In December 2022, the Securities and Exchange Commission (“SEC”) finalized amendments (the “Amendments”) to Rule 10b5-1 (the “Rule”) of the Securities Exchange Act of 1934 and Regulation S-K to combat insider trading. The Rule was adopted less than one year following its proposal.
Rule 10b5-1 under the Exchange Act defines the purchase or sale of a security on the basis of material nonpublic information (i.e., “insider trading”) as one of the “manipulative and deceptive devices” prohibited by Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. However, Rule 10b5-1(c) contains an affirmative defense to insider trading for persons making a trade: (i) pursuant to a binding contract; (ii) an instruction to another person to execute the trade for the instructing person’s account; or (iii) a written plan (“10b5-1 trading arrangements”). The SEC is amending the Rule and adopting new disclosure requirements to combat what the SEC has described as corporate insiders’ use of the affirmative defenses to opportunistically trade securities on the basis of material nonpublic information.
Amendments to Rule 10b5-1: Trading Arrangements
- Condition reliance on Rule 10b5-1(c) upon a cooling-off period between when a 10b5-1 trading arrangement is adopted and the date of the first transaction to be executed under the trading arrangement. The cooling-off periods are:
- For directors and officers: the later of (a) 90 days after the adoption of the plan, or (b) two business days following the disclosure of the issuer’s financial results in a quarterly or annual report for the fiscal quarter in which the plan was adopted. Although the cooling-off period may be longer than 90 days, the maximum cooling-off period is 120 days from adoption of the trading arrangement.
- Persons other than directors, officers or issuers: 30 days
- Issuers: none.
- The Amendments treat a modification as a new trading arrangement if it modifies the amount, price, or timing of the purchase/sale of the securities underlying a trading arrangement, or the written formula or algorithm or computer program that affects such amount, price, or timing.
- Require a director/officer who adopts a 10b5-1 trading arrangement to represent within the written plan that they are not aware of material nonpublic information about the issuer or its securities and that they are adopting the trading arrangement in good faith.
- Prohibit a non-issuer from maintaining overlapping 10b5-1 trading arrangements for open market purchases/sales of an issuer’s securities (other than where a person acquires/sells securities directly from/to the issuer e.g. pursuant to an employee stock ownership plan). Multiple contracts with different broker-dealers will be treated as a single trading arrangement, and a modification of any one contract will be treated as a modification of all such contracts.
- Permit a non-issuer person to maintain two separate Rule 10b5-1 trading arrangements for open market purchases/sales of an issuer’s securities if trading under the later plan begins only after (a) all trades under the earlier plan are completed or expire, or (b) the cooling-off period following termination of the earlier plan.
- Limit the use of single-trade plans by non-issuers to one single-trade plan in a 12-month period.
- Require a person entering into a 10b5-1 trading arrangement to act in good faith with respect to the plan.
Amendments to Regulation S-K Item 408: Disclosure Requirements
To improve investors’ ability to assess whether insiders are misusing their access to material nonpublic information, a new Regulation S-K Item 408 and amendments to Forms 10-Q and 10-K would require disclosures regarding the following:
- Quarterly (on Form 10-Q and Form 10-K):
- Whether a director or officer has adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement.
- A description of the material terms of the trading arrangement other than the price at which the person is authorized to trade under the arrangement. Material terms include:
- Number of securities to be sold/purchased under the trading arrangement.
- Duration of the trading arrangement.
- Date of adoption or termination of the trading arrangement.
- Name and title of the director or officer.
- Annually (on Form 10-K and proxy and information statements on Schedules 14A and 14C):
- A copy of a registrant’s trading policies and procedures governing the purchase, sale, and other dispositions of their securities by directors, officers, and employees, or the registrant itself. Policies/procedures must be reasonably designed to promote compliance with insider trading laws and applicable listing standards. If a registrant has not adopted such insider trading policies/procedures, it must explain why it has not done so.
Amendments to Regulation S-K Item 402: Equity Instruments Granted in Certain Time Periods
Pursuant to a new paragraph (x) in Item 402 of Regulation S-K, on Form 10-K and in proxy and information statements, registrants must:
- Discuss the registrant’s policies and practices on the timing of options in relation to the disclosure of material nonpublic information by the registrant, including:
- How the board determines when to grant awards.
- How the board considers material nonpublic information when determining the timing and terms of awards.
- Whether the disclosure of material nonpublic information is timed to affect the value of executive compensation.
- Provide, in tabular form, the details of any option award granted to a named executive director/officer within four business days before or one business day after the filing of (i) a Form 10-Q or 10-K or (ii) a Form 8-K that contains material nonpublic information (other than disclosure of a material new option award grant under Form 8-K Item 5.02(e)). The table must provide: grantee name; grant date; number of securities underlying the award; exercise price; grant date fair value; and percentage change in market price of the securities underlying each award between the trading day prior to disclosure of material nonpublic information and the trading day following such disclosure.
Amendments to Section 16: Form 4 and Form 5
Officers/directors and beneficial owners of 10% of an issuer would need to indicate (by checkbox on Form 4 and Form 5) whether they made the sale/purchase reported on the form pursuant to a Rule 10b5-1 trading arrangement and the date they adopted the trading arrangement.
In addition, gifts of securities must be reported on Form 4 (rather than Form 5), which must be filed before end of the second business day following the date of execution of the transaction.
Compliance dates for the Amendments vary based on the specific amendment and whether a company is a smaller reporting company (“SRC”)
Since the “First Filing” column above assumes a fiscal year ending December 31, the timing of disclosures may be before those described above. For example, if a non-SRC has a fiscal year beginning May 1, the company would need to disclose its insider trading policies/procedures, option grants and option granting policies/practices in the Form 10-K for its fiscal year May 1, 2023 to April 30, 2024.
The Amendments signal the SEC’s focus on preventing insider trading, and issuers and insiders should ensure that they are fully compliant with Amendments. Issuers should implement or review policies and procedures designed to ensure that they and their insiders comply with applicable securities laws.