Updated Compliance & Disclosure Interpretations on Rule 10b5-1
On April 25, 2025, the Securities and Exchange Commission’s Division of Corporation Finance (the “SEC”) updated its Compliance and Disclosure Interpretations (“C&DI”) pertaining to Rule 10b5-1 trading plans, which provide an affirmative defense to insider trading liability in circumstances where securities transactions were made under a written trading plan and subject to certain conditions.
The C&DI updates include two new questions, the withdrawal of three questions, and tweaks to 20 of the existing questions, many of which appear to be intended to align previously issued C&DIs with the amendments to Rule 10b5-1 adopted by the SEC in 2022.
New Questions
The SEC added two new questions, Question 120.32 and Question 120.33, relating to Rule 10b5-1(c)(1) (the provision that provides the conditions for the availability of the affirmative defense). New question 120.32 clarifies how security transactions through a 401(k) plan pursuant to a self-directed “brokerage window” are treated for purposes of claiming the Rule 10b5-1(c)(1) affirmative defense. The SEC explains that because the counterparty to the self-directed “brokerage window” transaction will be an open market participant, the instruction for such transaction must satisfy all conditions of Rule 10b5-1(c)(1), including those applicable to purchases and sales of the issuer’s securities on the open market.
New question 120.33 addresses the reference to “necessary to satisfy tax withholding obligations” for purposes of the exception provided in Rule 10b5-1(c)(1)(ii)(D)(3). Generally, under Rule 10b5-1(c)(1)(ii)(D), an individual may not claim the Rule 10b5-1 affirmative defense if the individual has multiple Rule 10b5-1 plans that provide for purchases or sales of issuer securities on the open market. Rule 10b5-1(c)(1)(ii)(D)(3) provides an exception to such rule in the case of eligible sell-to-cover transactions. An eligible sell-to-cover transaction is a contract or plan that authorizes the agent to sell only such securities as are “necessary to satisfy tax withholding obligations” arising from the vesting of a compensation award. The SEC clarifies that the phrase “necessary to satisfy tax withholding obligations” refers to tax withholding payments that are calculated in good faith to satisfy the employee’s or director’s expected effective tax obligation solely with respect to the vesting transaction, consistent with applicable tax law and accounting rules.
Revised and Withdrawn Questions
The majority of the revisions to the existing questions generally concern corrected rule references as well as compliance with the conditions applicable to the affirmative defense to align with the amendments adopted in 2022. More substantive revisions were made to questions regarding limit orders (Questions 120.12, 120.15 and 120.16) and terminations of Rule 10b5-1 plans (Question 120.18). Additionally, there were several substantive revisions made to Questions 120.21, 120.22 and 120.23 regarding the applicability of the affirmative defense to security purchases in a 401(k) plan via payroll deductions. Question 120.21 clarifies that if an employee’s enrollment in a 401(k) plan satisfies the enumerated conditions of Rule 10b5-1(c)(1) applicable to the employee, then the affirmative defense would be available for payroll deductions for purchases under the 401(k) plan. Question 120.22 explains that the instruction for a fund-switching transaction in a 401(k) plan must be analyzed independently of the analysis of the employee’s enrollment in a 401(k) plan and, specifically, must satisfy the enumerated conditions in Rule 10b5-1(c)(1). Question 120.23 provides direction as to whether a fund-switching transaction under a 401(k) plan could be considered a “corresponding or hedging transaction” within the meaning of Rule 10b5-1(c)(1)(i)(C) with respect to payroll deduction purchases under a 401(k) plan.
The three withdrawn C&DIs concerned Form 144 (Question 120.02), the cancellation of plan transactions (Question 120.19) and the transfer of plans to a different broker (Question 220.01).
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