SEC Adopts Amendments to Rule 10b5-1 and New Disclosure Requirements

On December 14, 2022, the Securities and Exchange Commission (the “SEC”) adopted final amendments to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and related disclosure requirements. 

Rule 10b5-1(c) of the Exchange Act establishes an affirmative defense for an insider who has knowledge of material non-public information (“MNPI”) when trading public company securities by allowing the insider to set up future trades pursuant to a contract or plan that is adopted in good faith when the insider is not in possession of MNPI.  These arrangements are commonly known as 10b5-1 plans.

New Rule 10b5-1 Requirements

Cooling-Off Periods

Directors and officers:  Under the amended rule, the 10b5-1 plan of a director or officer[1] must provide for a cooling-off period during which trades cannot be made after the adoption or modification of a 10b5-1 plan until the later of:

  1. 90 days following the adoption or modification of the 10b5-1 plan; and
  2. two business days following the disclosure in Form 10-Q or 10-K of the issuer’s financial results for the fiscal quarter in which the 10b5-1 plan was adopted or modified (not to exceed 120 days following the adoption or modification of the 10b5-1 plan). 

Other persons:  Persons other than the issuer, directors, and officers are subject to a cooling-off period of 30 days. 

Issuers:  The SEC did not adopt rules requiring a cooling-off period for issuers, as previously proposed, but is continuing to consider the issue to determine whether additional regulatory action is needed.

For purposes of these amendments, a modification of a 10b5-1 plan is treated as the adoption of a new 10b5-1 plan.  A modification is any change in the amount, price, or timing of purchases or sales, or changes to the formula or algorithm that affect the amount, price, or timing of purchases or sales.

Director and Officer Certifications

Under the amendments, directors and officers must include a certification in the 10b5-1 plan itself that on the date of adoption or modification of the 10b5-1 plan:

  1. the individual is not aware of any MNPI about the security or the issuer; and
  2. the individual is adopting the 10b5-1 plan in good faith and not as part of a plan or scheme to evade Section 10(b) of the Exchange Act and Rule 10b-5.

Prohibition on Overlapping Plans

Under the new rule, individuals may not have more than one 10b5-1 plan outstanding for purchases or sales of any class of securities of the issuer during the same period, with the following limited exceptions:

  1. An individual may enter into more than one 10b5-1 plan with different broker-dealers or other agents and treat them as a single 10b5-1 plan so long as, when taken together as a whole, such plan meets the requirements of Rule 10b5-1.  This allows one 10b5-1 plan to cover securities held in separate accounts.
  2. An individual may adopt one later-commencing 10b5-1 plan if the later-commencing plan does not authorize trades to begin until after (i) all trades under an earlier plan have been completed or expired without execution, and (ii) the expiration of an “effective cooling-off period” for the later-commencing plan.  The effective cooling-off period is the cooling-off period that would apply to the later-commencing plan if its date of adoption was deemed to be the date of termination of the earlier plan.
  3. An individual may have a sell-to-cover plan that allows sales of shares as necessary to cover tax withholding obligations on the vesting of an equity awards (such as restricted stock or restricted stock units), so long as the individual does not exercise control over the timing of the sales.  It is unclear if this can apply to the settlement of restricted stock units.  This exception does not apply to the exercise of options, where the exercise is at the discretion of the individual.

This prohibition on overlapping plans does not apply to transactions through an employee stock ownership plan (“ESOP”) or dividend reinvestment plan (“DRIP”).

Single-Trade Plans

The affirmative defense under Rule 10b5-1 is available for an individual’s single-trade plans (other than sell-to-cover plans) only if (i) the plan was adopted at least 12 months after another single-trade plan was adopted by the individual, and (ii) the other single-trade plan was eligible for the affirmative defense under Rule 10b5-1. 

A “single-trade plan” is a plan that is designed to effect the purchase or sale of securities in a single transaction, and does not include plans (i) where the agent has the discretion to execute the plan as a single transaction, or (ii) where the agent’s future acts depend on data not known at the time the plan is adopted (e.g., plans that provide for purchases or sales at several given future stock prices) and it is reasonably foreseeable at the time the plan is adopted that it might result in multiple transactions.

Good Faith Requirement

The amendments expand the existing good faith requirement that a 10b5-1 plan be entered into in good faith by adding that the individual subject to that plan must act in good faith with respect to the plan from the adoption of the plan through the duration of the plan.

Effective Date for Rule 10b5-1 Amendments

The amended 10b5-1 requirements will become effective 60 days after publication in the Federal Register (the “Effective Date”).  Rule 10b5-1 plans adopted or modified after the Effective Date must comply with the new requirements in order to rely on the affirmative defense under Rule 10b5-1.  The affirmative defense for existing plans adopted before the Effective Date is not affected, unless the plan is modified.

New Periodic Reporting Requirements

The final SEC rules add several new reporting requirements which are required to be Inline XBRL tagged in accordance with Rule 405 and the EDGAR Filer Manual.

Quarterly Disclosure of Trading Arrangements

Under new Item 408 of Regulation S-K, companies will now be required to disclose in Form 10-Q and 10-K whether during the company’s last fiscal quarter any director or officer adopted or terminated a Rule 10b5-1 plan or a “non-Rule 10b5-1 trading arrangement.”  A “non-Rule 10b5-1 trading arrangement” is defined in new Regulation S-K Item 408(c) and includes certain pre-planned trading arrangements that do not meet the conditions of the Rule 10b5-1(c)(1) affirmative defense.  For example, a new plan which does not comply with the required cooling-off period would have to be disclosed as a non-Rule 10b5-1 trading arrangement.

