-1 plans. For instance, for companies that rely on
such plans to implement issuer repurchases, the costs of the proposed
amendments could result in an inefficient decrease in repurchases.
Costs incurred by companies could be borne by their existing
shareholders.\169\ In particular, the proposed 30-day cooling-off
period could decrease a company's flexibility in implementing and
modifying Rule 10b5-1 plans.
---------------------------------------------------------------------------

    \168\ We lack data on the length of cooling-off periods and
other terms used in companies' own Rule 10b5-1 plans. For a
discussion of Rule 10b5-1 practices related to issuer repurchases,
see, e.g., these law firm publications providing suggestions and
recommendations of best practices to issuers that use Rule 10b5-1
for repurchases and other trading: Capital Market Alert: Share
Repurchases, Skadden, Arps, Slate, Meagher & Flom LLP, March 16,
2020, available at https://www.skadden.com/en/insights/publications/2020/03/share-repurchases (suggesting, among practice tips, that
``companies consider a `cooling-off' period before any transactions
under the Rule 10b5-1 plan will occur'' and that ``[r]egular
transactions over an extended period are preferable to a small
number of large transactions'' and also noting that while a cooling-
off period, for instance, 30 days, is recommended, some companies
may begin their purchases within days of adopting a Rule 10b5-1
plan); Robert H. Friedman, Jonathan H. Deblinger, and Kenneth S.
Mantel, Navigating Public Company Equity Buybacks, 25(12) Insights:
The Corporate & Securities Law Advisor (2011) (discussing, among
others, buybacks under Rule 10b5-1 plans and recommending that
issuers ``[e]stablish a waiting period for some time after a plan's
adoption or modification or suspension during which trading under
the plan is not permitted. While not cast in stone, a waiting period
of 30 days or more is a reasonable timeframe'' and that ``issuer[s]
should not maintain multiple Rule 10b5-1 plans'' and cautioning
against plans ``that will only last a short period of time'');
Stuart Gelfond, Arielle L. Katzman, Frank Fried, Shriver Harris, &
Jacobson LLP, A Guide to Rule 10b5-1 Plans, March 24, 2016,
available at https://corpgov.law.harvard.edu/2016/03/24/a-guide-to-rule-10b5-1-plans/ (suggesting, as a ``best practice'', that issuers
``establish only one 10b5-1 plan'' and ``establish a waiting
period'' and also noting that ``[b]rokers administering plans
frequently impose a seasoning period as part of their own trading
practices, but companies also adopt these policies. A fourteen day
period is often used, but many companies have increased the waiting
period to about one month.'').
    \169\ In the case of repurchases under trading plans, costs
incurred by companies would be borne by the subset of existing
shareholders that are not selling their shares to the company during
the repurchase.
---------------------------------------------------------------------------

    The costs of the amendments to companies could be partly mitigated
because companies are not required to rely on Rule 10b5-1 plans.
Further, companies that value financial flexibility in executing their
repurchase programs may be minimally affected by changes to the rule
because they might already choose not to rely on such plans today.\170\
However, companies that would have otherwise relied on a Rule 10b5-1
plan under current rules might see incrementally greater costs from a
choice not to rely on such a plan under the proposed rules. The costs
of the proposed amendments to companies may be further mitigated by the
availability of the Rule 10b5-1(c)(2) affirmative defense.\171\
---------------------------------------------------------------------------

    \170\ See supra note 139 and accompanying text. In particular,
one recent study found that ``[i]n 2014 [the latest year analyzed in
the study], only 12% of repurchase announcements included an ASR
[accelerated stock repurchase] whereas 29% included a 10b5-1 plan.
These results are consistent with more firms preferring to maintain
some level of flexibility in their repurchase programs.'' See Alice
Bonaim[eacute], Jarrad Harford, and David Moore, Payout Policy
Trade-Offs and the Rise of 10b5-1 Preset Repurchase Plans, 66(6)
Management Science, 2762-2786 (2020). See also supra note 140 and
accompanying text (estimating that only approximately 220 companies
disclosed share repurchase programs executed under a Rule 10b5-1
plan during calendar year 2020, with the caveat that existing
disclosure of such plans is voluntary and may therefore be a low
bound).
    \171\ See supra note 11.
---------------------------------------------------------------------------

