- Cooling-off Period. A director or officer who adopts a Rule 10b5-1 plan will not be able to rely on the Rule 10b5-1(c)(1) affirmative defense unless the plan provides that trading under the plan will not begin until the later of (1) 90 days after the adoption of the Rule 10b5-1 plan or (2) two business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the fiscal quarter in which the plan was adopted.
- Director and Officer Certifications. As a condition to the availability of the affirmative defense, a director or officer of an issuer who adopts a Rule 10b5-1 plan must include a representation in the plan that (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are adopting the contract, instruction, or plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.
- Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements and Single-Trade Arrangements. Persons other than issuers may not have another outstanding, or additional contract, instruction, or plan that would qualify for the affirmative defense under the amended Rule 10b5-1 for the purchase or sale of any class of securities of the issuer on the open market during the same period.
- Amended Good Faith Condition. A person who entered into the Rule 10b5-1 contract, instruction, or plan must represent that he, she or they “acted in good faith with respect to” the contract, instruction, or plan.
The Bottom Line
The amendments add new conditions to the affirmative defenses available under Rule 10b5-1(c)(1), create new disclosure requirements concerning the issuer’s insider trading policies, and create new requirements for director and officer compensation regarding certain equity compensation awards made close in time to the issuer’s disclosure of material nonpublic information, and update Forms 4 and 5 requiring filers to identify transactions made pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).
We recommend that issuers review existing Rule 10b5-1 plans and insider trading policies, and consider adopting a uniform equity grant policy in order to establish governance controls to limit equity awards in close proximity to the release by the issuer of material nonpublic information.
On December 15, 2021, the Securities and Exchange Commission (SEC) proposed amendments to Rule 10b5-1 to “enhance disclosure requirements and investor protections against insider trading.”
SEC Chair Gary Gensler noted that, since Rule 10b5-1 was adopted more than 20 years ago, it has been used by corporate insiders and issuers to provide affirmative defenses in connection with the purchase and sale of securities as long as the trading plans were adopted in good faith before becoming aware of material nonpublic information. Chair Gensler also noted that “[o]ver the past two decades, we’ve heard from courts, commenters, and members of Congress that insiders have sought the benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information.” The amendments to the affirmative defense address these concerns.
The mandatory cooling-off period states that directors and officers are unable to rely on Rule 10b5-1 affirmative defenses unless trading under the Rule 10b5-1 plan will not begin until the later of (1) 90 days after the adoption of the Rule 10b5-1 plan or (2) two business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the fiscal quarter in which the plan was adopted. The amendments further provide that the required cooling-off period is subject to a maximum of 120 days after adoption of the Rule 10b5-1 plan. The initial proposal contemplated a 120-day cooling-off period. The new rule mandates a cooling-off period of 30 days for persons other than issuers or directors or officers before any trading can commence under the trading arrangement or modification.
A director or officer adopting a 10b5-1 plan must now include a representation that, at the time of the adoption of a new or modified Rule 10b5-1 plan: (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are adopting the contract, instruction, or plan in good faith. The certification must be included in the plan itself and not as a separate document. The final rule modified the proposal by removing the reference to “same class of securities,” so that the multiple overlapping plans restriction will apply to any class of securities of the issuer.
The SEC also decided to adopt the proposed limitation on single-trade plans, under which Rule 10b5-1’s affirmative defense are only available if an insider (other than an issuer) has a single plan for trading in any securities of an issuer in place at the same time.
Directors and officers who want to be covered by Rule 10b5-1’s affirmative defense are now required to make representations that they are adopting the a 10b5-1 plan in good faith and are not in possession of material nonpublic information concerning the issuer or its securities.
With respect to multiple overlapping Rule 10b5-1 plans, persons other than issuers may not have another outstanding plan that would qualify for the affirmative defense for the purchase or sale of any class of securities of the issuer on the open market during the same period.
New Item 408(a) of Regulation S-K will require registrants to disclose quarterly whether the registrant has adopted or terminated any agreement to buy or sell securities of the registrant, provide the material terms of the agreement, and provide a description of the material terms of the Rule 10b5-1 trading arrangement. The new disclosure does not require the disclosure of pricing information relating to the trading arrangement.
Under new Item 408(b) of Regulation S-X, registrants are required to disclose whether they have adopted insider trading policies governing the purchase and sale of their securities by directors, officers, and employees, or the registrant itself, that are reasonably designed to promote compliance with insider trading rules and regulations. If a registrant has not adopted such insider trading policies, it must explain why it has not done so. These disclosures will be required in annual reports on Form 10-K and proxy statements and information statements on Schedules 14A and 14C, respectively.
The narrative disclosure for new Item 402(x) of Regulation S-X will require registrants to discuss the registrant’s policies on the timing of awards of stock options, stock appreciation rights (SARs) and similar option-like instruments in relation to the disclosure of material nonpublic information by the registrant. Issuers must now disclose awards made in the four business days before the filing of a periodic report or the filing of a current report on Form 8-K that discloses material nonpublic information and ending one business day after a triggering event.
The final amendments will require registrants to tag the information specified by new Items 402(x), 408(a), and 408(b)(1) of Regulation S-K, and new Item 16J(a) of Form 20-F, in Inline XBRL in accordance with Rule 405 and the EDGAR Filer Manual.
Under new Rule 16a-3 under the Exchange Act, Section 16 reporting persons will be required to report dispositions of bona fide gifts of equity securities on Form 4 (rather than Form 5) in accordance with Form 4’s filing deadline. The affirmative defense of Rule 10b5-1(c)(1) is available for any bona fide gift of securities.
The final rules will become effective 60 days following publication of the adopting release in the Federal Register. Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023. Issuers will be required to comply with the new disclosure requirements in Exchange Act 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. The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies.
Ballard Spahr’s Securities and Capital Markets Group advises private and public companies through all stages of development and capital-raising activities. We also help clients comply with public reporting, proxy, and disclosure obligations. Our more than 50 securities attorneys represent public and private companies, underwriters, selling stockholders, and officers and directors, as well as private equity funds, venture capital firms, and institutional investors in compliance matters, capital-raising activities, and other transactions. Please contact us for more information.
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