SEC Adopts Amendments to Rule 10b5-1 Insider Trading Plans

Background

On December 14, 2022, the Securities and Exchange Commission (SEC) adopted amendments to Rule 10b5-1 of the Securities Exchange Act of 1934. Rule 10b5-1 provides company insiders, who often hold material nonpublic information (“MNPI”), with an affirmative defense against claims of insider trading. The final rule is intended to protect investors against insider trading and includes mandatory cooling-off periods, limitations on overlapping plans, director and officer certifications, a requirement to act in good faith, and enhanced disclosures. The press release is available here and the fact sheet is available here.

Summary

The final amendments to Rule 10b5-1 require:

• A mandatory cooling-off period. Directors and officers¹ may not begin trading under the new plan² until the later of 90 days following plan adoption, or two business days following disclosure of financial results in the annual or interim report³  for the fiscal quarter in which the plan was adopted. However, such cooling-off period shall be subject to a maximum of 120 days.

Persons other than officers or directors are subject to a 30-day cooling-off period.  Issuers are not subject to a cooling-off period as the adopting release indicates further consideration is warranted before subjecting them to the requirements.  

• Directors and officers to certify that they are adopting the plan in good faith, and without knowledge of MNPI. 
• Limitations on the use of multiple overlapping plans, and a limitation on the reliance of the affirmative defense to one single-trade plan during any consecutive 12-month period. These limitations do not apply to the issuer.
• The person subject to the plan to act in good faith with respect to the plan.
• Additional quarterly disclosures regarding the use of 10b5-1 plans and certain other trading plans, annual disclosures of the registrant’s insider trading policies and procedures, and tabular and narrative disclosure of options (or other option-like instruments) awarded near the release of MNPI, among others.  The tabular disclosure requirements include:
  • The name of the officer,
  • The grant date of the award,
  • The number of securities underlying the award,
  • The exercise price per share,
  • The grant date fair value of the award, and
  • The percentage change in the market price of the securities underlying the award between the closing market price one trading day before and after the disclosure of MNPI. 

Such disclosures are subject to the XBRL tagging requirements.  

• A new checkbox on Forms 4 and 5 to indicate if the transaction was intended to satisfy the affirmative defense under Rule 10b5-1.
• The use of Form 4 to report bona fide gifts of securities.

Effective Date

The final rules become effective 60 days following publication in the Federal Register. 

Directors and officers who are required to file reports under Section 16 of the Exchange Act must comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.

Issuers must comply with the new disclosure requirements on Forms 10-Q, 10-K, and 20-F 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 are permitted an additional six months to comply with the new disclosure requirements.

¹ The definition of “officer” is consistent with the definition in Exchange Act Rule 16a-1(f).

² Under the final rule, a new plan includes “a modification or change to the amount, price, or timing of the purchase or sale of the securities (or a modification or change to a written formula or algorithm, or computer program that affects the amount, price, or timing of the purchase or sale of the securities) underlying a contract, instruction, or written plan.”

³ Includes Forms 10-K and 10-Q for domestic registrants and Forms 20-F and 6-K for foreign private issuers.