4. Effects on Efficiency, Competition, and Capital Formation
    We expect the proposed amendments to reduce the improper use of
Rule 10b5-1 plans by insiders with MNPI. This decrease in insider
trading should also limit insiders' incentives to engage in inefficient
corporate decisions associated with insider trading, which were
discussed in Section IV.A above. The effects of the proposed rule on
the efficiency of corporate investment and other decisions are not
fully certain because the proposed rule may induce insiders to adjust
their holdings in response to the reduced liquidity and potentially
lead companies to adjust incentive and compensation structure or other
policies and practices in response to the rule.
    Further, limiting insiders' ability to trade on MNPI would decrease
the insiders' incentives to influence the timing and content of
corporate disclosures. Timelier and higher-quality corporate
disclosures would provide more information to investors, resulting in
more informationally efficient share prices in the secondary market and
more efficient allocation of investor capital across investment
opportunities in their portfolio.
    A reduction in insider trading may also benefit market
efficiency.\172\ Further, a lower risk of trading against an informed
insider or company is expected to increase investor confidence and the
willingness of market participants to buy, and trade in, the company's
shares. This would indirectly make it easier for the company to raise
capital from investors.
---------------------------------------------------------------------------

    \172\ See supra note 109.
---------------------------------------------------------------------------

    Finally, the proposed amendments may affect competition. Decreasing
the ability of insiders and companies to trade on MNPI would weaken
their competitive edge in trading, promoting competition among other
investors in the market for the company's shares. A lower risk of an
insider with a significant private information advantage trading the
company's shares may strengthen the incentive of other market
participants to trade the company's shares and compete in gathering and
processing information about the company.
    All of the effects described above would be weaker to the extent
that some officers and directors may switch to trading under non-Rule
10b5-1 plans, or may trade in the absence of a plan. Whether the
amendments prompt a large-scale shift of insider trading to non-Rule
10b5-1 plans would depend, in part, on how burdensome insiders find the
proposed amendments and in part how company policies constrain insider
use of MNPI in non-Rule 10b5-1 plans (including in response to the
proposed Item 408 disclosure requirements).
    It is not clear if the proposed amendments would result in
meaningful competitive effects on the labor market for executive
talent. We are not exempting any categories of public companies from
the amendments. While the proposed Rule 10b5-1(c)(1) amendments could
reduce the liquidity of holding company stock and thereby make equity
ownership less attractive for insiders of public companies (as
discussed in greater detail in Section IV.B.3 above), even with these
additional conditions in place, the use of Rule 10b5-1 plans would
remain optional, and holdings of private company shares would remain
significantly less liquid.
5. Reasonable Alternatives
    In the case of Rule 10b5-1 trading arrangements of natural persons,
the proposed cooling-off periods and certification requirements would
apply to officers and directors, while the proposed amendments to the
good faith provisions and the proposed exclusion of multiple
overlapping trading arrangements would apply to all natural persons'
plans. As an alternative, with respect to natural persons, we could
apply all of the proposed Rule 10b5-1(c)(1) amendments only to officers
and directors, or only to officers.\173\ Compared to the proposal,
these alternatives would eliminate the costs of the rule (discussed in
greater detail in Section IV.B.3 above) for the exempted plan
participants but increase the risk of insider trading by such
participants, compared to the proposal. The latter effects may be
smaller to the extent the exempted persons are less involved in making
and overseeing corporate decisions or are less likely to be aware of
MNPI. As another alternative, with respect to natural persons, we could
extend all of the proposed Rule 10b5-1(c)(1) amendments to all plan

