SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans and Related Disclosures
On December 13, 2022, the Securities and Exchange Commission unanimously adopted amendments to Rule 10b5-1, imposing new limitations on the ability of insiders to utilize so-called “10b5-1 plans.” 10b5-1 plans are plans to buy or sell securities which if entered into in good faith while an insider is not in possession of material nonpublic information can create an affirmative defense to insider trading, even if the trades under such plans are ultimately made while the insider is in possession of material nonpublic information. The amendments also add greater transparency around such plans and insider trading policies by adding new disclosure requirements for public companies. The SEC further adopted new rules requiring disclosures about equity awards made close in time to the disclosure of material nonpublic information, as well as the reporting of gifts by insiders.
How Do The Amendments Impact 10b5-1 Plans?
New requirement for cooling off periods. The amendments adopt a requirement for 10b5-1 plans to have “cooling-off periods” for persons other than issuers before trading can commence under a Rule 10b5-1 plan. Specifically, the amendments add a requirement for all plans by directors or officers to have a cooling-off period of the later of: (1) 90 days following plan adoption or modification; or (2) two business days following the disclosure in certain periodic reports (Form 10-Q or Form 10-K for domestic filers and Form 20-F or Form 6-K for foreign private issuers) of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification) before any trading can commence under the trading arrangement.
For persons other than issuers or directors and officers, a cooling-off period of 30 days will be required. Issuers will not be subject to a cooling off period.
The new periods are much longer than many plans use today because cooling off periods are currently voluntary.
New certifications. Once effective, the amendments will require directors and officers to include a representation in in any new Rule 10b5-1 plans (or amendments to grandfathered plans) certifying, at the time of the adoption of a new or modified plan, that: (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1. Further, the amendments provide that not only must a plan be entered into in good faith but also be operated in good faith (i.e., it is clarified that the requirement to act in good faith applies throughout the life of the plan, not just when it is entered into).
Limit on overlapping plans and single-trade plans. The amendments add a limitation on the ability of anyone other than issuers to use multiple overlapping Rule 10b5-1 plans.
What Will Issuers Need to Disclose About 10b5-1 Plans, Insider Trading Policies and Option Grant Practices?
Quarterly and annual disclosures. Pursuant to new Item 408 of Regulation S-K, issuers will be required to disclose quarterly disclosure in their Forms 10-Q and 10-K if, during the last completed quarter, any director or officer of the issuer adopted or terminated a “Rule 10b5-1 trading arrangement” or “Non-Rule 10b5-1 trading arrangement.” A Non-Rule 10b5-1 trading arrangement is a written trading arrangement that complies with the old Rule 10b5-1 affirmative defense (circa 2000 to 2022) but does not comply with the new affirmative defense conditions of Rule 10b5-1(c).
Issuers will be required to indicate whether the arrangement is a Rule 10b5-1 trading arrangement or a Non-Rule 10b5-1 trading arrangement and provide a description of the material terms, other than with respect to price, which include the name and title of the director or officer, date of adoption or termination, duration, and aggregate number of securities to be sold or purchased.
The periodic disclosure requirements will be required to be tagged in inline XBRL.
Insider trading policies. Annually, issuers will be required to disclose in Form 10-K or Form 20-F and proxy and information statements whether they have adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of their securities by directors, officers, and employees, and if not, to explain why they have not done so. A copy of any such policies must be filed as an exhibit to Form 10-K and 20-F. As a result, issuer insider trading policies will now become public documents.
The disclosure may be incorporated by reference from the proxy statement into the Form 10-K if the proxy statement is filed within 120 days of the fiscal year-end.
Disclosures about option granting practices. Issuers will be required to discuss in their discussions of executive compensation (i.e., in Part III of Form 10-K or a proxy statement) their policies and practices on the timing of awards of stock options, stock appreciation rights (“SARs”) or similar option-like instruments in relation to the disclosure of material nonpublic information by the issuer, including how the board of directors determines when to grant such awards (e.g., whether the awards are granted according to a predetermined schedule).
Issuers must also discuss whether, and if so, how, the board or compensation committee takes material nonpublic information into account when determining the timing and terms of an award, and whether the issuer has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation. In addition, if, during the last completed fiscal year, stock options, SARs or similar option-like instruments were awarded to a named executive officer (“NEO”) within a period beginning four business days before the filing of a periodic report, or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information (including earnings information, but not including a Form 8-K reporting a material new option award grant under Item 5.02(e)), and ending one business day after the filing of such report, the issuer must provide information concerning each such award for the NEO on an aggregated basis in the following tabular format:
|Name||Grant date||Number of securities underlying the award||Exercise price of the award ($/Sh)
||Grant date fair value of the award||Percentage change in the closing market price of the securities underlying the award between the trading day ending immediately prior to the disclosure of material nonpublic information and the trading day beginning immediately following the disclosure of material nonpublic information|
Types of issuers impacted. All domestic issuers must provide each of the foregoing new disclosures. With respect to the new disclosures about option granting, smaller reporting companies and emerging growth companies only need to cover the same named executive officers they cover in other existing executive compensation disclosure tables. Foreign private issuers will be subject to the new rules regarding insider trading policies, but not subject to the disclosure about 10b5-1 plans or option granting practices.
How is Section 16 Reporting Impacted?
New check-the-box requirement for 10b5-1 plans on Forms 4 and 5. Forms 4 and 5 will be revised to include a new box to check for Section 16 reporting persons (directors, executive officers, 10% shareholders) to indicate that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1, and disclosing the date of adoption of the trading plan.
Accelerated reporting of gifts by insiders. Unrelated to the amendments to Rule 10b5-1, the SEC revised the Section 16 rules to require the reporting on Form 4 of bona fide gifts of issuer securities by insiders within two business days rather than the current rules allowing annual reporting of gifts on Form 5. While many insiders voluntarily report gifts early under the current rules, the revised rules will mandate gift reporting on the same timeline as most other insider transactions in an issuer’s securities.
What are the Deadlines for Compliance?
The final rules will become effective 60 days after publication in the Federal Register, which may take several weeks, at which point any Rule 10b5-1 plan thereafter adopted or modified should comply with the new requirements. For anyone party to existing Rule 10b5-1 plans that were entered into in compliance with the current rule, no action is required. Existing Rule 10b5-1 plans are grandfathered in so long as they are not further amended after the amendments go into effect.
Issuers will be required to comply with the new disclosure requirements in Exchange Act periodic reports on Forms 10-K, 10-Q, and 20-F and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023 (i.e., the second-quarter Form 10-Q for the new quarterly disclosure requirements for a domestic issuer with a December 31 fiscal year-end or the Form 10-K or 20-F for the year ending December 31, 2024 for the annual disclosure requirements), or October 1, 2023 for smaller reporting companies (i.e., the fiscal 2023 Form 10-K for the new quarterly disclosure requirements for a domestic issuer with a December 31 fiscal year-end or the Form 10-K for the year ending December 31, 2024 for the annual disclosure requirements).
Section 16 insiders will be required to comply with the amendments to Form 4 beginning with reports regarding gifts filed on or after April 1, 2023.
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If you would like further information regarding the new amendments to Rule 10b5-1 or the other rule changes described above, please contact the lawyer at Sullivan & Worcester LLP with whom you regularly consult, or either of the lawyers listed above.