On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 and new disclosure requirements aimed at enhancing investor protections against insider trading. The final rules generally follow the proposed rules published last December but contain additional, helpful modifications that address concerns raised by commentators. It remains to be seen whether directors and officers will continue to use Rule 10b5-1 plans once the new rules come into effect given mandated cooling off periods and limits on multiple or overlapping 10b5-1 plans.
We set out below our general observations on the final rules as well as practical points to consider for certain specific rules. In addition, we have included a chart comparing the proposed amendments against the final rules as an annex.
General observations regarding the final rules:
- Rules adopted with helpful modifications – In particular, the originally proposed 120-day cooling off period for directors and officers has been shortened and the limits on the number of Rule 10b5-1 plans includes several useful exceptions, including for sell-to-cover transactions where securities are sold to satisfy tax withholding obligations arising from the vesting of a compensatory award.
- Issuers largely excluded for now – Several proposed rules relating to issuers, such as a cooling off period and limits on the number of Rule 10b5-1 plans entered by an issuer as well as quarterly disclosure of trading plans adopted by issuers were not adopted. However, the adopting release expressly notes that the SEC is continuing to consider whether regulatory action is needed to mitigate the risk of investor harm from the misuse of Rule 10b5-1 plans by issuers.
- Good faith requirement raises questions for insiders – The proposed rule that Rule 10b5-1 plans must be operated in good faith has been modified to require that a person (including an issuer) who enters into a 10b5-1 plan must have “acted in good faith with respect to” the plan. The SEC explained that the final rule was intended to prevent situations where a trader cancels or modifies a plan to evade the prohibitions of Rule 10b5-1 or uses their influence to affect the timing of corporate disclosures to increase the profitability or reduce the loss of a trade. The requirement, however, may create tension for insiders who play a role in the dissemination of corporate disclosures and have adopted a Rule 10b5-1 plan.
- Foreign private issuers affected by new rules – In general, the amendments related to Rule 10b5-1 also apply to foreign private issuers. Foreign private issuers will also be required to make disclosures about their insider trading policies as part of their annual report on Form 20-F and file such policies as an exhibit. However, foreign private issuers will not be required to include the new tabular disclosure of certain option or option-like awards granted close in time to the release of material non-public information.
- Education of key stakeholders – In light of the near-term impact that these rules have on issuers and insiders alike, issuers are advised to educate their directors, officers, and other employees with 10b5-1 plans regarding the ramifications of these new rules to allow for proper implementation and planning.
Practical points to consider:
- 10b5-1 plans
- Cooling off period – Directors and officers must observe a cooling off period after adopting or modifying a 10b5-1 plan that ends on the later of 90 days after the adoption or modification of such plan or two business days after disclosure of an issuer’s financial results on a Form 10-Q or 10-K (or 6-K or 20-F). Given the “longer of” formulation for the cooling off period, insiders should review the issuer’s reporting calendar as there will likely be periods during the year when the cooling off period will be longer than others, such as around the time when issuers file their annual reports.
- Limits on number of plans – sell-to-cover exception – Although the final rules contain helpful exceptions to the prohibition on overlapping plans and single trade plans, including a sell-to-cover exception, the sell-to-cover exception does not apply to sales of shares used to pay the exercise price of options or similar rights. Issuers should be mindful of the sell-to-cover exception when approving equity awards and managing their equity award programs to allow insiders to take advantage of this exception. For example, they should consider approving a non-discretionary sell-to-cover tax withholding mechanism as part of the equity award and/or eliminating the discretion for insiders to select their tax withholding percentages for equity compensation awards.
- Disclosures / Section 16 filings
- Quarterly disclosure of trading plans by directors or officers – The new rules require details of trading plans that are adopted, modified or terminated by any director or officer in an issuer’s quarterly and annual reports. Issuers should review their internal processes to ensure that they are able to review and track insider trading plans (including implementations, modifications and terminations) for purposes of complying with such disclosure requirements.
