On December 14, 2022, the U.S. Securities and Exchange Commission (SEC) approved final rules amending Rule 10b5-1 under the Securities Exchange Act of 1934 (Exchange Act) to impose additional conditions to the availability of the affirmative defense under Rule 10b5-1(c)(1), and to require new issuer disclosures relating to Rule 10b5-1 trading plans, insider trading policies, and the timing of certain option grants to officers of public companies, as well as new disclosure requirements for Section 16 reporting persons, including relating to bona fide gifts.

The SEC adopted Exchange Act Rule 10b5-1 in 2000 to facilitate trading in an issuer's securities by parties that frequently have access to material nonpublic information, such as directors and officers. Rule 10b5-1(c)(1) provides an affirmative defense against a claim of insider trading for an insider who trades pursuant to a written trading plan that is established in good faith at a time when the insider is unaware of material nonpublic information and instructs a third party to conduct such trades. There were no other conditions to the availability of the affirmative defense prior to these amendments. As discussed in our previous client alert, the SEC first proposed these rules on December 15, 2021, in response to concerns raised by U.S. Congress, institutional investors, the media, and academics regarding potential manipulation of Rule 105-1 trading plans¹ as an affirmative defense to insider trading liability.² The final rules include several additional conditions to the affirmative defense under Rule 10b5-1(c)(1), as discussed below.³

The final rules are effective 60 days after the date of publication in the Federal Register. Therefore, any Rule 10b5-1 trading plans adopted or amended after the effective date of the final rules should comply with the final rules. However, the SEC grandfathered existing Rule 10b5-1 trading plans, meaning that the final amendments to Rule 10b5-1 will not affect the affirmative defense available with respect to Rule 10b5-1 trading plans that were entered into prior to the effective date of the final rules, unless the plan is modified or changed after the effective date in a manner that would be deemed a termination of the plan under the amended rules. The final rules provide transition periods for the new disclosure and tagging requirements, as discussed under “Transition Periods” below. 

The Final Rules at a Glance

Additional Conditions to Rule 10b5-1(c)(1) Affirmative Defense

Cooling-Off Periods

The final rules mandate cooling-off periods between the adoption date of a Rule 10b5-1 trading plan and the first trading date thereunder. During a cooling-off period, no trades may be made pursuant to the plan. The required cooling-off periods in the final rules, which vary as between officers (as defined in Exchange Act Rule 16a-1(f) and referred to throughout this alert as Section 16 officers)⁹ and directors, and persons other than Section 16 officers and directors, are as follows:

• For Section 16 officers and directors, the later of 1) 90 days after the date of adoption of any Rule 10b5-1 trading plan or 2) two business days after filing the Form 10-Q or 10-K for the fiscal period in which the plan was adopted (but not more than 120 days).¹⁰ The duration of the cooling-off period in the final rules includes the later of a fixed deadline (90 days) and a variable deadline (two business days after the applicable periodic report), rather than the fixed 120 days originally proposed. Of note, the SEC clarified that the financial results must be in a Form 10-Q or 10-K filing to trigger the two-business day end of the cooling-off period and not just in an earnings release furnished on Form 8-K, and provided that the required cooling-off period would be subject to a maximum of 120 days after adoption of the plan. The effect of this “later of” formulation, with a 120-day cap, will result in cooling-off periods for Section 16 officers and directors between 90 and 120 days. The cooling-off period also applies to certain modifications to a Rule 10b5-1 trading plan, including a modification to cancel one or more trades. Under new Rule 10b5-1(c)(1)(iv) of the final rules, modifications, or changes to the amount, price, or timing of the purchase or sale of the securities under a Rule 10b5-1 trading plan would be treated as the termination of the existing plan and adoption of a new plan, thereby triggering a new cooling-off period.
• For persons other than the issuer, who are not Section 16 officers or directors, a minimum of 30 days after the date of adoption of any Rule 10b5-1 trading plan. Under the final rules, the SEC added a 30-day cooling-off period for persons other than issuers who are not Section 16 officers or directors. The shorter cooling-off period reflects what the SEC views as a “balancing” of several considerations, including its belief that some period of time should elapse between the time the plan is entered into and the date of the first trade and “the heightened burdens a cooling-off period may impose on insiders who are not directors or officers, and who may have more limited financial resources.” This 30-day cooling off period, like the longer period for Section 16 officers and directors, is triggered by the same modifications to a plan discussed above.
• Issuers. In a notable departure from the proposed rules, the SEC decided not to mandate any cooling-off period for issuers in the final rules because it believes the matter deserved more review.   

