SEC Adopts Significant Changes To 10b5-1 Trading Plans – Securities

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On December 14, 2022, the US Securities and Exchange Commission (the “Commission”) adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which change the rules governing trading plans structured to take advantage of the affirmative defense provided by Rule 10b5-1(c) (“Trading Plans”). The amendments also adopt certain new disclosure requirements related to insider trading and equity compensation as well as updates to the Section 16 reporting requirements. The Adopting Release is available here.

In December 2021, the Commission initially proposed amendments to Rule 10b5-1 and related disclosure requirements, as discussed here.

Highlights of Final Amendments

The final amendments will impose the following new conditions on Trading Plans and limitations on the affirmative defense provided by Rule 10b5-1(c):

  • Cooling-off Periods Before Trading Can Commence.
    • Directors and Section 16 Officers: The later of: (1) 90 days after adopting a Trading Plan or (2) two business days following the disclosure in a Form 10-Q or 10-K of the issuer’s financial results for the fiscal quarter in which the Trading Plan was adopted (but not to exceed 120 days);
    • Persons other than issuers, directors and Section 16 Officers: 30 days after adopting a Trading Plan.
  • Modifications. Any modification to the amount, price or timing of the purchase or sale of securities under a Trading Plan will be deemed the termination of such plan and adoption of a new Trading Plan (triggering a new cooling-off period).
  • Director and Section 16 Officer Certifications. Directors and officers required to file reports with the Commission under Section 16 of the Exchange Act (“Section 16 Officers”) who adopt a Trading Plan must include a representation in such plan certifying that they are not aware of material nonpublic information about the issuer or its securities and that they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5. Relatedly, the new rule changes the existing requirement that the plan be “entered into” in good faith with a requirement that the affirmative defense is available only if the insider has “acted in good faith with respect to” the contract, instruction, or plan . While this new rule is narrower than the Commission’s initial proposal that the plan needed to be “operated in good faith,” it still appears to broaden the showing the insider must make to establish the affirmative defense.
  • Overlapping Trading Plans. Anyone other than issuers will be prohibited from using multiple overlapping Trading Plans involving open-market transactions, provided there are exceptions in certain cases involving (i) separate contracts with different brokers, (ii) separate plans with trading under one plan commencing only after trading under the other is completed and (iii) plans authorizing certain “sell-to-cover” transactions.
  • Single-Trade Trading Plans. Anyone other than issuers will be limited to using one open-market single-trade Trading Plan during any consecutive 12-month period, except for plans authorizing certain “sell-to-cover” transactions. The final amendments will also require enhanced disclosure regarding insider trading arrangements, insider trading policies and procedures and option grants as well as new obligations for Section 16 reports, including the following:
  • Quarterly Reporting. Issuers will be required to disclose on a quarterly basis (in Forms 10-Q and 10-K) whether any of the issuer’s directors or Section 16 Officers adopted or terminated a Trading Plan or certain other written trading arrangements and the material terms of such Trading Plans and other written trading arrangements (excluding the price at which trades will be executed).
  • Policies and Procedures. Issuers will be required to disclose in their Form 10-K and annual meeting proxy statement any insider trading policies and procedures adopted by the issuer and will also be required to file those policies and procedures as an exhibit to their Form 10-K.
  • Equity Compensation Awards. Issuers will be required to disclose in their annual meeting proxy statement certain tabular and narrative disclosures regarding the awarding of options close in time to the release of material nonpublic information and related policies and procedures.
  • Section 16 Reports. Directors and Section 16 Officers will be required to indicate on Forms 4 and 5 by means of a new check box if a reported transaction was made pursuant to a Trading Plan.
  • Gifts of Securities. Directors and Section 16 Officers will be required to report on Form 4 within two business days any gifts of securities, which previously could be reported on a delayed basis using Form 5.

Notable Changes from the Proposing Release

The final amendments include a number of notable changes from the Commission’s proposal. The Commission did not apply some of the amended rules to issuers. For example, issuers will not be subject to a cooling-off period or the limitations on the use of multiple overlapping Trading Plans or single-trade Trading Plans applicable to other persons. Also, issuers will not be required to provide quarterly disclosure of their trading arrangements. Additionally, the final amendments shortened the cooling-off period applicable to directors and Section 16 Officers from the 120-day period initially proposed. The final amendments will also institute a cooling-off period for persons other than issuers, directors and Section 16 Officers, which was not contemplated by the proposed rules.

Transition and Going Forward

The final rules will become effective 60 days after publication of the Adopting Release in the Federal Register. The Adopting Release provides transition guidance for existing Trading Plans as well as the new disclosure requirements and Section 16 reporting requirements. The new rules will not affect the affirmative defense for Trading Plans entered into prior to the final rules’ effective date. However, certain modifications to those plans may constitute adopting a new Trading Plan, and that modified plan would be required to comply with the new rules.

With respect to the new disclosure requirements, issuers will be required to comply with the new requirements beginning with the first Form 10-Q, 10-K or 20-F or proxy or information statement that covers a full fiscal period that begins on or after April 1, 2023. Smaller reporting companies will be required to comply with the new requirements beginning with the first Form 10-Q, 10-K or 20-F or proxy or information statement that covers a full fiscal period that begins on or after October 1, 2023.

Section 16 reporting persons will be required to comply with the new Section 16 reporting requirements for beneficial ownership reports filed on or after April 1, 2023.

Issuers, directors and Section 16 Officers should begin analyzing the new rules and the implications for Trading Plans, disclosure and Section 16 compliance. For issuers, this should include reconsidering insider trading policies in light of the new rules and updating disclosure controls and procedures to ensure they will satisfy the new disclosure requirements. Furthermore, companies and other filers should begin thinking about how to structure future Trading Plans to comply with the new rules. In addition, issuers handling filings for directors and Section 16 Officers should ensure those persons are aware of the new gift reporting requirements on Form 4.

The Commission’s release and the rule itself explicitly maintain the Commission’s position that insider trading liability can arise “if the person making the purchase or salewas aware ofthe material nonpublic information when the person made the purchase or sale, “despite case law stating insider trading liability requires a higher showing that material nonpublic information was”used“to trade.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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