SEC Proposes Amendments to Rule 10b5-1

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The SEC has issued proposed amendments to Rule 10b5-1 and to related forms and disclosures.  The amendments are intended to address perceived abuses of Rule 10b5-1 plans. The amendments also address several other matters such as:

  • Mandatory disclosure of trades pursuant to a 10b5-1 plan on Form 4.
  • Requiring gifts to be reported on Form 4.
  • Disclosures regarding the timing of option grants and similar equity instruments shortly before or after the release of material nonpublic information

Cooling-Off Period

The SEC proposes to amend Rule 10b5-1(c)(1) to add as a condition to the availability of the affirmative defense to require that:

  • a minimum 120-day cooling-off period after the date of adoption of any Rule 10b5-1(c)(1) trading arrangement (including adoption of a modified trading arrangement) by a director or officer (as defined in Rule 16a-1(f)) before any purchases or sales under the new or modified trading arrangement; and
  • a minimum 30-day cooling-off period after the date of adoption of any Rule 10b5-1(c)(1) trading arrangement by an issuer before any purchases or sales under the new or modified trading arrangement.

The proposed amendments also include a note that clarifies that a “modification” of an existing Rule 10b5-1(c)(1) trading arrangement, including cancelling one or more trades, would be deemed equivalent to terminating the plan in its entirety, and the cooling-off period would therefore apply after a “modification” before any new trades could commence.

Director and Officer Certifications

The SEC is proposing to amend Rule 10b5-1(c)(1)(ii) to impose a certification requirement as a condition to the affirmative defense. Under the proposed amendment, if a director or officer of the issuer of the securities adopts a Rule 10b5- 1 trading arrangement, as a condition to the availability of the affirmative defense, such director or officer would be required to promptly furnish to the issuer a written certification at the time of the adoption of a new/modified trading arrangement.

The certification would require a director or officer to certify at the time of the adoption of the trading arrangement:

  • That they are not aware of material nonpublic information about the issuer or its securities; and
  • That they are adopting the contract, instruction, or plan in good faith and not as part of a plan or scheme to evade the prohibitions of Exchange Act Section 10(b) and Exchange Act Rule 10b-5.

The proposed amendment also includes an instruction that a director or officer seeking to rely on the affirmative defense should retain a copy of the certification for a period of ten years. The proposed amendments would not require a director, officer, or the issuer to file the certification with the SEC. The proposed certification would not be an independent basis of liability for directors or officers under Exchange Act Section 10(b) and Rule 10b-5. Rather the proposed certification would underscore the certifiers’ awareness of their legal obligations under the federal securities law related to the trading in the issuer’s securities.

Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements and Single-Trade Arrangements

The SEC is proposing to amend Rule 10b5-1(c)(1) to eliminate the affirmative defense for any trades by a trader who has established multiple overlapping trading arrangements for open market purchases or sales of the same class of securities. Under the proposed amendment, the affirmative defense would not be available for trades under a trading arrangement when the trader maintains another trading arrangement, or subsequently enters into an additional overlapping trading arrangement, for open market purchases or sales of the same class of securities.

In addition to restricting the use of multiple overlapping trading arrangements, the SEC is also proposing to amend Rule 10b5-1(c)(1)(ii) to limit the availability of the affirmative defense for a trading arrangement designed to cover a single trade, so that the affirmative defense would only be available for one single-trade plan during any 12-month period. Under the proposed amendment, the affirmative defense would not be available for a single-trade plan if the trader had, within a 12-month period, purchased or sold securities pursuant to another single-trade plan.

Requiring that Trading Arrangements be Operated in Good Faith

The SEC is proposing to amend Rule 10b5-1(c)(1)(ii) to add the condition that a contract, instruction, or plan be “operated” in good faith. The amendment is meant to address concerns such as the ability to trade on the basis of material nonpublic information through a Rule 10b5-1(c)(1) trading arrangement may incentivize corporate insiders to improperly influence the timing of corporate disclosures to benefit their trades under the trading arrangement.

Additional Disclosures Regarding Rule 10b5-1 Trading Arrangements

The SEC is proposing new Item 408 under Regulation S-K and corresponding amendments to Forms 10-Q and 10-K to require:

  • Quarterly disclosure of the use of Rule 10b5-1 and other trading arrangements by a registrant, and its directors and officers for the trading of the issuer’s securities; and
  • Annual disclosure of a registrant’s insider trading policies and procedures.

