The final rules (including requiring the reporting of dispositions by gift on Form 4) are effective 60 days after publication in the Federal Register, which under normal publication timeframes would mean the rules would take effect in late February 2023. The new conditions will not apply to existing plans or plans entered into prior to the effective date. The disclosure requirements will apply to Forms 10-Q, 10-K and 20-F, and to proxy and information statements in the first filing that covers the first full fiscal period beginning on or after April 1, 2023 (October 1, 2023 for smaller reporting companies). Section 16 filers will be required to disclose Rule 10b5-1 transactions in Forms 4 and 5 filed on or after April 1, 2023.
The final rules eliminate or soften a number of features that commenters found problematic in the proposed rule, e.g., shortening the cooling-off period for insiders and eliminating it entirely for issuers and removing the requirement for directors and officers to disclose pricing information about their Rule 10b5-1 plans.
The SEC adopted Rule 10b5-1 under the Securities Exchange Act of 1934 in 2000 to define certain parameters for insider trading liability. Rule 10b5-1(c)(1) provides an affirmative defense from insider trading liability for, among others, corporate insiders and issuers to buy and sell company securities pursuant to trading plans as long as they adopt their trading plans in good faith and while not in possession of material nonpublic information. These arrangements typically involve periodic sales or purchases pursuant to a schedule determined at the outset of the plan, sometimes combined with giving a third party (generally a broker) sole discretionary authority with respect to certain aspects of the trades.
New Conditions to the Availability of the Rule 10b5-1(c)(1) Affirmative Defense to Insider Trading Liability
Expanded Good Faith Requirement. To be eligible for the affirmative defense, issuers, directors, officers or other insiders must not only have entered into the Rule 10b5-1 plan in good faith but must also act in good faith with respect to any contract, instruction or plan they adopt.
Additional Conditions Applicable to Persons Other than the Issuer. Officers, directors and other insiders (but not issuers themselves) wishing to rely on the affirmative defense to insider trading liability under Rule 10b5-1(c)(1) will have to comply with additional conditions after the effective date of the new rules. These conditions include:
- Cooling-Off Periods. Trades may not be made during a cooling-off period of:
- for directors and officers, the later of (1) 90 days after adoption of the plan or (2) two business days following disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal period in which the plan was adopted, or, for foreign private issuers, in a Form 20-F or Form 6-K that discloses the issuer’s financial results (not to exceed 120 days); or
- for insiders other than directors or officers, 30 days after adoption of the plan.
- Representations. Directors and officers must include a representation in their Rule 10b5-1 plans that at the time of adopting or modifying a plan they are not aware of any material nonpublic information and are adopting the plan in good faith.
- Overlapping Plans. Insiders may not use multiple overlapping Rule 10b5-1 plans for transactions on the open market, with the following exceptions:
- A series of separate contracts with different broker-dealers or agents that, when taken as a whole, effectively function as a single “plan” and meet the applicable conditions of the rule;
- One plan under which trading is authorized to begin only after all trades under an earlier-commencing plan are completed or expired; and
- A plan providing for an agent to sell securities only as necessary to satisfy tax withholding obligations arising exclusively from the vesting of a compensatory award.
- Single-Trade Plans. Insiders may rely on the affirmative defense for only one single-trade plan within any consecutive 12-month period.
Enhanced Disclosure Requirements
Issuers and Section 16 filers will be subject to additional disclosure requirements and expedited disclosure timing in certain circumstances.
- Issuers must, on a quarterly basis, provide disclosure regarding their use of Rule 10b5-1 plans and certain other written trading arrangements by their directors and officers for the trading of their securities.
- Issuers must annually disclose their insider trading policies and procedures.
- Issuers must provide certain tabular and narrative disclosures of the grant of options to named executive officers made during the period starting four business days before the filing of a periodic report on Form 10-Q or Form 10-K or a Form 8-K disclosing material nonpublic information (including earnings information) and ending one business day after such filing.
- Certain disclosures must be tagged.
- Section 16 filers must report dispositions of shares via a bona-fide gift on a Form 4 within two business days of a transaction, rather than annually on Form 5. Forms 4 and 5 will also include a box for filers to check indicating whether the transaction was made pursuant to a plan intended to satisfy the conditions of the Rule 10b5-1 affirmative defense, and the reporting person will need to disclose the date of the adoption of the Rule 10b5-1 plan. In our view, the terms “trade” and “sale” in Rule 10b5-1(c)(1) include bona fide gifts of securities.
Updates From Proposed Rules
The final rules reflect a number of changes to the rules as initially proposed in December 2021. In relation to the conditions for the affirmative defense, the final rules:
- Changed the proposed requirement that a plan be “operated in good faith” to a requirement that the insider “has acted in good faith with respect to” the Rule 10b5-1 plan.
- Shortened the 120-day cooling-off period for insiders and eliminated the 30-day cooling-off period for issuers.
- Require directors and officers of only the issuer, not its subsidiaries, to provide representations as to good faith and awareness of material nonpublic information. Further, representations are required in the Rule 10b5-1 plan only rather than in a separate certification.
- Added exceptions to the single plan requirement.
The proposed rules’ disclosure requirements were also pared back; the final rules:
- Shortened the period during which the grant of options to named executive officers would trigger disclosure requirements and eliminated share repurchases as a trigger for such disclosure.
- Revised the required tabular disclosure to require information on market price instead of market value, eliminating the need for issuers to compute the market value of the disclosed awards.
- Removed the requirement to disclose the adoption or termination of any Rule 10b5-1 plan by the issuer. Disclosure is still required for adoption or termination by any director or officer, but terms relating to the authorized trading price under the plan are specifically exempted from disclosure.
- Added a clearer definition of when a plan would be considered a non-Rule 10b5-1 trading arrangement.
Key revisions benefiting issuers include the exclusion of issuers from cooling-off periods and the prohibition on multiple overlapping plans.
Companies may wish to revisit their Rule 10b5-1 plans and insider trading policies and procedures, considering what processes and disclosures must be added to comply with the new rules, particularly the cooling-off periods. Additionally, companies may want to consider offering training on the new rules to their officers, directors and other insiders.
The amendments to Rule 10b5-1 do not change the underlying elements of a cause of action for insider trading, but instead impose additional requirements that must be satisfied if an insider wishes to rely upon the particular defense under Rule 10b5-1(c)(1). Rule 10b5-1 by its express terms does not supplant the body of law behind insider trading (including case law) and, as the original adopting release notes, the SEC must still prove scienter (among other elements) in an insider trading case as it is a cause of action under Section 10(b). Thus, regardless of whether a defendant complies with the new conditions of the affirmative defense (e.g., trades within the cooling-off period), the SEC still must prove the fundamental elements of insider trading for liability to attach.