Introduction

In August 2000, the Securities and Exchange Commission (“SEC”) adopted Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which, among other things, established an affirmative defense to a charge of transacting in a security on the basis of material nonpublic information (“MNPI”) for trades executed pursuant to a binding arrangement entered into at a time when a person was not in possession of material non-public information about the issuer of the security or the security itself.  These arrangements have become known as 10b5-1 Plans.  On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 designed to address concerns about opportunistic trading on MNPI pursuant to 10b5-1 Plans. In short, the amendments: (i) condition the availability of the affirmative defense afforded by 10b5-1 Plans on the inclusion of “cooling-off” periods for directors, officers and persons other than the issuer; (ii) create new disclosure requirements regarding issuers’ insider trading policies and procedures and the adoption and termination of 10b5-1 Plans by directors and officers; (iii) create new disclosure requirements for equity compensation awards made to directors and executive officers close in time to an issuer’s disclosure of MNPI; and (iv) update Forms 4 and 5 to require filers to identify whether transactions reported were made pursuant to a 10b5-1 Plan and to disclose all bona fide gifts of securities on Form 4 (instead of Form 5).

Background

Section 10(b) of the Exchange Act and Rule 10b5 thereunder prohibit the purchase or sale of a security on the basis of MNPI in breach of a duty owed to the issuer of the security, the shareholders of that issuer or any person who is the source of the MNPI.  Rule 10b5-1 clarified that a person would be deemed to have traded on the basis of MNPI if they were aware of the MNPI when they completed the trade.  Rule 10b5-1(c) sets forth an affirmative defense to liability for trading on the basis of MNPI for any trades entered into in accordance with a 10b5-1 Plan.  To establish the affirmative defense, a person must demonstrate that a 10b5-1 Plan: (i) was adopted when the person was unaware of MNPI; (ii) specified the amount, price, and date for each security to be purchased or sold; included a written formula, algorithm, or computer program for determining the amount, price, and date for each purchase or sale; or did not permit the person to have any subsequent influence over how, when, or whether to affect the trades; (iii) was a binding contract, an instruction or a written plan; and (iv) was entered into in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5.

Amendments to Rule 10b5-1

Cooling-Off Periods

• Directors and officers (as defined in Rule 16a-1(f) under the Exchange Act) adopting 10b5-1 Plans will not be able to rely on the Rule 10b5-1 affirmative defense unless the plan provides that trading will not begin until the later of: (1) 90 days following the adoption or modification of the plan; or (2) two business days following the disclosure in certain periodic reports (Forms 10-Q, 10-K, 20-F or 6-K) of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification).
• Persons other than issuers, directors or officers adopting 10b5-1 Plans will not be able to rely on the Rule 10b5-1 affirmative defense unless the plan provides that trading will not begin until 30 days following adoption or modification of the plan.
• A modification or change to a 10b5-1 Plan that impacts the amount, price, or timing of the purchase or sale of the securities (or a modification or change to a written formula or algorithm, or computer program that affects the amount, price, or timing of the purchase or sale of the securities) thereunder is deemed a termination of the original plan and the adoption of a new plan, subject to a new cooling-off period.
• The amendments to Rule 10b5-1 will not affect the affirmative defense available under a 10b5-1 Plan that was entered into prior to the revised rule’s effective date, except to the extent that such a plan is modified or changed in the manner described above after the effective date of the revised rules. In that case, the modification or change would be equivalent to adopting a new 10b5-1 Plan, and the amended rule would apply.

Director and Officer Certifications

• Directors and officers are required to include a representation in their Rule 10b5-1 Plan certifying, at the time of the adoption of a new or modified plan, that: (1) they are not aware of MNPI about the issuer or its securities and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.

Restrictions on Multiple Overlapping 10b5-1 Plans and Single Trade Arrangements

• Persons other than the issuer may not have multiple outstanding 10b5-1 Plans for purposes of sales of any class of securities on the open market during the same period.
• Persons other than the issuer will be able to rely on the Rule 10b5-1(c)(1)(ii) affirmative defense for only one single-trade plan during any 12-month period.

Amended Good Faith Condition

• All persons entering into a 10b5-1 Plan must act in good faith with respect to that plan (e.g., not engage in opportunistic trading with respect to such plan or improperly influence the timing of corporate disclosures to benefit trades under such plan).