The SEC is also proposing new Item 16J to Form 20-F to require annual disclosure of a foreign private issuer’s insider trading policies and procedures. In addition, the SEC is proposing amendments to Forms 4 and 5 to require insiders to identify whether a reported transaction was executed pursuant to a Rule 10b5-1(c) trading arrangement.

Quarterly Reporting of Rule 10b5- 1(c) and non-Rule 10b5-1(c) Trading Arrangements

Proposed Item 408(a) of Regulation S-K would require registrants to disclose:

  • Whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), the registrant has adopted or terminated any contract, instruction or written plan to purchase or sell securities of the registrant, whether or not intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and provide a description of the material terms of the contract, instruction or written plan, including:
    • The date of adoption or termination;
    • The duration of the contract, instruction or written plan; and
    • The aggregate amount of securities to be sold or purchased pursuant to the contract, instruction or written plan.
  • Whether, during the registrant’s last fiscal quarter, any director or officer has adopted or terminated any contract, instruction or written plan for the purchase or sale of equity securities of the registrant, whether or not intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and provide a description of the material terms of the contract, instruction or written plan, including:
    • The name and title of the director or officer;
    • The date on which the director or officer adopted or terminated the contract instruction or written plan;
    • The duration of the contract instruction or written plan; and
    • The aggregate number of securities to be sold or purchased pursuant to the contract, instruction or written plan.

Disclosure of Insider Trading Policies and Procedures

The SEC is proposing to add new Item 408(b) to Regulation S-K, which would require registrants to disclose whether the registrant has adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of the registrant’s securities by directors, officers, and employees or the registrant itself that are reasonably designed to promote compliance with insider trading laws, rules, and regulations, and any listing standards applicable to the registrant. If the registrant has not adopted such insider trading policies and procedures, the registrant woule be required explain why it has not done so.

If the registrant has adopted insider trading policies and procedures, the registrant would be required to disclose such policies and procedures. These disclosures would be required in a registrant’s annual reports on Form 10-K and proxy and information statements on Schedules 14A and 14C. Foreign private issuers would also be required to provide analogous disclosure in their annual reports pursuant to a new Item 16J in that form.

Structured Data Requirements

The SEC is proposing to require registrants to tag the information specified by Item 408 in Inline XBRL in accordance with Rule 405 of Regulation S-T (17 CFR 232.405) and the EDGAR Filer Manual.

Identification of Rule 10b5-1(c) and non-Rule 10b5-1(c)(1) Transactions on Forms 4 and 5

The SEC is proposing to add a Rule 10b5-1(c) checkbox as a mandatory disclosure requirement on Forms 4 and 5. The checkbox would require a Form 4 or 5 filer to indicate whether a sale or purchase reported on that form was made pursuant to a Rule 10b5-1(c) trading arrangement. Filers would also be required to provide the date of adoption of the Rule 10b5-1 trading arrangement, and would have the option to provide additional relevant information about the reported transaction.

In addition, the SEC is proposing to add a second, optional checkbox to both of Forms 4 and 5. This optional checkbox would allow a filer to indicate whether a transaction reported on the form was made pursuant to a pre-planned contract, instruction, or written plan that is not intended to satisfy the conditions of Rule 10b5-1(c).

Disclosure Regarding the Timing of Option Grants and Similar Equity Instruments Shortly before or after the Release of Material Nonpublic Information

The SEC proposes to revise Item 402 of Regulation S-K that would require tabular disclosure of:

  • Each option award (including the number of securities underlying the award, the date of grant, the grant date fair value, and the option’s exercise price) granted 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 nonpublic information;
  • The market price of the underlying securities the trading day before disclosure of the material nonpublic information; and
  • The market price of the underlying securities the trading day after disclosure of the material nonpublic information.

In addition, revised Item 402 would require narrative disclosure about an issuer’s option grant policies and practices regarding the timing of option grants and the release of material nonpublic information, including how the board determines when to grant options and 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.

Reporting of Gifts on Form 4

The SEC is proposing to amend Exchange Act Rule 16a-3 to require the reporting of dispositions of bona fide gifts of equity securities on Form 4 instead of delayed reporting on Form 5. Under the proposed amendment, an officer, director, or a beneficial owner of more than 10 percent of the issuer’s registered equity securities making a gift of equity securities would be required to report the gift on Form 4 before the end of the second business day following the date of execution of the transaction. This would be significantly earlier than what is required under current reporting rules.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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