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Cheetah Mobile Enforcement Action Demonstrates SEC’s Focus on Rule 10b5-1 Trading Plans九月 26, 2022
The SEC underscored its scrutiny of Rule 10b5-1 trading plans with the recent announcement of settled insider trading and other charges against the CEO and former President and CTO of Cheetah Mobile for sales conducted through such a plan.
In December 2021, the SEC proposed amendments to Rule 10b5-11, which provides an affirmative defense to insider trading liability for trades made in accordance with the Rule’s requirements. One of the requirements is that when the person adopts a trading plan, they must not be aware of material, nonpublic information about the securities to be purchased or sold pursuant to the plan.
According to the SEC’s order, the Cheetah Mobile officers’ trading plan did not meet the requirements of Rule 10b5-1 because, when they established the plan to sell Cheetah Mobile securities, they were aware of the company’s negative trend in revenue from a major partner.
As part of the settlement, the individual respondents agreed to assume certain undertakings regarding their securities transactions for the next five years, including:
- Disclosing to the SEC all of their US securities accounts;
- Notifying the SEC within forty-eight hours of any transactions involving Cheetah Mobile securities; and
- Annually certifying compliance with the undertakings.
The Cheetah Mobile CEO agreed to further undertakings, given his continued relationship with the company, including:
- Notifying the SEC within forty-eight hours of the creation or modification of any 10b5-1 plan involving Cheetah Mobile securities;
- Implementing a 120-day “cooling off” period before starting any trading pursuant to a new or modified 10b5-1 plan involving Cheetah Mobile securities;
- Limiting himself to one 10b5-1 plan at a time relating to Cheetah Mobile securities; and
- Notifying the Cheetah Mobile legal department of any prospective Cheetah Mobile securities transaction other than one made pursuant to a 10b5-1 plan and obtaining approval of the legal department before executing the transaction.
Certain of these undertakings parallel the limitations in the proposed Rule 10b5-1 amendments. For example, the proposed rules would require a 120-day cooling off period for officers and directors and provide that the Rule 10b5-1 defense would not apply to multiple overlapping 10b5-1 plans. Although fashioned as an undertaking, the incorporation of those requirements into the settlement suggests that those terms will be part of the final rule amendments.
The SEC’s action serves as a reminder of the importance for both companies and individuals of seeking legal advice in connection with the adoption of Rule 10b5-1 policies and trading plans and ensuring compliance with their terms.
1 17 C.F.R. § 240.10b5-1(c)(1) (2021).
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