Representations

The final rules require that Section 16 officers and directors include representations in the Rule 10b5-1 trading plan that:

• they are not aware of material nonpublic information about the issuer or its securities; and
• they are adopting the Rule 10b5-1 trading plan in good faith and not as part of a plan or scheme to evade the prohibitions of the rule.

The final rules provide that these statements be made as representations in the Rule 10b5-1 trading plan rather than in a separate written certification. Although materiality is not defined for the purposes of the representations, the SEC reiterated that whether a piece of information is material involves a facts and circumstances analysis (just as it does in other contexts) and that officers and directors may consult counsel in making their certification, but that materiality should be a “personal determination” in the final analysis. These representations are not required of persons adopting Rule 10b5-1 plans who are not Section 16 officers or directors, even if employees of the issuer. 

Multiple, Overlapping Plans, and Single Trade Plans

The final rules restrict the availability of the affirmative defense under Rule 10b5-1(c)(1) for multiple, overlapping plans and limit the availability of the affirmative defense for single trade plans, but provide for a number of exceptions.

• Overlapping Rule 10b5-1 trading plans for open market trades of any class of shares during the same period. The restriction on multiple, overlapping plans applies to all persons (not just Section 16 officers and directors) other than the issuer, and prohibits multiple, overlapping plans that cover open market purchases or sales of any class of the issuer’s securities. The SEC was concerned that individuals were adopting multiple plans with different pricing triggers and later terminating or modifying certain of them to achieve the best outcome. For example, an insider could establish one trading plan with a low price point, another with a medium price point and a third with a high price point, all covering the same or overlapping periods. As the execution date neared and the insider had more information, they could simply cancel whichever of the plans conformed to their better information (such as canceling the low and medium price plan if they had material nonpublic information of an upcoming positive announcement or canceling the high price plan prior to a negative announcement). In essence, the insider would be using the plans as a way to hedge stock trades while still benefiting from the affirmative defense under Rule 10b5-1. As noted above, the SEC did not extend this restriction to issuers; therefore, an issuer could continue to have side-by-side Rule 10b-18 and Rule 10b5-1 repurchase plans. The final rules also include certain exceptions where multiple plans would be allowed, including:
  • Using multiple brokers to execute trades in different accounts. The use of multiple brokers to execute trades in different accounts may be treated as a single “plan” so long as each of the contracts taken as a whole meet all of the conditions to the affirmative defense, and any modification to one of the contracts would be deemed a modification of each other contract.
  • Adopting a new plan that will not trade until expiration of existing plan. A person may adopt a new Rule 10b5-1 trading plan while another Rule 10b5-1 trading plan is in operation, so long as the first trade under the new plan will not occur until the existing plan expires or terminates by its terms, allowing the insider to “set up two successive plans for open-market trading.” However, if the person terminates the current plan early, and the first trade under the new plan was scheduled to occur in the “effective cooling-off period,” then the new plan would not receive the benefit of the affirmative defense. Conversely, if the first trade under the new plan was scheduled to occur only after the “effective cooling-off period,” then the new plan would receive the benefit of the affirmative defense. In the adopting release, the SEC provided the following example of a non-officer/director insider who has an existing Rule 10b5-1 trading plan with the last scheduled trade to occur on May 31, 2023. In the example, the insider adopts another plan on May 1, 2023, with the first scheduled trade to occur on June 1, 2023 (since the insider is only required to have a 30-day cooling-off period). If the insider terminates the existing plan on May 15 (i.e., terminates it early, prior the last scheduled trade thereunder), then the “effective cooling-off period” would mean that the later-commencing plan would need to have a 30-day cooling-off period from May 15 (i.e., the date of early termination of the existing plan), in order to receive the benefit of the affirmative defense. Because the first trade under the new plan had been scheduled to occur on June 1, it would not receive the benefit of the affirmative defense. Conversely, if the first scheduled trade under the new plan was scheduled July 1 (i.e., a date that is at least 30 days from the early termination date), then the later-commencing plan would receive the benefit of the affirmative defense (assuming all other conditions were met).
  • Sell-to-cover transactions. An additional Rule 10b5-1 trading plan (or plans) may be used for certain sell-to-cover transactions, i.e., instructing the broker or agent to sell securities in order to satisfy tax withholding obligations at the time an equity award vests, so long as the additional plan or plans are only for authorized sell-to-cover transactions (and only for such securities as are necessary to satisfy specific tax withholding obligations), and the insider does not exercise any control over the timing of the sales. This exception applies only to qualified sell-to-cover transactions, such as tax withholding related to vesting and settlement of restricted stock units (RSUs) or exercise of stock appreciation rights, but not to “sales incident to exercise of option awards,” because those “exercises occur at the discretion of the insider[.]”
• More than one Rule 10b5-1 trading plan in a 12-month period that is designed to cover a single trade. In the adopting release, the SEC noted that studies have shown that plans covering one-time trades consistently show “abnormal profitability,” which it says suggests that the plans are being adopted while the insider has material nonpublic information. To counter this, the final rules provide that the affirmative defense will only be available for a single trade plan if the person (other than the issuer) had not, during the prior 12-month period, adopted another single trade that qualified for the affirmative defense. This limitation applies to all persons, including Section 16 officers and directors, but not to issuers. The final rules refer to single trade plans as plans “designed to effect the open-market purchase or sale of the total amount of securities as a single transaction[.]” The phrase “designed to effect” a single transaction means that the plan or instructions have the practical effect of requiring a single transaction. Conversely, a plan where the broker or agent may have discretion over whether to execute all transactions in a single trade, even though the plan is not designed for a single trade, would not be “designed to effect” a single transaction and thus would not be considered a single trade plan. Similar to the restriction on multiple, overlapping plans, an exception to single trade plans has been added for certain sell-to-cover transactions, i.e., instructing the broker or agent to sell securities in order to satisfy tax withholding obligations at the time an equity award vests, so long as the additional plan or plans are only for authorized sell-to-cover transactions (and only for such securities as are necessary to satisfy specific tax withholding obligations), and the insider does not exercise any control over the timing of the sales.   

