The U.S. Securities and Exchange Commission (SEC) adopted Rule 10b5-1 in 2000. Under that Rule, company insiders unaware of material, non-public information (MNPI) can enter into pre-arranged trading plans that, subject to certain conditions, provide such insiders with an affirmative defense to insider trading liability—even if the trades under such plans ultimately are made when the insider actually does possess MNPI.

Given Rule 10b5-1’s affirmative defense provision, paired with the fact that internal corporate communications concerning the propriety of entering into and trading under Rule 10b5-1 plans often involve privileged advice from in-house counsel that generally may be shielded from production in response to subpoenas or litigation discovery requests, it is not surprising that the SEC and U.S. Department of Justice (DOJ) have been hesitant to sue individuals over unscrupulous 10b5-1 trading practices. Indeed, the Wall Street Journal reports that only three actions were brought in the first two decades after Rule 10b5-1 was enacted. Recently, however, the SEC and DOJ appear to have begun bucking that trend.

First, in large part to curb perceived abuses of Rule 10b5-1, the SEC revamped Rule 10b5-1 through amendments that were finalized in December 2022, which are expected to become effective later this year, and those amendments augment the Rule’s requirements.

Second, it is evident that the SEC and DOJ recently have been monitoring perceived Rule 10b5-1 abuses. For example, in September 2022, the SEC brought insider trading claims against senior officers of a Chinese technology company whom the SEC found had established a 10b5-1 trading plan after learning MNPI. In settling such claims, the SEC imposed on each officer a civil penalty of several hundred thousand dollars. Likewise, in December 2022, a publicly traded car rental company disclosed that it had received a grand jury subpoena from the DOJ seeking documents concerning certain of its directors’ and officers’ 10b5-1 plans and trades, as well as an SEC subpoena seeking similar documents. In March 2023, both the SEC (civilly) and DOJ (criminally) charged a public healthcare company’s chief executive officer for insider trading based on sales that he made pursuant to a trading plan that he allegedly entered into while in possession of MNPI. The DOJ described this “groundbreaking” prosecution as “the first time” that it had “brought criminal insider trading charges based exclusively on an executive’s use of 10b5-1 trading plans.”

Time will tell whether these recent SEC and DOJ activities mark a new enforcement trend in which government claims against individuals over 10b5-1 trades become common. While such insider trading claims, if proven, might trigger certain coverage exclusions in a directors’ and officers’ (D&O) liability insurance program, for now, directors and officers should regularly audit their D&O polices to maximize the potential coverage available to them in the event that they have to defend against insider trading claims.

If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.