SEC Adopts New Conditions and Disclosures Regarding 10b5-1 Plans

On Dec. 14, 2022, the Securities and Exchange Commission (SEC) adopted amendments to Rule 10b5-1, generally in the form issued for comment in January 2022 (replacing the version initially published on Dec. 15, 2021), which we discussed in a previous alert. The amendments include new conditions to the affirmative defense under Rule 10b5-1, create new disclosure requirements regarding the use of 10b5-1 Plans in periodic reports, and update Forms 4 and 5. The press release announcing the new rules can be found here.

The amendments will become effective 60 days following publication of the adopting release in the Federal Register.  For specific compliance dates:

• Form 4 and 5 beneficial ownership reports under Section 16 of the Securities Exchange Act for directors, officers and 10% beneficial owners will be subject to the amendments for reports filed on or after April 1, 2023.
• Issuers will be subject to the new disclosure requirements in periodic reports on Forms 10-Q, 10-K 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. (Smaller reporting companies have an additional six months to comply with the additional disclosure requirements.)

Changes to the 10b5-1 Defense. Rule 10b5-1(c)(1) provides an affirmative defense against insider trading liability. The defense allowed directors, officers and issuers that engaged in transactions in the issuer’s securities to be deemed to not have entered such transactions “on the basis of” material nonpublic information if the transactions were made pursuant to a prior trading arrangement, so-called “10b5-1 Plans,” which must be either a binding contract, instructions to another person or a written plan. The amendments will add new conditions to the defense, including:

• For directors and officers, a cooling-off period, during which such individuals may not commence any trades under the trading plan. The period would last the later of (1) 90 days following a plan adoption or modification, or (2) two business days after the disclosure in certain periodic reports of the issuer’s financial results for the quarter in which the plan was adopted or modified (but not exceeding 120 days) following the plan adoption or modification;
• For persons other than directors, officers or issuers, a cooling-off period of 30 days following the adoption or modification of a trading plan;
• A certification in any 10b5-1 Plan that, at the time of adoption or modification, the directors and officers entering the plan (1) are not aware of material non-public information about the issuer or its securities, and (2) that they are adopting the plan in good faith and not to evade the prohibitions of Rule 10b-5;
• A requirement that all entrants to 10b5-1 Plans must act in good faith with respect to the plan.

In addition, the new rules will no longer allow for any persons other than issuers to enter multiple overlapping 10b5-1 Plans or rely on the affirmative defense more than once in any 12-month period for single trade plans (plans designed to effect the open-market purchase or sale of the total amount of securities in a single transaction).

New Disclosures. The new rules also amend the disclosure requirements in an issuer’s periodic reports pursuant to new Item 408 of Regulation S-K. First, an issuer must disclose if its directors or officers adopted, terminated or modified a 10b5-1 Plan or other “Non-Rule 10b5-1 Trading Arrangement” during the previous fiscal quarter. A plan would be a “Non-Rule 10b5-1 Trading Arrangement” if the director or officer asserts that at a time when they were not aware of material non-public information about the security or issuer, they adopted a written arrangement for trading in securities that: (1) specified the amount of securities to be bought or sold as well as the price and date on which they were to be bought or sold, (2) included a written formula or algorithm for determining the amount of securities to be bought and sold and the price at which to buy or sell, or (3) does not allow the individual to otherwise influence the transaction.  The SEC explained that the “Non-Rule 10b5-1 Trading Arrangement” disclosure requirements are designed to limit the ability of directors and officers to avoid the disclosure obligations of Rule 10b5-1 plans by asserting defenses to liability under Section 10(b) pursuant to plans that do not fully satisfy the Rule.

If such adoption, modification or termination occurred, these periodic disclosures would include the material terms of the plan, including the name and title of the director or officer; the date of adoption, modification or termination; the duration of the plan; the aggregate amount of securities to be bought or sold under the plan; and whether the plan is a 10b5-1 Plan or a Non-Rule 10b5-1 Trading Arrangement. In addition, issuers would be required to annually disclose, in both their Form 10-K and proxy and information statements, whether they have adopted insider trading policies and procedures, and if not, an explanation of why it has not done so.  Issuers that have adopted insider trading policies and procedures will also be required to file a copy of them as an exhibit to Forms 10-K and 20-F, as applicable.

The new rules would further amend Item 402 of Regulation S-K to require registrants to discuss their policies and practices on the timing of awards of stock options, stock appreciation rights or similar option-like instruments (Stock Awards). These disclosures would include how the board determines to grant such awards, whether the board takes into consideration material nonpublic information when determining the timing and terms of the awards, and whether the registrant has timed the disclosure of material nonpublic information for the purpose of affecting the value of the executive compensation. The rules would further require that if, during the last fiscal year, Stock Awards were issued to a named executive officer within four business days before or one business day after the filing of a periodic or the filing or furnishing of certain current reports on Form 8-K that disclose material nonpublic information, the registrant must disclose, in a tabular format, (1) the name of the officer, (2) the date of the grant, (3) the number of securities underlying the grant, (4) the per-share exercise price, (5) the grant date fair value of each award computed using the same methodology used for the registrant’s financial statements, and (6) the percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and one trading day following the disclosure of material nonpublic information.

These new disclosures would be required to be tagged using the Inline XBRL structured data language.

Updates to Forms 4 and 5. Under the new rules, Forms 4 and 5 will be updated to include a mandatory checkbox disclosure, where filers would identify whether the reported transaction is made pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). In addition, Section 16 reporting persons would be required to report bona fide gifts of equity securities on Form 4, rather than Form 5, which will significantly reduce the time the filer has to report the gifts.