- Reporting gifts on Form 4 – Under the new rules, Form 4 filers must report all gifts of equity securities, which may impose additional logistical burdens relating to the gifting of securities for estate and tax planning purposes, especially given the need to report within two business days of the date of the gift. Insiders should review their gifting and estate planning practices to ensure they are able to meet the two-day filing deadline in connection with such activities.
- XBRL tagging – Issuers will have to tag in Inline XBRL information addressing the new disclosure requirements related to trading plans, insider trading policies and option awards, which could result in additional time being needed for the preparation of the relevant quarterly report, annual report or proxy statement.
- Insider trading policies– In light of the new rules and market practice developments, we expect that the new disclosure requirement for issuers to file their insider trading policy as an exhibit to their annual report may lead to more standardization of insider trading policies, which traditionally have been bespoke to each issuer.
- 10b5-1 plans – Issuers will need to update their insider trading policies for the amendments to Rule 10b5-1, in particular to address the new rules relating to cooling off periods, the prohibition on adopting overlapping or single trade plans and amendments or terminations of existing plans.
- Blackout periods – There has historically been some divergence in the length and timing of blackout periods imposed by issuers through their insider trading policies. Under the new rules adopted by the SEC, we expect the divergences to narrow. We recommend that issuers pay particular attention to their blackout periods when reviewing their insider trading policies.
- Gifting policy –The SEC explicitly provides in the adopting release that a 10b5-1 plan can be used for gifts, including a gift that might otherwise cause the donor to be subject to liability under Section 10(b) because the donor was aware of material non-public information and knew or was reckless in not knowing that the donee would sell the securities prior to the disclosure of such information. Issuers should review their insider trading policies as they apply to gifts and directors and officers should revisit their current gifting practices and estate planning structuring in view of the SEC’s commentary.
- New disclosures of option grant policies and practices and certain option awards
- Annual disclosure of option grant policies and practices – In light of the new requirement for issuers to disclose their option grant policies and practices, issuers who grant stock options may wish to consider adopting new or amending existing option grant policies, as applicable, to provide specific parameters for granting option awards in order to reduce the discretion issuers can exercise when granting option awards (e.g., prescribing a predetermined schedule for granting option awards).
- New tabular disclosure of option awards granted close in time to release of material non-public information – The new tabular disclosure requirements in annual reports and proxy statements applicable to issuers who issue options close to the release of material non-public information are expected to increase the administrative burden for issuers when preparing annual reports and proxy statements and potentially invite additional scrutiny from investors on the issuer’s executive compensation programs. In addition, issuers will want to be mindful of when they grant option awards to named executive officers if they wish to avoid triggering this additional disclosure and related investor scrutiny. For example, issuers may need to reschedule preestablished board or compensation committee meetings at which option grants are scheduled to be made.
- Transition considerations
- 10b5-1 plan requirements – The changes to Rule 10b5-1 will become effective once the final rules are effective (i.e., 60 days following publication in the Federal Register). These changes will not affect existing Rule 10b5-1 plans that have already been entered into prior to the effective date of the amended rules. However, should any existing Rule 10b5-1 plan be modified in the manner that under the amended rules would be considered equivalent to adopting a new plan, such modified plan would need to adhere to the amended rules.
- Quarterly and annual report disclosures – Issuers must comply with the new disclosure requirements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023 (for “smaller reporting companies,” October 1, 2023). For issuers with a calendar year end, this means compliance starting with the 10-Q for the second quarter of 2023 (for “smaller reporting companies”, the 10-K for 2023).
- Section 16 filings – Filers must comply with the new requirements for Forms 4 and 5 filed on or after April 1, 2023.