Acting in Good Faith

The final rules require that the person who entered into the Rule 10b5-1 trading plan has acted in good faith with respect to the plan. This requirement is in addition to the existing requirement that a Rule 10b5-1 trading plan be entered into in good faith. In the adopting release, the SEC stated that “a corporate insider would not be operating a Rule 10b5-1 plan in good faith if the corporate insider, while aware of material nonpublic information, directly or indirectly induces the issuer to publicly disclose that information in a manner that makes their trades under a Rule 10b5-1 plan more profitable (or less unprofitable).” The good faith requirement is applicable to all persons who adopt a Rule 10b5-1 trading plan, including employees who are not Section 16 officers or directors, and the issuer.

Additional Disclosure Required by Final Rules

The final rules also require the disclosures set forth below. The discussion of the disclosure requirements includes 1) issuer disclosure requirements, which will be required to be made by issuers, and 2) beneficial ownership reporting requirements, which will be required to be made by Section 16 reporting persons.

Issuer Disclosure Requirements

Beneficial Ownership Reporting Requirements

Transition Periods

As noted above, the final rules are effective 60 days after the date of publication in the Federal Register. However, the final rules provide transition periods for the new disclosure and tagging requirements, including: 

• Annual and Quarterly Disclosures. Issuers (other than smaller reporting companies) will be required to comply with the new disclosure and tagging requirements in their first periodic report or proxy or information statement that covers the first full fiscal period that begins on or after April 1, 2023. In other words, for companies with a fiscal quarter ending March 31, applicable required disclosures would commence with their quarterly report on Form 10-Q for the fiscal quarter ending June 30, 2023 (e.g., for December 31 fiscal year-end companies, these disclosures would be required in their second quarter Form 10-Q).
  • Smaller reporting companies will have until the first full fiscal period that begins on or after October 1, 2023, within which to comply.
• Section 16 Disclosures. Section 16 reporting persons will be required to comply with the amendments to Form 4 and Form 5 in beneficial ownership reports filed on or after April 1, 2023.

What to Do Now?

