On May 25, 2023, the staff of the SEC’s Division of Corporate Finance (the “Staff”) released three new compliance and disclosure interpretations (“C&DIs”) relating to the SEC’s recent amendments to Rule 10b5-1. As we previously discussed, these amendments implement new disclosure requirements and mandatory cooling-off periods with regard to Rule 10b5-1 trading plans, among other changes, aimed at enhancing investor protections against insider trading. C&DIs 120.26¬–28 clarify relevant dates for companies to comply with the new disclosure requirements as well as the applicable cooling off periods for individuals with multiple Rule 10b5-1 plans.
New Guidance Explained:
1. In C&DI 120.26, the Staff clarifies when companies are required to begin providing new disclosures in their periodic reports pursuant to quarterly Item 408(a) and annual Items 402(x) and 408(b) (Item 16J of Form 20-F disclosures for foreign private issuers). Companies (other than smaller reporting companies) must comply with the new disclosures on their Forms 10-Q, 10-K, and 20-F “in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.” The Staff provides the following compliance dates depending on the company’s fiscal year-end:
- December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in the Form 10-Q for the period ended September 30, 2023 and the Form 10-K for the fiscal year ended December 31, 2023.
- June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2023.
- December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
- June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2024.
By contrast, smaller reporting companies must comply with the new disclosure requirements in the first filing that covers the first full fiscal period beginning on or after October 1, 2023. These compliance dates are as follows:
- December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023.
- June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended December 31, 2023.
- December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
- June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2025.
2. The second C&DI 120.27 clarifies when companies must begin providing the new disclosures in their proxy or information statements. Most companies will need to provide the information in proxy statements for the first annual meeting for director elections (or information statements for consent solicitations in lieu thereof) after completion of the first fiscal year that begins on or after April 1, 2023. Whereas, smaller reporting companies must provide the information after the completion of the first fiscal year that begins on or after October 1, 2023.
3. In the third and final new C&DI, 120.28, the Staff provides guidance to investors who have two or more Rule 10b5-1 trading plans. The Rule 10b5-1(c) affirmative defense is generally unavailable if an individual has multiple Rule 10b5-1 plans in place, but Rule 10b5-1(c)(1)(ii)(D)(2) permits a person (other than the issuer) to maintain two separate plans at the same time so long as trading pursuant to the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or have expired without execution.
C&DI 120.28 clarifies that if an individual preemptively terminates their earlier-commencing trading plan, then trading under the later-commencing plan can only occur after “an effective cooling-off period.” The length of the cooling-off period varies; for individuals other than directors and officers, it is 30 days after adopting the trading plan, and for directors and officers, it is the later of 90 days after adopting the trading plan or two business days after the issuer discloses its financial results in Form 10-Q or Form 10-K (but no more than 120 days total). By contrast, if the earlier-commencing plan ends by its terms without action by the individual, trading may begin under the later-commencing plan as soon as that plan’s original cooling-off period is completed. Thus, the Staff notes that trading could begin “as soon as immediately after the earlier-commencing plan ends” depending on the terms of the original Rule 10b5-1 plan.
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Additional authors include Patricia Halling and Collette Moura.
