Stocking Stuffer from the SEC: SEC Adopts Final Rules on 10b5-1 Plans and Related Disclosures
On December 14, 2022, the Securities and Exchange Commission (the “SEC”) announced amendments to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and related insider trading laws (the “Amendments”). The Amendments were adopted in response to the growing perception that Rule 10b5-1 plans have led to abuses of insider trading laws by issuers and insiders opportunistically trading in company securities while in possession of material nonpublic information. This alert summarizes the Amendments and recommends next steps to ensure compliance with the new rules.
Rule 10b5-1 under the Exchange Act provides an affirmative defense to insider trading liability if:
- A trading plan or arrangement is adopted in good faith and at a time when the person or issuer was not aware of material nonpublic information;
- The plan specifies a non-discretionary trading method;
- The person adopting the plan has no ability to influence how, when or whether to make purchases or sales once the plan is adopted; and
- The purchase or sale was made in accordance with the plan’s terms.
Amendments to Rule 10b5-1 and Related Disclosure Requirements
The Amendments amend Rule 10b5-1 to require compliance with the following conditions in order to rely on the affirmative defense to insider trading liability:
- 10b5-1 plans entered into by officers
and directors must include a cooling off period during which no trading under the plan may occur until the later of (i) 90 days following the adoption of the plan and (ii) two business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the fiscal quarter in which the plan was adopted (but not to exceed 120 days following the adoption of the plan).
- 10b5-1 repurchase plans entered into by persons other than issuers, officers and directors must include a 30-day cooling off period between the time of adoption of the plan and the first transaction under the plan.
- Modifications to an existing trading plan will only require a new cooling off period if the modification relates to the amount, price, or timing of the purchase or sale (or the written formula or algorithm or computer program that affects the amount, price or timing of the purchase or sale).
- Officers and directors must personally certify, in the representations in the trading plan, that they are not aware of material nonpublic information about the issuer or the security when adopting a new or modified 10b5-1 plan and that they are adopting the plan in good faith and not as part of a plan to evade Rule 10b-5.
- Persons other than issuers may have in place only one 10b5-1 plan at a time for open market transactions in any class of the issuer’s securities, subject to certain exceptions.
- For persons other than issuers, 10b5-1 trading arrangements designed to cover a single trade are limited to one plan per 12-month period.
- All persons entering into a 10b5-1 plan must act in good faith with respect to the plan.
The SEC did not adopt a cooling off period for issuers at this time but noted that they “are continuing to consider whether regulatory action is needed to mitigate any risk of investor harm from the misuse of Rule 10b5-1 plans by issuers, such as in the share repurchase context.”
In addition, the Amendments added the following enhanced disclosure requirements regarding 10b5-1 plans, option grants, issuer insider trading policies and gifts of securities:
- Issuers’ annual reports will need to (i) disclose all policies and practices relating to the timing of awards of stock options, SARs and similar option-like awards, and (ii) include a table showing option grants made in the four business days before the filing of a periodic report or the filing or furnishing of a Form 8-K that discloses material nonpublic information and ending one business day after such a triggering event, as well as the percentage change in the market value of the underlying securities between the trading day before the disclosure of material nonpublic information and the trading day after such disclosure. These new disclosures do not apply to restricted stock or restricted stock units.
- Issuers’ quarterly reports will be required to disclose the adoption and termination of Rule 10b5-1 plans and other preplanned trading arrangements by directors and officers and the material terms of such trading arrangements, including the date of adoption or termination, the duration of the plan, contract or instruction, and the aggregate amount of securities to be sold or purchased under such plan, contract or instruction. Disclosure of pricing terms will not be required.
- Issuers’ annual reports and proxy statements will be required to disclose whether the issuer has adopted insider trading policies and procedures and, if not, why not, and to file as an exhibit to the issuer’s Form 10-K the issuer’s insider trading policies and procedures if they have adopted such policies and procedures.
- The new disclosures will be required to be tagged in Inline XBRL.
- Officers, directors and greater than 10% holders will be required to check a new box on Forms 4 and 5 to report that a transaction was made pursuant to a Rule 10b5-1 plan and will be required to disclose the date of adoption of the Rule 10b5-1 plan.
- Insiders will be required to report bona fide gifts of securities within two business days of the date of the gift on a Form 4. Under current rules, bona fide gifts of securities are reportable on a Form 5 due within 45 days after the end of the issuer’s fiscal year, with early reporting on Form 4 permitted. In practice, many insiders choose to report gifts early so that they do not forget to file the Form 5 after the end of the fiscal year. The final rule requires gifts to be reported on a Form 4 within two business days just like many other transactions reportable under Section 16(a) of the Exchange Act.
Effective and Compliance Dates
- The final rules will become effective 60 days following publication of the adopting release in the Federal Register.
- Section 16 filings that report transactions pursuant to 10b5-1 plans and gifts will need to comply with the new rules for Form 4 and 5 reports filed on or after April 1, 2023.
- Issuers other than smaller reporting companies will be required to comply with the new disclosure and Inline XBRL tagging requirements for 10-Qs, 10-Ks and proxy statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023 (e.g., for calendar year fiscal year end companies, the 10-Q for the second quarter of 2023 and the 10-K and proxy statement for the year ending December 31, 2023, filed in 2024).
- Smaller reporting companies get an additional six-month grace period and will be required to comply with the new disclosure and Inline XBRL tagging requirements in the first filing that covers the first full fiscal period that begins on or after October 1, 2023 (e.g., for calendar year fiscal year end companies, the 10-K and proxy statement for the year ending December 31, 2023, filed in 2024).
- Rule 10b5-1 plans in effect on the effective date of the new rules will be entitled to the benefit of grandfathering and, accordingly, will not need to be amended to comply with the new rules. However, if a grandfathered plan is modified in a manner that changes the amount, price or timing of transactions under the plan, the plan will be deemed to be terminated and, at that time, will need to comply with the new rules.
What To Do Now
We recommend that companies take the following actions to ensure compliance with the Amendments ahead of their respective effective and compliance dates:
- Review your insider trading policy and other applicable policies and amend those policies if changes are needed to comply with the new rules (for example, to add the respective cooling off periods for 10b5-1 plans entered into by officers, directors and employees).
- Consider the effects of the new cooling-off period requirements on employee benefit plans such as employee stock purchase plans and 401(k) plans.
- Ensure your Section 16 insiders are aware of the accelerated deadline to report gifts of issuer securities and the changes required in Forms 4 and 5 filed to report transactions pursuant to 10b5-1 plans.
- Ensure all employees and directors are aware of any changes made to the company’s policies in response to the final SEC rules.
- Determine whether to put in place policies on equity grant practices in connection with the disclosure requirements associated with equity compensation awards.
- Update your disclosure controls to include the disclosure requirements related to the timing of equity compensation awards and Section 16 filing requirements for transactions made under a Rule 10b5-1 plan and gifts of securities.
For additional information about any of the above developments, or to discuss any questions that you may have, please contact a member of Maynard’s Public Company Advisory Group.
 As used throughout this client alert, “officers” are the officers set forth in Rule 16a-1(f) under the Exchange Act.
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