Issuers should begin now to prepare for the Rule 10b5-1 changes and inclusion of the new disclosure requirements beginning in their first Exchange Act periodic filing or proxy or information statement that covers the first full fiscal period that begins on or after April 1, 2023 (or October 1, 2023, for smaller reporting companies). In particular, affected issuers should:

• Review the final rules and the timing for compliance with the final rules with internal teams and external advisers who prepare and advise on Rule 10b5-1 trading plans, option grants, and insider trading policies to discuss the issuer’s current trading plans, option grant policies (if any), and policies, to plan for any work required to comply with the final rules in advance of their effective date.
• Review insider trading policies in light of the final rules, as well as relative to market practices. In the proposing release, the SEC stated that investors may find useful information in an insider trading policy “on the issuer’s process for analyzing whether directors, officers, employees, or the issuer itself when conducting an open-market share repurchase have material nonpublic information; the issuer’s process for documenting such analyses and approving requests to purchase or sell its securities; or how the issuer enforces compliance with any such policies and procedures it may have.” Accordingly, consideration should be given to pre-clearance procedures, the duration of trading blackouts and windows, and prohibitions on certain types of trading. Also consider any changes that may be necessary in insider trading policies related to gifts, including pre-clearance procedures given the expedited Section 16 reporting of bona fide gifts as well as the SEC’s statements regarding potential liability for gifts made while in possession of material nonpublic information.
• Review Rule 10b5-1 trading plan guidelines, if any, and revise those guidelines as needed to comply with the new conditions to the affirmative defense under Rule 10b5-1(c)(1) as of the effective date of the final rules. For example, if the existing trading plan guidelines provide a shorter cooling-off period than will be required under the final rules, then the cooling-off period should be amended, effective as of the effective date. Any revisions should take into account grandfathered Rule 10b5-1 trading plans.
• Identify any option grant timing going forward that may appear to be positioned to benefit from material nonpublic information and would require to be disclosed under the final rules. Consider adopting procedures to change such timing so as not to necessitate disclosure.  
• Educate officers and directors on the final rules. Also, consider educating the broader employee population on the final rules if they have previously received information on Rule 10b5-1 trading plans or are required to submit Rule 10b5-1 trading plans to the issuer for approval prior to implementation.

[1] In this alert, the phrase “Rule 10b5-1 trading plan” includes any contract, instruction, or written plan intended to satisfy the requirements of the affirmative defense in Rule 10b5-1(c)(1).

[2] Rule 10b5-1 and Insider Trading, 87 Fed. Reg. 8686, 8688 (Feb. 15, 2022).

[3] Wilson Sonsini is pleased to have commented on the proposed rules and that its comments appear to have helped inform the final rules.

[4] The final rules provide that a modification or change to the amount, price, or timing of the purchase or sale of securities will be deemed a termination of the existing plan and adoption of a new plan, and thus would trigger a new cooling-off period. See new Rule 10b5-1(c)(1)(iv). This new rule is discussed in more detail later in this alert.

[5] For example, if a Rule 10b5-1 trading plan is adopted during the second fiscal quarter following the announcement of the first fiscal quarter results, then the first trade may not occur until two business days following the filing of the Form 10-Q for the second fiscal quarter.

[6] See new Rule 10b5-1(c)(1)(ii)(D)(3).

[7] See new Rule 10b5-1(c)(1)(ii)(D)(3) and Rule 10b5-1(c)(1)(ii)(E).

[8] See Section 16(a)(1) of the Securities Exchange Act of 1934, as amended (Exchange Act), codified at 15 U.S. Code § 78p(a)(1).

[9] Exchange Act Rule 16a-1(f) defines “officer” as “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 (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer. Officers of the issuer's parent(s) or subsidiaries shall be deemed officers of the issuer if they perform such policy-making functions for the issuer. In addition, when the issuer is a limited partnership, officers or employees of the general partner(s) who perform policy-making functions for the limited partnership are deemed officers of the limited partnership. When the issuer is a trust, officers or employees of the trustee(s) who perform policy-making functions for the trust are deemed officers of the trust.”

[10] For foreign private issuers, the cooling-off period would be the later of 1) 90 days after the date of adoption of any Rule 10b5-1 trading plan or 2) two business days following the disclosure of the issuer’s financial results in a Form 20-F or Form 6-K that discloses the issuer’s financial results, but subject to a maximum of 120 days after adoption of the plan.

[11] Generally, if the company files its annual meeting proxy statement within 120 calendar days after the end of its fiscal year, it would not include this information in its annual report on Form 10-K but would instead forward incorporate the information by reference from the proxy statement. Foreign private issuers will be required to include this information under new Item 16J in their annual reports on Form 20-F.

[12] As with the insider trading plan disclosure, this option plan disclosure may be forward incorporated by reference into the Form 10-K from the proxy statement. Foreign private issuers will not be required to include this information.

[13] The SEC recently issued a Staff Accounting Bulletin regarding the potential accounting implications of spring-loaded option grants. See https://www.sec.gov/news/press-release/2021-246.