SEC Adopts Amendments Regarding Rule 10b5-1 Insider Trading Plans and Related Disclosures
By Dina Bernstein, Samantha Nussbaum, Bindu M. Culas
On December 14, 2022, the Securities and Exchange Commission (SEC) adopted amendments regarding Rule 10b5-1 insider trading plans and related disclosures. In August 2000, the SEC originally adopted Rule 10b5-1, which, in part, provides insiders (who typically hold material nonpublic information) with an affirmative defense to insider trading liability subject to certain conditions. For example, under the initial Rule 10b5-1, insiders can institute future trades pursuant to a binding contract when the insider was not aware of material nonpublic information, and the trade can be executed even if the insider later obtains material nonpublic information. The recent amendments are meant to enhance investor protections concerning insider trading. As noted by SEC chair Gary Gensler in his statement announcing the changes, the concern was that “insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically.” As described below, the amendments provide for a delayed effective date, meaning that plans adopted before the effective date and not later revised are still subject to the old rules.
The amendments add new conditions to the availability of the affirmative defense under Rule 10b5-1(c)(1), including:
- Mandatory cooling-off periods
- for directors and officers until the later of (1) 90 days following plan adoption or modification and (2) two business days following the disclosure in periodic reports on Forms 10-Q, 10-K, 20-F or 6-K (as applicable) 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), and
- for persons other than issuers or directors and officers, 30 days, in either case before trading may begin under the plan or modification;
- Limitations on the use of overlapping plans for anyone other than issuers;
- Limitations on the ability to use more than one single-trade plan in a 12-month period, for anyone other than issuers; and
- A condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to that plan, including director and officer certifications.
The amendments also include the following new disclosure requirements: quarterly disclosure by registrants regarding the use of Rule 10b5-1 plans by a registrant’s directors and officers; annual disclosure of a registrant’s insider trading policies and procedures; certain tabular and narrative disclosures regarding awards of options close in time to the release of material nonpublic information and related policies and procedures; tagging of the required disclosures; and a requirement that Form 4 and 5 filers indicate by checkbox that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5- 1(c).
Importantly, these amendments do not affect the affirmative defense available under an existing plan that was entered into prior to the revised rule’s effective date, unless the plan is modified in the manner described in Rule 10b5-1(c)(iv) after the effective date of the final rules.
The amendments will become effective 60 days following 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 not 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 in the first filing that covers the first full fiscal period that begins on or after April 1, 2023. The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies.
Dina Bernstein has extensive experience advising on all aspects of executive compensation, working with companies on an ongoing basis, as well as in the context of mergers and acquisitions, spin-offs, initial public offerings, and other corporate events. Dina provides guidance to private and public companies across various industries regarding cash and equity incentive compensation arrangements, employment, severance and change in control agreements, overall compensation program design, pay governance practices, taxation, stock exchange listing requirements and securities regulation compliance.
Samantha Nussbaum has consulted on behalf of public and private companies, compensation committees, and senior management on all aspects of executive compensation. Samantha’s consulting and legal background includes advising on executive compensation in the context of mergers and acquisitions, spin-offs, and initial public offerings; executive employment, severance, and change in control agreements; equity incentive plans; deferred compensation; and securities laws, including reporting and disclosure implications.
Bindu M. Culas
Bindu Culas has over 15 years of experience advising clients on the US and international legal, tax and regulatory aspects of designing and structuring equity incentive programs, employment agreements, and severance and change-of control plans. Bindu has worked with both domestic and foreign publicly traded and privately held companies as well as pre-IPO companies.