participants. Compared to the proposal, this alternative would subject
additional natural persons to the costs of the rule (discussed in
greater detail in Section IV.B.3 above) but also decrease the risk of
insider trading by such participants. The latter effects may be smaller
to the extent that natural persons other than officers and directors
are less involved in making and overseeing corporate decisions, may
lack control or knowledge about the timing and substance of the
company's disclosures, or are less likely to be aware of MNPI. The
aggregate effects of all of the discussed alternatives, compared to the
proposal, may also be smaller to the extent that Rule 10b5-1 plans tend
to be most prevalent among officers.
---------------------------------------------------------------------------

    \173\ With the caveat about data availability, where Rule 10b5-
1(c)(1) use is reported, officers are far more likely to report
trading under Rule 10b5-1 plans than directors.
---------------------------------------------------------------------------

    The proposed amendments to Rule 10b5-1(c)(1) would subject Rule
10b5-1 trading arrangements of issuers to a 30-day cooling-off period,
amended good faith provisions, and restrictions on single-trade and
multiple overlapping Rule 10b5-1 trading arrangements. As an
alternative, we could exempt issuer plans from some or all of these
proposed conditions, or modify some or all of these conditions for
issuers (e.g., subjecting issuers to a shorter or longer cooling-off
period). Compared to the proposal, a greater (smaller) number of
companies might continue to find Rule 10b5-1 plans attractive for
purchases and sales of securities under the alternative of less (more)
stringent conditions of the affirmative defense. However, the
alternative of imposing less (more) stringent conditions on issuer
plans would result in a greater (lower) risk of companies adopting or
modifying Rule 10b5-1 plans based on MNPI, compared to the proposal. To
the extent that issuers already avail themselves of the affirmative
defense under Rule 10b5-1(c)(2), which does not contain such
conditions, the incremental effects of such alternatives, compared to
the proposal, may be smaller. (For a more detailed discussion of the
potential benefits and costs of extending the proposed amendments to
issuers, see Sections IV.B.2.v and IV.B.3.v above.)
    The Commission is proposing to amend Rule 10b5-1(c)(1) by adding
new conditions to the affirmative defense. As an alternative, we could
rescind the Rule 10b5-1(c)(1) affirmative defense altogether.
Rescinding Rule 10b5-1(c)(1) would increase the costs for existing Rule
10b5-1 plan participants (such as in the form of the additional cost of
legal counsel to determine whether trading arrangements, or trades not
reliant on a trading arrangement, are compliant with the Exchange Act
in the absence of the Rule 10b5-1(c)(1) affirmative defense). The
associated costs of divesting stock in the absence of the affirmative
defense would make insiders' holdings of stock less liquid and could
further induce insiders to negotiate non-stock-based compensation.\174\
Rescinding the Rule 10b5-1(c)(1) affirmative defense would also
increase the legal liability risk for insiders that continue to trade
due to greater uncertainty about whether they have complied with Rule
10b-5, as well as subject insiders to additional limitations on trading
(such as restrictions on trading during blackout periods). Further,
while rescinding Rule 10b5-1(c)(1) would eliminate Rule 10b5-1 plans,
it would not affect the use of other trading arrangements by officers,
directors, and companies. The potential shift of trading from Rule
10b5-1 plans, which contain conditions specifically tailored for
investor protection, to other trading arrangements or trading outside
of plans might lead to an increase in insider trading, and a negative
impact on investor protection, compared to the proposal. From the
companies' standpoint, the continued existence of Rule 10b5-1(c)(1) may
facilitate companies' efforts to develop and implement corporate
governance practices for issuer and insider trading arrangements that
comply with securities laws and regulations. We expect the proposed
Item 408 disclosure requirements, discussed in detail in Section IV.C
below, to partly mitigate incentives to engage in insider trading under
all plans, including plans that are not reliant on Rule 10b5-1(c)(1)
under this alternative.
---------------------------------------------------------------------------