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ANNEX
Topic | Proposed Rules (December 2021) | Final Rules (December 2022) |
| Changes to 10b5-1 Plan Requirements | ||
| 1. 120-day / 30-day cooling off period | For directors and officers, 120-day cooling off period between the adoption date of any new 10b5-1 plan or modification of any existing 10b5-1 plan (including the cancellation of one or more trades under an existing 10b5-1 plan) and the date of the first trade under the plan. | For directors and officers, a cooling off period between the adoption date of any new 10b5-1 plan or modification (see below) of any existing 10b5-1 plan and the later of (1) 90 days after the adoption or modification of such plan and (2) two business days following disclosure of the issuer’s financial results on Form 10-Q or 10-K, (or in the case of foreign private issuers, Form 6-K or 20-F) for the fiscal quarter in which the plan was adopted or modified (capped at 120 days after adoption or modification of the plan). |
| For issuers, 30-day cooling off period between the adoption date of any new 10b5-1 plan or modification of any existing 10b5-1 plan (including the cancellation of one or more trades under an existing 10b5-1 plan) and the date of the first trade under the plan. | Issuer cooling off period not adoptedbut for persons other than directors, officers or the issuer, 30-day cooling off period between the adoption date of any new 10b5-1 plan or modification of any existing 10b5-1 plan and the date of the first trade under the plan. Note that having this requirement apply to persons other than directors, officers or the issuer was not in the proposed rules. | |
| Any modification of a 10b5-1 plan would be treated as a new plan. | Only specified modifications such as any change to the amount, price or timing of the purchase or sale of the securities underlying a contract, instruction, or written plan, but not adjustments for stock splits or a change in account information of a 10b5-1 plan would be treated as a new plan. | |
| 2. Director / officer certifications | At the time of adopting any 10b5-1 plan, directors and officers must certify in writing to the issuer that they are not aware of any material non-public information and that they are adopting the plan in good faith. | At the time of adopting or modifying any 10b5-1 plan, directors and officers must certify (via representations in the Rule 10b5-1 plan, rather than prepared as a separate document to be presented to the issuer) that they are not aware of any material non-public information and that they are adopting the plan in good faith. |
| 10-year retention period by such directors and officers for the certification that aligns with the statute of limitations for insider trading; no filing requirement. | 10-year retention period not adopted. | |
| 3. Limits on multiple or overlapping 10b5-1 plans | The affirmative defense under Rule 10b5-1 not available for persons with overlapping 10b5-1 plans covering the same class of securities. | The affirmative defense under Rule 10b5-1 not available for persons, other than issuers, entering into overlapping 10b5-1 plans covering any class of securities of an issuer with limited exceptions for: (1) separate contracts with different broker dealers due to securities being held in different accounts which will be treated as a single plan, (2) adopting a later commencing 10b5-1 plan that will not commence until an earlier plan terminates (provided the first trade under the later adopted plan cannot occur during the “effective cooling off period” as described under the rules); and (3) sell-to-cover transactions undertaken to satisfy tax withholding obligations arising from the vesting of compensatory awards (e.g., restricted stock or RSUs), subject to the insider satisfying certain requirements. |
| In respect of single trade 10b5-1 plans, only one such plan may be adopted during any 12-month period. | In respect of single trade 10b5-1 plans[1], only one plan adopted by persons other than issuers may qualify for the affirmative defense during any 12-month period, subject to certain exceptions for sell-to-cover plans. | |
| 4. Clarification that 10b5-1 plans must be operated in good faith | In addition to being entered into in good faith, 10b5-1 plans must be “operated in good faith” (i.e., a trader must not cancel or modify their plan to evade the prohibitions of the rule or use their influence to affect the timing of corporate disclosures to increase the profitability or reduce the loss of a trade). | In addition to being entered into in good faith, a person who enters into a 10b5-1 plan must have “acted in good faith with respect to” the plan for its duration (i.e., a trader must not materially modify a planned trade at their discretion and to their benefit based on material non-public information acquired after the plan was entered into or while aware of material non-public information or, induce the issuer to publicly disclose such information in a manner that makes their trades more profitable or less unprofitable). |
| Issuer Quarterly and Annual Report Disclosures | ||