Additional Disclosures re: 10b5-1 Trading Arrangements

Quarterly Reporting of Rule 10b5-1 and Non-10b5-1 Trading Arrangements

• New Item 408(a) of Regulation S-K requires:
  • Quarterly disclosure by issuers regarding the use of 10b5-1 Plans and written trading arrangements meeting the requirements of a non-Rule 10b5-1 trading arrangement as defined in new Item 408(c) (a “Non-Rule 10b5-1 Trading Arrangement”) by an issuer’s directors and officers for the trading of its securities. Required disclosure includes:
    • whether any director or officer has adopted or terminated (i) a 10b5-1 Plan and/or (ii) Non-Rule 10b5-1 Trading Arrangement; and
    • a description of the material terms of the 10b5-1 Plan or Non-Rule 10b5-1 trading arrangement other than terms with respect to the price at which the individual executing the respective trading arrangement is authorized to trade, such as:
    • the name and title of the director or officer;
    • the date of adoption or termination of the trading arrangement;
    • the duration of the trading arrangement; and
    • the aggregate number of securities to be sold or purchased under the trading arrangement.
  • Any modification or change to a 10b5-1 Plan by a director or officer that would trigger a new “cooling-off” period as described above would also be required to be disclosed as it is deemed to constitute the termination of an existing plan and the adoption of a new plan.

Annual Disclosure of Insider Trading Policies and Procedures

• New Item 408(b) requires:
  • Annual disclosure in Forms 10-K and 20-F and Proxy/Information Statements on Schedules 14A and 14C regarding whether the issuer has adopted insider trading policies and procedures or, if the issuer has not adopted such insider trading policies and procedures, it must explain why it has not done so.
• Item 601 of Regulation S-K requires that issuers file their insider trading policies and procedures annually as an exhibit to Forms 10-K and 20-F.

Identification of Rule 10b5-1 and non-10b5-1 Transactions on Forms 4/5

• Form 4 and 5 filers are required to indicate by checkbox if a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

Disclosure re: Certain Equity Awards Made Close in Time to the Release of MNPI

• New Item 402(x) requires:
  • Narrative disclosure regarding the issuer’s policies and practices on the timing of awards of stock options, stock appreciation rights (“SARs”) and/or similar option-like instruments in relation to the disclosure of material nonpublic information by the issuer, including how the board determines when to grant such awards (for example, whether such awards are granted on a predetermined schedule); whether, and if so, how, the board or compensation committee takes material nonpublic information into account when determining the timing and terms of an award, and whether the issuer has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation.
  • Tabular disclosures including the following information for each such award if, during the last completed fiscal year, stock options, SARs and/or similar option-like instruments were awarded to a named executive officer (“NEO”) within a period starting four business days before the filing of a periodic report on Form 10-Q or Form 10-K, or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information (including earnings information), other than a current report on Form 8-K disclosing a material new option award grant under Item 5.02(e), and ending one business day after a triggering event:
    • the name of the NEO;
    • the grant date of the award;
    • the number of securities underlying the award;
    • the per-share exercise price;
    • the grant date fair value of each award computed using the same methodology as used for the issuer’s financial statements under generally accepted accounting principles; and
    • the percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and one trading day following the disclosure of material nonpublic information.

XBRL Tagging of the required disclosures

• Issuers are required to tag the information specified by new Items 402(x), 408(a), and 408(b)(1) of Regulation S-K, and new Item 16J(a) of Form 20-F, in Inline XBRL in accordance with Rule 405 and the EDGAR Filer Manual.

Form 4 Reporting of Gifts

• Section 16 reporting persons are required to report dispositions of bona fide gifts of equity securities on Form 4 (rather than Form 5, as was previously permitted) in accordance with Form 4’s filing deadline (that is, before the end of the second business day following the date of execution of the transaction).

Effective Dates

The final rules will become effective 60 days after the date of publication of the adopting release in the Federal Register.

Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.

Issuers that are Smaller Reporting Companies will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements beginning with the first filing that covers the first full fiscal period that begins on or after October 1, 2023.

All other issuers will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements beginning with the first filing that covers the first full fiscal period that begins on or after April 1, 2023.