    \174\ See supra note 159 and accompanying and following text.
---------------------------------------------------------------------------

    As discussed above, the proposed amendments to Rule 10b5-1(c)(1)
include several new conditions of the affirmative defense (cooling-off
periods, amended good faith requirements, exclusion of multiple
overlapping plans for open market trades in the same class of
securities, and officer and director certifications). As an
alternative, we could propose to impose some, but not all, of these
additional conditions. This alternative could possibly lower the
aggregate costs of the rule and preserve greater flexibility, compared
to the proposal, decreasing the costs discussed in the case of each of
the specific provisions. However, this alternative would make the
combined set of proposed amendments less effective at curbing insider
trading behavior under Rule 10b5-1.
    The Commission is proposing a 120-day cooling-off period for
officers and directors, and a 30-day cooling-off period for issuers,
after the adoption of a new or modified plan. As an alternative to the
proposed cooling-off period for officers and directors, the Commission
could propose a shorter cooling-off period (e.g., between one and three
months), a longer cooling-off period (e.g., five or six months), or a
variable time period until the next quarterly or annual report filing
or earnings release).\175\ As an alternative to the proposed 30-day
cooling-off period for issuers, the Commission could propose a shorter
or longer cooling-off period. A shorter cooling-off period could reduce
some of the costs of a cooling-off period and preserve greater
flexibility for insiders and issuers, compared to the proposal, but
would increase the risk of trading based on MNPI. Conversely, a longer
cooling-off period could increase costs to insiders and issuers and
limit flexibility, compared to the proposal, but would decrease the
risk of trading based on MNPI. A more detailed discussion of the costs
and benefits of a cooling-off period that would be magnified or
reduced, respectively, under these alternatives is included in Sections
IV.B.2.i, IV.B.2.v, IV.C.2.i, and IV.C.2.v. The discussed effects of
the alternatives would also depend on whether they differ from the
existing cooling-off period practices.\176\
---------------------------------------------------------------------------

    \175\ See supra note 144 (discussing suggestions for three-month
and four- to six-month cooling-off periods); see also supra note 120
and following text (noting that at over three-quarters of surveyed
respondents, the cooling-off period was 60 days or less).
    \176\ See supra notes 118-120 and accompanying and preceding
text and supra note 168.
---------------------------------------------------------------------------

    The proposed amendments would make the affirmative defense
unavailable for multiple overlapping Rule 10b5-1 trading arrangements
for open market trades in the same class of securities. As an
alternative, we could allow multiple plans but limit their number
(e.g., to two or three), limit the provisions to no more than one plan
pertaining to purchases and one plan pertaining to sales, or provide
other exceptions. These alternatives could preserve greater
flexibility, compared to the proposal, and lower costs for plan
participants that have multiple accounts through which they trade in
the company stock. However, these alternatives would present a greater
risk of illegal insider trading, compared to the proposal (to the
extent not mitigated by other proposed provisions, including
certifications, amended good faith requirement, cooling-off periods,
and amended disclosure requirements). In particular, the option to
maintain multiple plans concurrently facilitates

the ability to selectively cancel one of the plans based on material
nonpublic information, without being subject to a waiting period with
respect to the remaining plans' trades. This alternative may be less
significant to the extent that companies already disallow, or avoid,
multiple overlapping plans voluntarily,\177\ or to the extent that
companies may allow, or have, a trading plan not reliant on Rule 10b5-
1(c)(1) to exist in conjunction with a trading plan reliant on Rule
10b5-1(c)(1).\178\
---------------------------------------------------------------------------

    \177\ See supra note 150 and accompanying text and supra note
168.
    \178\ See supra note 151 and accompanying text.
---------------------------------------------------------------------------

