Insights

SEC Adopts Amendments to Rule 10b5-1 and Adds New Disclosure Requirements

By S. Blake Leger, Jonathan A. Greene

Capital Markets

On December 14, 2022, the Securities and Exchange Commission (“SEC”) adopted several amendments regarding Rule 10b5-1 insider trading plans and other related disclosures. Plans adopted pursuant to Rule 10b5-1 provide corporate insiders an affirmative defense to Rule 10b5-1 liability for insider trading by allowing the insider to set up future trades pursuant to a contract that is adopted when the insider is not in possession of material non-public information (“MNPI”). The new rules add conditions to the availability of the affirmative defense to insider trading provided for under Rule 10b5-1, while also requiring several new disclosures related to 10b5-1 plans.

The SEC indicated that the purpose of the new rules is to strengthen investor protections regarding insider trading and to also help shareholders understand when and how company insiders are trading in securities for which they may have MNPI.

Below we summarize the new rules and disclosure requirements and provide information on when companies must begin complying with such new requirements.

I. 10b5-1 Amendments

Mandatory Cooling-Off Periods

Previously, the affirmative defense provided for in Rule 10b5-1 did not require a corporate insider to wait any amount of time between the adoption of a 10b5-1 plan and the first trade under such plan (although some companies included such waiting periods in 10b5-1 plans and insider trading policies). The new rules will now impose a mandated “cooling-off” period between adoption of a plan and the first trade under the plan. The length of the cooling-off period depends on the corporate insider:

  • For executive officers and directors, the cooling-off period is the later of (a) 90 days after adoption of the plan and (b) 2 business days following the issuer’s disclosure of financial results in Form 10-Q or 10-K for the fiscal quarter in which the plan was adopted, provided that the maximum cooling-off period is 120 days.
  • For corporate insiders other than executive officers and directors, the mandatory cooling off period is 30 days.

A material modification of a 10b5-1 plan is treated as a new plan adoption, triggering a mandatory cooling-off period. A material modification is any change in the amount, price, or timing of purchases or sales, or changes to the formula or algorithm that affect the amount price, or timing of purchases or sales.

Notably the SEC did not adopt rules regarding a cooling-off period for 10b5-1 plans adopted by issuers to trade in their own stock as they previously proposed. However, the SEC noted it is continuing to consider the issue to determine if additional regulatory action is needed.

Director and Officer Representations

Pursuant to the new rule, directors and officers will now be required to include a representation in their 10b5-1 Plan certifying, at the time of the adoption (or modification) of the plan, that:

  • They are not aware of any MNPI about the issuer or the securities (this effectively codifies an SEC interpretation of Rule10b5-1 not supported by the rule’s original language); and
  • 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.

It should be noted that most brokerage firms’ 10b5-1 plan templates already require similar    representations from persons setting up plans.

Restriction on Multiple Overlapping Rule 10b5-1 Plans

Under the new rule, individuals (but not the issuer) are restricted from having more than one 10b5-1 plan outstanding for purchases or sales of any class of securities of an issuer during the same period. The SEC noted this restriction is intended, in part, to prevent the use of multiple overlapping plans (and the selective cancelling of such plans) for hedging purposes. However, there are multiple exceptions to this restriction:

  • An individual may have two separate 10b5-1 plans in place at the same time as long as trading under the “later-commencing” plan does not begin until after all trades under the first plan were executed or expired without execution. The later-commencing plan will be subject to the new cooling-off period with the termination date of the first plan serving as the “adoption date” of the later-commencing plan.
  • An individual may have separate 10b5-1 plans in place with different broker-dealers and treat them as a “single” plan, provided that the plans, when taken as a whole, satisfy all of the requirements of Rule 10b5-1.
  • An individual may have two separate 10b5-1 plans in place at the same time, provided that one of the plans is a “sell-to-cover” plan where the agent is only authorized to sell shares as necessary to cover tax withholding obligations related to the vesting of equity awards.

Restriction on Single-Trade Plans

The new rule limits individuals (but not issuers) to one single-trade plan within a 12-month period. “Single-trade plans” are plans designed to effect the purchase or sale of securities in a single transaction and do not include plans where the agent has discretion over whether to execute the plan as a single transaction.

As with the restriction on multiple overlapping plans, “sell-to-cover” plans are excluded from this provision.

Expanded Good Faith Requirement

The new rule expands the existing “good faith” requirement that plans be entered into with good faith, by adding the condition that the person subject to the plan “has acted in good faith with respect to” the plan. This clarification essentially requires that an individual act with good faith for the duration of a plan and would prohibit, for example, a person from attempting to improperly influence the timing of corporate disclosures so as to benefit their trades under a 10b5-1 plan.

