SEC Proposes Amendments to Rule 10b5-1 Trading Arrangements and New Disclosure Requirements

Alerts / December 17, 2021
Key Takeaways
  • The Securities and Exchange Commission (SEC) issued proposed rules regarding Rule 10b5-1 under the Securities Exchange Act of 1934 (the Exchange Act) and insider trading, which would add conditions to the availability of the affirmative defense to liability for insider trading under Rule 10b5-1 and add new disclosure requirements for Rule 10b5-1 trading arrangements.
  • The proposed rules would also require disclosure regarding the timing of stock option grants in relation to the disclosure of material nonpublic information and require that gifts of equity securities are reported on Form 4.

On Dec. 15, 2021, the SEC announced proposed amendments to Rule 10b5-1 that seek to enhance disclosure requirements and strengthen protections against insider trading. The proposal includes updates to Rule 10b5-1(c), which provides an affirmative defense to insider trading liability, to provide further conditions to and limitations on the availability of such defense. The amendments also would require disclosure about issuers’ policies and procedures related to insider trading and for granting options in advance of the release of material nonpublic information, as well as insiders’ use of Rule 10b5-1 plans and gifts of securities. The SEC indicated that “these proposed amendments aim to address critical gaps in the SEC’s insider trading regime and to help shareholders understand when and how insiders are trading in securities for which they may at times have material nonpublic information.”

Amendments to Rule 10b5-1

Rule 10b5-1 established a safe harbor from liability for insider trading when it is apparent that a trade was not made based on material nonpublic information because the trade was made under a trading arrangement adopted when the insider was not aware of such information. Since the adoption of Rule 10b5-1, many have raised concerns that there is potential in the rule for an insider to engage in certain trading practices that exploit opportunities for abuse.

To reduce the risk of potentially improper trading practices under Rule 10b5-1 trading arrangements, the SEC has proposed adding the following conditions to the availability of the affirmative defense under Rule 10b5-1:

  • Cooling-off period: A minimum “cooling off” period after the adoption or modification of a Rule 10b5-1 trading arrangement of (i) 120 days for a director or officer (as defined in Rule 16a-1(f) under the Exchange Act) and (ii) 30 days for the issuer, in each case, before trading may begin under the new or modified trading arrangement.
  • Director and officer certifications: At the time of adopting or modifying a Rule 10b5-1 trading arrangement, directors and officers would be required to provide to the issuer a written certification that states: (i) that they were not aware of material nonpublic information regarding the issuer or its securities, and (ii) that they are adopting the plan in good faith.
  • Restriction on overlapping trading arrangements: The affirmative defense under Rule 10b5-1 would not be available for multiple, overlapping trading arrangements for open market trades in the same class of securities.
  • Restriction on single-trade arrangements: The affirmative defense under Rule 10b5-1 would be available for only one single-trade plan in any 12-month period.
  • Good faith requirement: A Rule 10b5-1 trading arrangement must be entered into and “operated” in good faith and not as part of a plan to evade the rule.
Additional disclosures regarding Rule 10b5-1 trading arrangements

Currently, issuers are not required to disclose the use of Rule 10b5-1 trading arrangements by issuers or insiders. The SEC has proposed a new Item 408 under Regulation S-K and amendments to Forms 10-Q and 10-K to require both the quarterly disclosure of the adoption or termination of any Rule 10b5-1 trading arrangements by the issuer or insiders and the annual disclosure of the issuer’s insider trading policies and procedures. If, however, the issuer has not adopted such insider trading policies and procedures, it must explain why it has not.

In addition, the SEC has proposed adding a Rule 10b5-1(c) checkbox to Forms 4 and 5, which would require Section 16 reporting persons to indicate whether a trade reported on such form was made according to a Rule 10b5-1 trading arrangement. If so, the filer would also be required to provide the date such Rule 10b5-1 trading arrangement was adopted and could also provide additional information relevant to the reported transaction.

Disclosure regarding the timing of option grants

To provide better transparency into an issuer’s policies and practices regarding stock option grants, the SEC has proposed amendments to Item 402 of Regulation S-K, which would require an issuer to disclose its policies regarding option grant timing in relation to the release of material nonpublic information and a table setting forth all options awarded to a named executive officer or director within 14 days of the release of material nonpublic information. This disclosure would be required in annual reports on Form 10-K and proxy statements.

Reporting of gifts on Form 4

Finally, the SEC has proposed additional amendments to require prompt reporting of bona fide gifts of equity securities by Section 16 reporting persons. Currently, gifts of equity securities are required to be reported on Form 5 within 45 days after the issuer’s last fiscal year end. The proposed amendment would require filers to report a gift of equity securities on Form 4 before the end of the second business day following the transaction date.

Authorship credit: Brittany Stevenson and Janet A. Spreen

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