    The proposed amendments would also limit the availability of the
affirmative defense in the case of single-trade Rule 10b5-1 plans to a
maximum of one such plan in a 12-month period. As another alternative,
we could restrict the use of single-trade plans under Rule 10b5-1(c)(1)
entirely, or conversely, allow a greater number of single-trade plans
in a 12-month period. The alternative of more (less) stringent
restrictions on single-trade plans could reduce (increase) the risk of
insider trading, compared to the proposal (to the extent not mitigated
by the cooling-off period and other proposed provisions). Unlike in the
case of a multi-trade plan, an insider who decides to initiate a
single-trade Rule 10b5-1 plan based on MNPI is more likely to be able
to execute it with less price impact and not to have to disclose the
trade on Form 4 (and, depending on the timing of plan adoption and Form
10-Q/10-K filing, not to have to disclose the plan adoption) until
after the plan is fully executed.\179\ In turn, the alternatives of
more (less) stringent restrictions on single-trade plans could also
limit (expand) the flexibility and impose additional costs on insiders
with a one-time, ad hoc liquidity need, compared to the proposal.\180\
---------------------------------------------------------------------------

    \179\ See supra note 152.
    \180\ See supra note 166.
---------------------------------------------------------------------------

6. Request for Comment
    45. Would the proposed amendments to the conditions of Rule 10b5-
1(c)(1) benefit investors? In what specific ways would the proposed
amendments help protect investor interests?
    46. What would be the costs of the proposed amendments to Rule
10b5-1(c)(1) for insiders, companies, and investors?
    47. Would the proposed amendments affect the use of Rule 10b5-1
plans, and if so, how?
    48. How often are Rule 10b5-1 plans used today for purchases and
sales of securities? How often are Rule 10b5-1 plans used by natural
persons other than officers (e.g., directors, beneficial owners, non-
executive employees)? How prevalent are concerns about insider trading
under Rule 10b5-1 plans? Which traders raise the most significant
concerns (e.g., officers, directors, others)?
    49. How often do companies impose cooling-off periods on Rule 10b5-
1 plans today? What cooling-off period length is most common today?
Would the proposed 120-day minimum cooling-off period for Rule 10b5-1
plans of officers and directors benefit investors? What would be the
costs of the proposed cooling-off periods? Should we consider
alternative cooling-off period lengths or definitions, and what would
be their costs and benefits?
    50. Are there other provisions we should consider instead of
cooling-off periods, to more effectively address insider trading
through Rule 10b5-1 plans, and what would be the economic effects of
such alternative provisions?
    51. What other practices and policies are used today to mitigate
insider use of material nonpublic information for trading through
trading plans?
    52. What would be the economic effects of the proposed restriction
on multiple overlapping Rule 10b5-1 plans? What would be the costs and
benefits of the proposed limit on the number of single-trade Rule 10b5-
1 plans in a 12-month period? Would these provisions appropriately
balance concerns about the use of multiple overlapping plans and
insiders' liquidity needs? Should we consider alternative restrictions,
and what would be the benefits and cost of those alternatives?
    53. Would the proposed director and officer certification
requirements with respect to Rule 10b5-1 plans serve to protect
investors and deter insider trading under such plans? What would be the
costs of the proposed certification requirements? What challenges might
insiders face in complying with the proposed requirements?
    54. Would the amended good faith requirement of Rule 10b5-1(c)(1)
serve to protect investors from insider trading through Rule 10b5-1
plans? What would be the costs of the amended good faith requirement?
    55. How often do companies themselves rely on Rule 10b5-1 plans
today to purchase securities and to sell securities, respectively? How
often do companies that rely on Rule 10b5-1 plans disclose such plans?
How prevalent are concerns about insider trading under Rule 10b5-
1(c)(1) by companies?
    56. Would applying the proposed 30-day cooling-off period, the
proposed amendments to the good faith provision, and the proposed
exclusion of multiple trading plans to companies benefit investors?
What would be the costs of the proposed amendments for companies that
rely on Rule 10b5-1 plans and their shareholders? What would be the
economic effects of exempting companies from some of the proposed
conditions, or modifying some of the proposed conditions in cases of
companies' Rule 10b5-1 plans? For example, what would be the costs and
benefits of exempting companies from the cooling-off period
requirement, or applying a shorter or longer cooling-off period to
companies' Rule 10b5-1 plans? How would issuer ability to rely on Rule
10b5-1(c)(2) change these economic effects?

