On August 25, 2023, the U.S. Securities and Exchange Commission’s Division of Corporation Finance (Corp Fin) issued five new Compliance and Disclosure Interpretations (CDIs) relating to Rule 10b5-1 trading arrangements. Three of the CDIs provide clarification on the recent amendments to Rule 10b5-1, and the other two CDIs relate to the new quarterly disclosure requirements for Rule 10b5-1 plans. The full text of the CDIs is set forth in the Appendix below.
Question 120.29
Under Rule 10b5-1, the required cooling-off period for directors and officers is the later of 90 days after the adoption of a trading arrangement or “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted.” This CDI confirms that for calculating the relevant two business days, the first business day would be the next business day following the filing date of the Form 10-Q or Form 10-K (rather than the filing date). For example, if the relevant form is filed on a Monday, trading may commence under the trading arrangement on Thursday (assuming no intervening Federal holidays). In addition, whether a form is filed before or after trading opens on a given day has no bearing on the calculation.
Question 120.30
With a few limited exceptions, the affirmative defense under Rule 10b5-1 is unavailable for overlapping trading plans. This CDI clarifies that if a participant relies on Rule 10b5-1 to participate in a 401(k) plan, an open-market transaction conducted at the direction of the 401(k) plan administrator (not at the direction of the plan participant) to match the participant’s contribution with employer stock would not be an overlapping plan.
Question 120.31
The Rule 10b5-1(c) check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan does not apply to trading plans that were adopted prior to the effective date of the amendments to Rule 10b5-1 (i.e., February 27, 2023).[1]
Question 133A.01
Item 408(a)(1) of Regulation S-K requires disclosure under Item 5 of Form 10-Q and Item 9B of Form 10-K of Rule 10b5-1 plan terminations; however, this CDI confirms that this requirement does not apply to a plan that ends due to its expiration or completion.
Question 133A.02
This CDI clarifies that Item 408(a) applies to any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate.
APPENDIX
Section 120. Manipulative and Deceptive Devices and Contrivances: Rule 10b5-1
Question 120.29
Question: Under Rule 10b5-1(c)(1)(ii)(B)(1), the required cooling-off period for directors and officers subject to Exchange Act Section 16 reporting is the later of 90 days after the adoption of the contract, instruction, or plan or “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted.” Does the filing date count as the first business day for the purposes of the Rule 10b5-1(c)(1)(ii)(B)(1) required cooling-off period?
Answer: No. For purposes of the cooling-off period specified in Rule 10b5-1(c)(1)(ii)(B)(1), the date of disclosure of the issuer’s financial results is the filing date of the relevant Form 10-Q or Form 10-K, and the first business day would be the next business day that follows the filing date. To determine the filing date of the relevant form, refer to Rule 13(a)(2) of Regulation S-T. For example, if the relevant form is filed on a Monday, trading may commence under the contract, instruction, or plan on Thursday (assuming no intervening Federal holidays). In addition, whether a form is filed before or after trading opens on a given day has no bearing on the calculation. [August 25, 2023]
Question 120.30
Question: Under a 401(k) plan, an issuer advances cash to the plan administrator who purchases stock in the open market to make matching grants of the issuer’s common stock to plan participants. If a participant relies on Rule 10b5-1 to participate in the 401(k) plan, would the Rule 10b5-1 affirmative defense be available to the participant for a concurrent plan for purchases or sales on the open market?
Answer: Yes. Even though participants elect how much to contribute to their individual 401(k) accounts, an open-market transaction conducted at the direction of the plan administrator, and not at the direction of the plan participant, to match a contribution by the participant with employer stock would not be an overlapping plan for purposes of Rule 10b5-1(c)(1)(ii)(D) that would disqualify a plan participant’s reliance on Rule 10b5-1 for a concurrent open market trading plan. [August 25, 2023]
Question 120.31[2]
Question: Does the Rule 10b5-1(c) check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan apply to trading plans that were adopted prior to the effective date of the amendments to Rule 10b5-1?
Answer: No. The Rule 10b5-1 check box on Form 4 applies to transactions that are made pursuant to a contract, instruction, or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of amended Rule 10b5-1(c). See Release No. 33-11138 (Dec. 14, 2022). [August 25, 2023]
Section 133A. Item 408 ― Insider Trading Arrangements and Policies
Question 133A.01
Question: Under Item 408(a)(1) of Regulation S-K, does the requirement to disclose plan terminations require disclosure of a plan that ends due to its expiration or completion (e.g., the plan ends by its terms and without any action by an individual)?
Answer: Disclosure regarding termination of a plan is not required for a plan that ends due to its expiration or completion. [August 25, 2023]
Question 133A.02
Question: Item 408(a) of Regulation S-K requires disclosure of whether “any director or officer (as defined in § 240.16a–1(f) of this chapter)” adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter. Does this disclosure requirement apply to any such trading arrangement covering securities in which a director or officer has a pecuniary interest?
Answer: Item 408(a) applies to any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate. [August 25, 2023]
[1] This CDI is also included as Question 135.04 of Section 135. Form 4, in the Exchange Act Section 16 and Related Rules and Forms CDIs.
[2] This CDI is also included as Question 135.04 of Section 135. Form 4, in the Exchange Act Section 16 and Related Rules and Forms CDIs.
