Corporate

SEC Announces Adoption of Amendments to Rule 10b5-1 Insider Trading Plans and Related Disclosures

Written by Blake Baron and Gabriel Miranda

On December 14, 2022, the Securities and Exchange Commission (“SEC”) announced that they adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (“Exchange Act”).

Rule 10b5-1 was first adopted by the SEC in August 2000, which provided affirmative defenses for corporate insiders and companies to buy and sell company stock pursuant to a 10b5-1 plan, so long as they adopted such plans in good faith and before becoming aware of material nonpublic information. Since then, SEC Chair Gary Gensler explained, “we’ve heard from courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information. I believe today’s amendments will help fill those gaps.”[i]

The proposed amendments were first introduced in January 2022, which also included additional disclosure requirements to enhance investor protections concerning insider trading. The final adopted amendments include modifications to Rule 10b5-1(c)(1) affirmative defense to insider trading liability, including:

  • A cooling-off period for directors and officers of the later of: (i) 90-days following a plan adoption or modification; or (ii) two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not more than 120 days following plan adoption or modification) before any trading can commence under such trading arrangement or plan;
  • A cooling-off period of 30-days for persons other than issuers or directors and officers before any trading can commence under the trading arrangement or modification;
  • A condition for directors and officers to include a representation in their Rule 10b5-1 plan certifying, at the time of the adoption of a new or modified plan, that: (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5;
  • A limitation on the ability of anyone other than issuers to use multiple overlapping Rule 10b5-1 plans;
  • A limitation on the ability of anyone other than issuers to rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period; and
  • A condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to that plan.

Previously, plans entered into pursuant to Rule 10b5-1 did not include cooling-off periods before trading commenced under such plan. Further, the amendments adopted by the SEC included additional steps for directors and officers entering into a Rule 10b5-1 plan, which include that they must provide representations in their plans, at the time of adoption of such plan, that they are not aware of any material nonpublic information and that they are adopting the plan in “good faith,” and not as part of a plan or scheme to avoid Rule 10b-5 prohibitions. Directors and officers entering into trading arrangements or plans pursuant to Rule 10b5-1 after the final amendments must also not only enter these 10b5-1 plans in “good faith,” but must also act in “good faith” with respect to such plan.

The amendments also created new disclosure requirements that include:

  • Quarterly disclosure by registrants regarding the use of Rule 10b5-1 plans and certain other written trading arrangements by a registrant’s directors and officers for the trading of its securities;
  • Annual disclosure of a registrant’s insider trading policies and procedures;
  • Certain tabular and narrative disclosures regarding awards of options close in time to the release of material nonpublic information and related policies and procedures;
  • Tagging of the required disclosures; and
  • A requirement that Form 4 and 5 filers indicate by checkbox that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

These final amendments will become effective 60 days after the publication of the adopting release in the Federal Register. Further, Section 16 reporting persons will be required to comply with the amendments described above on 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 the Exchange Act periodic reports on Forms 10-K, 10-Q, 20-F and in any proxy or information statements in the first filing that covers the full fiscal year 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.

Please contact the MSK Corporate & Business Transactions Department to discuss how we can help you prepare for the effectiveness of these amendments and comply with the new SEC disclosure obligations.

[i] https://www.sec.gov/news/press-release/2022-222#:~:text=%E2%80%9CAbout%2020%20years%20ago%2C%20the,said%20SEC%20Chair%20Gary%20Gensler.

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