C. Disclosure of Trading Arrangements in New Item 408 of Regulation S-K
and Mandatory Rule 10b5-1 Checkbox in Amended Forms 4 and 5

    The proposed new Item 408 of Regulation S-K would require quarterly
disclosure, on Form 10-Q and Form 10-K (with respect to a company's
fourth quarter), of the adoption or termination, and the terms of a
Rule 10b5-1 trading arrangement or other preplanned trading arrangement
by directors, Rule 16a-1(f) officers, and the company itself. Proposed
Item 408 would also require disclosure in Form 10-K and proxy or
information statements of policies and procedures governing trading by
directors, officers, and employees and the issuer itself (as discussed
in greater detail in Section II.B above). A similar requirement with
respect to disclosure of policies and procedures would extend to
foreign private issuers that file annual reports on Form 20-F.\181\ The
proposed disclosures would be tagged using a structured data language
(specifically, Inline XBRL). In addition, the proposed amendments would
add a Rule 10b5-1 checkbox as a mandatory disclosure requirement on
Forms 4 and 5 to indicate that a reported transaction was made pursuant
to a Rule 10b5-1 trading arrangement, and disclosure of the date of
adoption of the trading plan. We are also proposing to add an optional
checkbox to Forms 4 and 5 that would allow a filer to indicate whether
a transaction reported on the form was made pursuant to a contract,

instruction, or written plan that did not satisfy the conditions of
Rule 10b5-1(c).
---------------------------------------------------------------------------

    \181\ The discussion in this section referring to Item 408(b)
also extends to the economic effects of related amendments to Form
20-F that apply similar requirements to Form 20-F filers.
---------------------------------------------------------------------------

1. Baseline and Affected Parties
    The proposed Item 408(a) disclosure requirements regarding the
adoption, modification, termination, and material terms of officer,
director, and company trading plans would apply to annual and quarterly
reports on Forms 10-K and 10-Q. During calendar year 2020, based on the
analysis of EDGAR filings, we estimate that there were approximately
6,400 filers with annual reports on Form 10-K or quarterly reports on
Form 10-Q or amendments to it.\182\ The proposed Item 408(b) disclosure
requirements regarding insider trading policies and procedures would
apply to annual reports on Forms 10-K and proxy and information
statements on Schedules 14A and 14C. Disclosure requirements similar to
proposed Item 408(b) would also apply to foreign private issuers that
file Form 20-F. During calendar year 2020, based on the analysis of
EDGAR filings, we estimate that there were approximately 5,900 filers
of annual reports on Form 10-K or proxy or information statements, or
amendments to them, and, in addition, approximately 700 filers of
annual reports on Form 20-F (or amendments to them).\183\
---------------------------------------------------------------------------

    \182\ The estimate excludes registered investment companies and
asset-backed securities issuers, which would not be subject to the
proposed disclosures.
    \183\ Id.
---------------------------------------------------------------------------

    The proposed requirements regarding the disclosure of trading plans
will affect all companies that have their own trading plans or whose
officers or directors have trading plans, as well as, indirectly, all
officers and directors with trading plans whose plans would now be
subject to public disclosure by the company (see Section IV.B.1 above).
    The proposed requirements regarding disclosure of insider trading
policies and procedures would affect companies subject to the
requirements, as well as indirectly, companies and natural persons that
engage in trading subject to the disclosed policies and procedures.
    The proposed Rule 10b5-1 checkbox requirement would apply to all
filers of Forms 4 and 5 (not just officers and directors). During
calendar year 2020, we estimate that there were approximately 44,000
such filers.\184\
---------------------------------------------------------------------------