| 5. Quarterly disclosure of trading plans | Details of any trading plans (whether in accordance with Rule 10b5-1 or otherwise) adopted, terminated or modified by the issuer or any director or officer during the relevant quarter must be disclosed in quarterly and annual reports. | Details of any Rule 10b5-1 plans or other “non-Rule 10b5-1(c) trading arrangement”[2] adopted, terminated or modified by any director or officer during the relevant quarter must be disclosed in quarterly and annual reports. The final rule does not require similar disclosure for plans adopted by issuers. |
| Required disclosure includes the identity of the director or officer, the date of adoption / termination / modification, the duration of the plan and the aggregate number of securities covered by the plan. | Required disclosure follows the proposed rules but clarification added that pricing terms are not required to be disclosed. | |
| 6. Annual report / proxy statement disclosure of insider trading policies | Issuers must disclose whether they have adopted insider trading policies and procedures reasonably designed to promote compliance with insider trading laws and any applicable listing standards and if not, why not. | Required disclosure follows the proposed rules. The required disclosure should address not only policies and procedures that apply to the purchase and sale of securities but also other dispositions of securities where material non-public information could be misused, such as gifts. |
| Issuers must describe such insider trading policies in their Form 10-K (or in the case of foreign private issuers on Form 20-F) and proxy statements. | Issuers do not have to describe such insider trading policies within the body of the annual report or proxy statement but must file a copy of their insider trading policy as an exhibit to Form 10-K (or in the case of foreign private issuers, as an exhibit to Form 20-F). Disclosures would be subject to SOX certifications. | |
| 7. Annual report / proxy statement disclosure of option awards (including stock appreciation rights and similar instruments) | Issuers must disclose in tabular format in annual reports and proxy statements: (1) each option award (including the number of underlying securities, the date of grant, the grant fair value and the option exercise price) granted to a named executive officer 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 material non-public information; and (2) the market price of the underlying securities on the trading day before and after the disclosure of the material non-public information. | Issuers (other than foreign private issuers) must include tabular disclosure in annual reports and proxy statements indicating: (1) each option award, stock-appreciation right or other option-like instrument (including the number of underlying securities, the date of grant, the grant fair value and the exercise price) granted in the past fiscal year to a named executive officer within a period starting four business days before and ending one business day after, the filing of a periodic report, or with limited exceptions, the filing or furnishing of a current report on Form 8-K that discloses material non-public information; and (2) the percentage change in the closing market price of the underlying securities between one trading day before and one trading day after the disclosure of the material non-public information. |
| Issuers must also disclose their option grant policies and practices regarding the timing of option grants and the release of material non-public information, including how the board determines when to grant options and how material non-public information is taken into account when determining the timing and terms of an award. | Disclosure of option grant policies and practices follows the proposed rules. The new disclosure is limited to option and option-like instruments, and will not require disclosure with respect to grants of restricted stock or RSUs. | |
| Section 16 filings | ||
| 8. Reporting of trades under plans on Form 4 and Form 5 and bona fide gifts on Form 4 for all required filers (including directors, officers and beneficial owners of more than 10% of an issuer’s registered equity securities) | Form 4s (and Form 5s, in the event of late reporting) must indicate whether the purchase or sale being reported was made pursuant to a 10b5-1 plan and the date of adoption of such plan. In addition, filers would have the option to indicate whether the reported transaction was made under a plan not intended to comply with Rule 10b5-1. | Form 4 and Form 5 reporting follows the proposed rules except that the text relating to the checkboxes will specify that the transaction was made pursuant to a plan “intended” to satisfy Rule 10b5-1(c). Optional check box for whether the reported transaction was made under a plan not intended to comply with Rule 10b5-1 not adopted. |
| Filers must report all bona fide gifts of equity securities on Form 4 before the end of the second business day following the date of the transaction (rather than being permitted to disclose on a Form 5 under the existing rules). | Reporting of gifts follows the proposed rules. | |
