In our prior articles, “SEC to Consider Changes to 10b5-1 Plans” and “IAC Recommends Changes to 10b5-1 Plans,” in the HSE Securities and Capital Markets newsletters, we have chronicled the Securities and Exchange Commission’s (“SEC”) progression toward revised rules governing Rule 10b5-1 plans. On December 15, 2021, the SEC acted on the SEC’s Investor Advisory Committee’s recommendations and issued proposed amendments to Rule 10b5-1.

Background on Rule 10b5-1

As we discussed in our previous articles, executives are frequently in possession of material non-public information (“MNPI”), which limits their ability to trade shares without the risk of claims of insider trading. Rule 10b5-1 was adopted by the SEC in 2000 and sets forth a procedure that provides an affirmative defense against allegations of insider trading. Under Rule 10b5-1, executives adopt a 10b5-1 plan instructing a third-party to execute trades on their behalf according to a set of written instructions which specify when such trades are to be made (e.g., timing, shares prices, etc.). A 10b5-1 plan must be adopted at a time when the executive is not aware of any MNPI and can be modified at any time that the executive is not aware of any MNPI. 

Proposed Amendments

The SEC has released proposed amendments intended to limit the use of Rule 10b5-1 plans and increase the disclosure of such plans and insider trading policies. The proposed amendments include the following: 

  1. Cooling-Off Period.  The proposed amendments would require a cooling-off period of at least 120 days after the date of adoption or modification of a 10b5-1 plan by a director or officer before any trades could be made under the plan. For a 10b5-1 plan adopted or modified by an issuer, the proposed minimum cooling-off period is 30 days. Under the current rule, there is no required cooling-off period following the adoption or modification of a plan and the first transaction executed under the plan. The proposed amendments also clarify that a modification of an existing Rule 10b5-1 plan, including cancelling one or more trades, would be deemed equivalent to terminating the plan in its entirety, thereby triggering application of the proposed cooling-off period before any new trades. 
  2. Restricting Overlapping and Single-Trade Arrangements.  The proposed amendments would eliminate the affirmative defense provided by 10b5-1 plans for any insider that has established multiple overlapping trading arrangements or subsequently enters into an additional overlapping trading arrangement for open market purchases or sales of the same class of securities. The proposal does not treat securities acquired directly from the issuer, such as through participation in an employee stock ownership plan or dividend reinvestment plan, as a prohibited overlapping plan. Further, under the proposed amendments, the affirmative defense would only be available for one single-trade arrangement during any 12-month period. 
  3. Director and Officer Certifications.  The proposed amendments will require directors and officers to furnish a written certification to the issuer upon the adoption of a new or modified 10b5-1 plan. The certification must state that at the time of adoption of the plan, the director or officer was not aware of MNPI about the issuer or its securities and that he or she is adopting the contract, instruction, or plan in good faith and not as a part of a plan or scheme to evade the prohibitions of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. Under the proposed amendments, the certification does not need to be filed with the SEC, but the insider should retain a copy for 10 years. Further, the certification would not be an independent basis of liability under Section 10(b) of the Exchange Act and Rule 10b-5. 
  4. Operated in Good Faith.  The Rule 10b5-1 affirmative defense currently requires that a 10b5-1 plan only be entered into in good faith and not as part of a plan or scheme to evade the prohibitions of the rule. The proposed amendments add a requirement to be eligible for the affirmative defense that a contract, instruction, or plan must also be operated in good faith. The proposed amendment indicates the intention is to make the affirmative defense unavailable to an insider that cancels or modifies a plan in an effort to evade the prohibitions of the rules or uses their influence to affect the timing of a corporate disclosure to occur before or after a planned trade under a trading arrangement to make such trade more profitable or to avoid or reduce a loss. 
  5. New Disclosure of 10b5-1 Plans.  The proposed amendments would require quarterly disclosure on Form 10-Q or 10-K of the use of Rule 10b5-1 and other trading arrangements by an issuer and its directors and officers for the trading of the issuer’s securities. The disclosure must state whether the issuer or a director or officer has adopted or terminated any contract, instruction, or written plan to purchase or sell securities of the company (whether or not a 10b5-1 plan) and must describe the material terms of the trading arrangement, including the date of adoption or termination, the duration of the trading arrangement, and the aggregate amount of securities to be sold or purchased pursuant to the trading arrangement. 
  6. Annual Disclosure of Insider Trading Policies and Procedures.  The proposed amendments would require an issuer to disclose in its Form 10-K and proxy statement whether it has adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of the issuer’s securities by directors, officers, employees, or the issuer itself that are reasonably designed to promote compliance with insider trading laws, rules, regulations, and any applicable listing standards. A foreign private issuer would be required to provide analogous disclosure in its annual reports. An issuer that has adopted insider trading policies and procedures must disclose them, while an issuer that has not adopted such policies and procedures must explain why. 
  7. Disclosure on Forms 4 and 5.  The proposed amendments include a mandatory disclosure requirement on Forms 4 and 5 that require indicating through a checkbox whether a reported transaction was made pursuant to a 10b5-1 trading arrangement. The filer must also disclose the date of adoption of the 10b5-1 trading arrangement and would have the option to provide additional relevant information about the reported transaction. There is also a proposed optional checkbox allowing a filer to indicate whether a transaction was made pursuant to a pre-planned trading arrangement not intended to satisfy the Rule 10b5-1(c) conditions. The proposed amendments would also require reporting bona fide gifts of equity securities on Form 4 before the end of the second business day following the date of execution of such gift. 
  8. Disclosure of Equity Awards Granted Near Disclosure of MNPI.  The proposed amendments require issuers to disclose, in a new table, any option awards to named executive officers or directors that are made within 14 calendar days before or after the filing of a periodic report, an issuer share repurchase, or the filing or furnishing of a current report on Form 8-K that contains MNPI. The disclosure must include the market price of the underlying securities the trading day before and after disclosure of the MNPI, along with the number of securities underlying the award, the date of grant, the grant date fair value, and the exercise price. In addition, issuers would also be required to disclose policies and practices on the timing of options in relation to the disclosure of MNPI, including how the timing of awards is determined, how MNPI is considered in determining the timing of awards, and whether disclosure of MNPI is timed to impact the value of awards. 

A copy of the SEC’s proposed amendments is available here. If you have any questions about the proposed amendments, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets or Employee Benefits and Executive Compensation groups at 585.232.6500 or 716.853.1616.


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