    \184\ The estimate is based on filings of Forms 4 and 5 during
calendar year 2020 in Thomson Reuters/Refinitiv insiders dataset.
---------------------------------------------------------------------------

2. Benefits
    The proposed Item 408 of Regulation S-K and related disclosure
amendments would benefit investors through greater transparency about
officer, director, and issuer trading arrangements, as well as
governance practices with respect to insider trading.\185\ The timing
of trading plan adoption and termination by officers, directors, or the
company itself, as well as a description of the terms of the trading
arrangement, would enhance the value of existing trade disclosures,
potentially conveying valuable information about the insiders' or the
company's views on the company's future outlook, aiding investors in
obtaining a more accurate valuation of the company's shares and making
more informed investment decisions.
---------------------------------------------------------------------------

    \185\ See also Section IV.A.
---------------------------------------------------------------------------

    The proposed requirement that these data points be tagged in a
structured data language (specifically, in Inline XBRL) would
facilitate access and analysis of the disclosures by investors,
potentially leading to more useful and timely insights. In particular,
structuring the disclosures about trading plans that would be required
under Item 408(a) of Regulation S-K would enable automated extraction
of granular data on such trading plans, which would allow investors to
efficiently perform large-scale analyses and comparisons of trading
plans across issuers and time periods. Structured data on trading plans
could also be efficiently combined with other information that is
available in a structured data language in corporate filings (e.g.,
information on insider sales and purchases of securities) and with
market data contained in external machine-readable databases (e.g.,
information on daily share prices and trading volume). The use of a
structured data language could also enable considerably faster analysis
of the disclosed data by investors. For the narrative disclosure on
policies and procedures that would be required under Item 408(b) of
Regulation S-K, structuring the disclosures in Inline XBRL would allow
investors to extract information from and search through the
disclosures about trading plan policies and procedures (rather than
having to manually run searches for these disclosures through entire
documents), automatically compare these disclosures against prior
periods, and perform targeted artificial intelligence and machine
learning assessments (tonality, sentiment, risk words, etc.) of
specific narrative disclosures about trading plan policies and
procedures rather than the entire unstructured document.
    We expect these benefits to result from disclosure of plan
terminations and changes in material plan terms, as well as from
disclosure of plan adoptions, because a termination, or a change in
material terms, of a prior trading plan may similarly convey
information about the views of the officers, directors, or the issuer
regarding the company's future outlook and share price. Further, the
timing of trading plan adoption or termination, relative to the
issuance of other corporate disclosures, would provide investors with
valuable insight into potential insider trading under such plans, and
thus associated conflicts of interest that erode firm value. We expect
such benefits to extend to all trading arrangements, including ones
that are not reliant on Rule 10b5-1(c)(1), which also are within the
scope of the proposed new Item 408 and related disclosure amendments.
This would be particularly beneficial in instances where issuers,
officers, or directors forgo reliance on Rule 10b5-1(c)(1) under the
proposed amendments or fail to meet one of the proposed amended
conditions of the affirmative defense. Moreover, by drawing market
scrutiny to the adoption, termination, and changes in the terms of
trading plans, enhanced trading plan disclosure is expected to deter
insider abuses of trading arrangements based on MNPI. This would
benefit investors by reducing insider trading, as well as reducing the
economic costs and inefficiencies associated with insider trading, as
discussed in Section IV.A above. The described benefits would be
lowered or eliminated to the extent that trading plans are initiated
due to liquidity needs or other reasons not related to the company's or
insider's outlook on future share price.
    The proposed additional disclosure of insider trading policies and
procedures is expected to provide investors with valuable information
about governance practices with respect to insider trading of company
stock. This requirement will allow investors to better understand the
policies and procedures that guide companies in which they invest and
the conduct of officers and directors of those companies, including
whether and how issuers adopt standards that are reasonably necessary
to promote (i) honest and ethical conduct, including the handling of
conflicts of interest, (ii) full, fair, and accurate disclosure in
periodic reports, including the potential mitigation of pricing
distortions from insider trading, and (iii) compliance with applicable
government rules and regulations, including the prohibition on insider
trading.\186\ The absence or presence, and the nature of, such policies
and practices can inform