Effectiveness

The amended 10b5-1 plan requirements will become effective on February 27, 2023 (60 days after publication in the Federal Register). Rule 10b5-1 plans adopted or modified on or after February 27, 2023 must be in compliance with the updated requirements in order to rely on the affirmative defense provided under Rule 10b5-1. Plans adopted prior to February 27, 2023 do not need to be in compliance with the new requirements in order to rely on the affirmative defense, unless such plans are modified on or after February 27, 2023.

II. New Issuer Disclosure Requirements

Quarterly Reporting of Trading Arrangements

The SEC added new Item 408(a) to Regulation S-K, which will require issuers to disclose quarterly in their Form 10-Qs and Form 10-Ks (i) whether any director or officer has adopted or terminated any 10b5-1 plan, or any “non-Rule 10b5-1 trading arrangement”[1] and (ii) the material terms of such 10b5-1 or non-Rule 10b5-1 trading arrangement.

The “material terms” required to be disclosed include the (i) name and title of the director or officer, (ii) date of adoption, modification or termination of the plan and its duration, (iii) the aggregate number of securities to be sold or purchased pursuant to the plan and (iv) whether the plan is a 10b5-1 plan or non-Rule 10b5-1 trading arrangement. Notably, pricing terms are specifically excluded from the disclosure requirements.

Annual Disclosure of Insider Trading Policies and Procedures

Pursuant to new Item 408(b) of Regulation S-K, issuers will be required to disclose annually, in their Form 10-K and proxy statements, whether they have adopted insider trading policies and procedures. If it has, the issuer will be required to file a copy of such policies and procedures as an exhibit to its annual report on Form 10-K. If an issuer has not adopted any such policies or procedures, it will be required to explain why.

These disclosures will be subject to the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002, including the attestation as to the accuracy of the statements.

Disclosure Regarding Option Awards

Pursuant to new Item 402(x) of Regulation S-K, issuers will be required to disclose, on Form 10-K or the annual meeting proxy, the issuer’s policies on the timing of awards of stock options, stock appreciation rights and/or similar option-like instruments (but not restricted stock or restricted stock units) in relation to the release of MNPI by the issuer. Such disclosure should include:

  • How the timing of the awards is determined;
  • How MNPI is considered, if at all, when determining the timing and terms of an award; and
  • Whether the disclosure of MNPI is timed so as to affect the value of awards.

New Item 402(x) will also require issuers to include a new tabular disclosure in their annual reports on Form 10-K disclosing any options granted in the last completed fiscal year to named executive officers (“NEOs”) that were granted within 4 business days before or 1 business day after the filing of a (i) Form 10-Q, (ii) Form 10-K or (iii) current report on Form 8-K that contains MNPI (including earnings information). The tabular disclosure must include, for each award identified:

  • Number of shares underlying the award;
  • Date of grant;
  • Grant-Date fair value;
  • Exercise price of the award; and
  • Percentage change in the closing market price of the shares underlying the award between the trading day ending immediately prior to the disclosure of MNPI and the trading day beginning immediately following the disclosure of such MNPI.

Smaller Reporting Companies and Emerging Growth Companies may limit their tabular disclosures to their Principal Executive Officer (“PEO”) and the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year. These scaled disclosure requirements are intentionally consistent with the scaled approach to their executive compensation disclosure.

Effectiveness

Issuers will be required to comply with the new periodic and proxy reporting requirements beginning with filings that cover full fiscal periods beginning on or after April 1, 2023 (October 1, 2023 for smaller reporting companies), meaning for calendar year end companies these disclosures will first be made in Forms 10-K and/or proxy statements filed with the SEC in 2025, covering the fiscal year beginning January 1, 2024 and ending December 31, 2024.

III. New Section 16 Reporting Rules

Gifts

Section 16 insiders will now be required to report bona-fide gifts of equity securities on Form 4 within 2 business days of such gifts. Previously, Section 16 insiders were allowed to report such gifts on Form 5 within 45 days after the end of the issuer’s fiscal year.

Rule 10b5-1 Checkbox

Forms 4 and 5 will now include a checkbox where filers will have to indicate whether a transaction reported on such form was made pursuant to a plan that is intended to satisfy the affirmative defense requirements under Rule 10b5-1.

Effectiveness

Section 16 insiders will be required to comply with the new requirements for gift reporting on Form 4 beginning February 27, 2023. However, gifts made before February 27, 2023 may still be reported on Form 5 within 45 days after the end of the fiscal year in which the gifts were made.

The checkbox reporting changes made to Forms 4 and 5 will apply to all Forms 4 and 5 filed on or after April 1, 2023.

[1] A “non-Rule 10b5-1 trading arrangement” is defined in Regulation S-K Item 408(c) and covers pre-planned trading arrangements that do not meet the conditions of the Rule 10b5-1(c)(1) affirmative defense.

Blake Leger  and Jonathan Greene are members of the Capital Markets practice group of Wyrick Robbins, which represents public company clients across a broad range of industries in connection with their SEC reporting and corporate matters, and significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.