For each plan or arrangement, the company will have to indicate if the plan or arrangement is a Rule 10b5-1 plan or a non-Rule 10b5-1 trading arrangement, and describe the material terms of the plan or arrangement.  Material terms would include the name and title of the director or officer, the date of adoption, modification or termination of the plan or arrangement, the duration of the plan or arrangement, and the aggregate amount of securities to be purchased or sold pursuant to the plan or arrangement, but does not include pricing terms.

Annual Disclosure of Insider Trading Policies and Procedures

Under new Item 408 of Regulation S-K, companies will be required to disclose in Form 10-K and proxy statements whether the company has adopted insider trading policies and procedures applicable to directors, officers, employees, or the company itself that are reasonably designed to promote compliance with insider trading laws, rules, regulations, and listing standards.  In addition, a copy of the insider trading policies and procedures must be filed as an exhibit to Form 10-K.  If the company has not adopted such insider trading policies and procedures, then the company must explain why.

This disclosure may be incorporated by reference from the proxy statement to the Form 10-K if the proxy statement is filed within 120 days of the end of the fiscal year.

Disclosure of Options Granted Close in Time to the Release of MNPI

Item 402 of Regulation S-K is amended to require companies to discuss in its Form 10-K or proxy statement their policies and practices on the timing of stock options, stock appreciation rights and similar instruments (but not restricted stock or restricted stock units) in relation to the release of MNPI by the company, including how the date of grant of such awards is determined.  Companies will also be required to discuss whether (and if so, how) the company takes MNPI into account when determining the date of grant and terms of an award, and whether the company has timed the disclosure of MNPI for the purpose of affecting the value of the awards.

If the company awarded stock options, stock appreciation rights or similar instruments to a named executive officer (“NEO”) during the period beginning four business days before the filing of a current report on Form 8-K that discloses MNPI (including earnings information) and ending one day after such filing, then the company must provide information concerning each such award for a NEO on an aggregate basis in a tabular format that sets forth:

  1. the grant date;
  2. the number of underlying securities;
  3. the exercise price per share;
  4. the grant date value; and
  5. the percentage change in the closing market price of the securities underlying the award between the trading day ending immediately prior to the disclosure of MNPI and the trading day beginning immediately following the disclosure of MNPI.

This disclosure requirement applies to emerging growth companies and smaller reporting companies, but with scaled disclosure requirements.

Form 4 and Form 5 Reporting

Trading Plans: Forms 4 and 5 will be modified to include a checkbox to indicate whether the reported transaction was made pursuant to a plan that is intended to satisfy the affirmative defense requirements under Rule 10b5-1.

Reporting of Gifts:  Insiders (including persons who are insiders solely because they are greater than 10% shareholders) will now be required to report bona fide gifts of securities within two business days of such gifts on Form 4. Prior rules allowed insiders to voluntarily report gifts on Form 4 or required reporting of gifts on Form 5 within 45 days following the end of the fiscal year.

Effective Date of New Reporting Requirements

Companies are required to comply with the new periodic and proxy reporting requirements for the first full fiscal year beginning after April 1, 2023 (October 1, 2023 for smaller reporting companies).  Insiders are required to comply with the new Form 4 and 5 reporting requirements and reporting of gifts on Form 4 beginning April 1, 2023.

Action Items

The amendments to Rule 10b5-1 and new disclosure rules will require companies to undertake several actions, including the following:

  • Review of insider trading policies to determine if any changes are needed to address the new rules, such as cooling-off periods, certification requirements, overlapping plans, single-trade plans, and the continuing good faith requirement – keeping in mind that the policy will be publicly filed with the Form 10-K or the proxy statement – and if the company will not have a policy, start drafting the explanation as to why.
  • Review or consider the adoption of equity grant policies to address the granting of options, stock appreciation rights and similar instruments when there is MNPI, as well as the granting of other types of equity awards.
  • Implement procedures for the quarterly reporting of the adoption, modification, or termination of 10b5-1 plans and non-Rule 10b5-1 trading arrangements and the material information to be disclosed.
  • If options, stock appreciation rights and similar instruments may be granted within the specified period preceding and following the release of MNPI, prepare to include the required table in the proxy statement.
  • Implement procedures for determining if purchases and sales on or after April 1, 2023 were made pursuant to a 10b5-1 plan, so that information may be properly reported on Form 4.
  • Implement procedures for directors, officers, and persons who are insiders because they are greater than 10% shareholders to timely report gifts of securities made on or after April 1, 2023, so that a Form 4 can be filed with two business days of the gift.

More Information

The SEC’s press release announcing the adoption of the amended rules and new disclosure requirements is available here, the fact sheet on the rules is available here, and the final rule is available here.

If you have any questions, please reach out to a member of HSE’s Securities and Capital Markets team or our Employee Benefits and Executive Compensation team at 585.232.6500 or 716.853.1616.

[1] Officer is as defined in Rule 16a-1(f) of the Exchange Act and generally includes an issuer’s president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function, any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer.

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