investors about the likelihood of insider use of MNPI and thus, the
likelihood of incurring the economic costs of insider trading discussed
in Section IV.A above. It will help investors better understand how
issuers protect their confidential information--which ``qualifies as
property to which the company has a right of exclusive of use''--as
well as guard against the misappropriation of that information.\187\
The disclosure of insider trading policies and procedures could also
aid shareholders' voting decisions. Requiring the disclosure would also
provide greater consistency in disclosures across companies. In
addition, the anticipation of market scrutiny following mandatory
disclosure may incentivize companies without specific insider trading
policies to implement such policies and procedures. Such revisions to
insider trading policies are in turn expected to reduce the likelihood
of insider trading, and the associated economic costs discussed in
Section IV.A above, particularly at companies with weaker governance
practices with respect to insider trading.
---------------------------------------------------------------------------

    \186\ See 15 U.S.C. 7264(c).
    \187\ O'Hagan, 521 U.S. at 654 (recognizing that the undisclosed
misappropriation of MNPI in breach of a duty of trust and confidence
is ``akin to embezzlement'').
---------------------------------------------------------------------------

    The proposed amendments adding a Rule 10b5-1 plan checkbox to Forms
4 and 5 would benefit investors by providing transaction-specific
disclosure of sales and purchases under Rule 10b5-1 plans. The proposed
checkbox disclosure would allow investors easier and timelier access to
information about trades under Rule 10b5-1(c)(1). This information
would enable investors to more comprehensively identify insider trading
pursuant to Rule 10b5-1 plans, as well as provide greater consistency
in the disclosure of Rule 10b5-1 plan trades. Today, the disclosure of
a purchase or sale under a Rule 10b5-1 trading arrangement in Forms 4
and 5 is voluntary, resulting in a lack of consistent and comprehensive
information about trades. To the extent that trades under Rule 10b5-
1(c)(1) are subject to a different regulatory framework and may have
different motivations than other insider trades, the checkbox would
allow investors to more readily interpret information in Forms 4 and 5.
    The proposed mandatory Rule 10b5-1 plan checkbox disclosures, in
combination with the proposed quarterly disclosure of adoption,
modification, termination, and material terms of trading plans, would
provide greater transparency to investors regarding the use of Rule
10b5-1 plans for trading. Such information about insider trading would
provide investors with valuable context for interpreting other
corporate disclosures in valuing the companies' shares and making
informed investment decisions. Because Forms 4 and 5 would continue to
use a structured data language, investors would be able to extract and
analyze comprehensive information about insider trades under Rule 10b5-
1 plans across multiple time periods, individuals, and companies.
3. Costs
    First, we consider the direct (compliance-related) costs of the
proposed disclosure requirements for insiders and companies. Such costs
would include preparing the disclosure and gathering the information
required to comply with the new disclosure requirements. Such costs
would be lower for companies that already disclose some information
about insider and issuer trading plans or insider trading policies
today. Insiders are likely to have information about which of their
trades were executed pursuant to a Rule 10b5-1 plan readily available,
likely resulting only in small direct costs of providing a checkbox
disclosure on Forms 4 and 5. The costs of complying with the new
checkbox requirement would be lowest for officers and directors that
already voluntarily disclose Rule 10b5-1 plan use in their filings of
Forms 4 and 5.
    Officers and directors will have information about the adoption,
modification, termination, and terms of their trading plans readily
available. Similarly, companies will have information about the
adoption, modification, termination, and material terms of their own
trading plans readily available. However, companies might not currently
be collecting such information from officers and directors as part of
their existing disclosure obligations, especially with respect to plans