United States: Insider Trading & Disclosure Update

From the Editors

Welcome to the Fall 2022 issue of the Insider Trading & Disclosure Update, Debevoise's periodic Update focusing on legal, compliance and enforcement developments in the areas of insider trading, the management of material nonpublic information and disclosure rules and enforcement.

The nature and extent of the developments highlighted in this Update, including a number of pending SEC rule proposals and the first insider trading case in the digital asset space, illustrate a significant uptick in securities regulatory and enforcement activity at the SEC under Chair Gensler and on the enforcement front at the DOJ.

We hope that you find this Update useful and informative, and we look forward to bringing you further news and analyses in future issues.

The Editorial Board

Rulemaking Activity

An Active Rulemaking Period with Gary Gensler at the Helm of the SEC

Since taking office as the SEC Chair in April 2021, Gary Gensler's SEC has been busy publishing rule proposals, targeting current hot-button areas such as issuer share repurchases, insider trading and cybersecurity as well as topics such as clawback rules and pay-versusperformance disclosure, which have been a part of the SEC agenda since the Dodd-Frank Act was enacted in 2010.

Proposed Rule on Share Repurchase Disclosures

On December 15, 2021, the SEC released a new proposed rule that would significantly expand required disclosure concerning an issuer's repurchases of its equity securities listed on a U.S. stock exchange or otherwise registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If adopted, the proposed rules would: (i) require daily repurchase disclosure on a new Form SR, furnished to the SEC one business day after execution of the issuer's share repurchase order; (ii) require additional detail regarding the structure of an issuer's repurchase program and its share repurchases to be disclosed in periodic reports by amending Item 703 of Regulation S-K ("Regulation S-K"); and (iii) require information disclosed on Form SR or pursuant to Item 703 of Regulation S-K to be tagged with inline eXtensible Business Reporting Language ("Inline XBRL"). The full text of these proposed amendments is available here.

The comment period closed April 1, 2022, but the SEC has yet to adopt final rules concerning share repurchase disclosures. The SEC's spring 2022 Regulatory Flexibility Agenda (the "SEC's Agenda") targets October 2022 as the date for final action on this proposal. If adopted, the new requirements will significantly impact the share repurchase regime and may impose a significant burden on issuers that decide to implement a share repurchase program. For more information about the SEC's proposed rule on share repurchase disclosure, please see our Debevoise Debrief here. ¹

Rule 10b5-1 Trading Plans and Augmented Trading-Related Disclosure Requirements

On December 15, 2021, the SEC proposed amendments to Rule 10b5-1 under the Exchange Act. The proposed amendments aim to address "real cracks in the insider trading regime," as cited by the SEC Chair, through enhanced disclosure relating to trading activity by corporate insiders and issuers and by placing new conditions on the use of Rule 10b5-1 trading plans.

If adopted, the proposed amendments would: (i) add significant new conditions to the availability of the Rule 10b5-1 affirmative defense to insider trading liability under Rule 10b-5 of the Exchange Act, including a cooling-off period for issuers and directors and officers subject to the beneficial ownership reporting requirements of Section 16 of the Exchange Act ("Section 16 officers") after the date of adoption or modification of a trading arrangement that satisfies the requirements of Rule 10b5-1(c)(1); (ii) create new disclosure requirements under Regulation S-K regarding the adoption, modification and termination of Rule 10b5-1 and other trading arrangements; insider trading policies and procedures of issuers; and the timing of equity compensation awards to named executive officers or directors made in close proximity to the issuer's release of material nonpublic information; and (iii) augment the reporting obligations under Section 16 of the Exchange Act for transactions made pursuant to a Rule 10b5-1 trading arrangement and gifts. The full text of these proposed amendments is available here.

The comment period closed April 1, 2022, but the SEC has yet to adopt final rules concerning Rule 10b5-1 trading plans and insider trading-related disclosure. All five SEC commissioners voted in favor of the proposed amendments, expressing particular support for cooling-off periods for directors and Section 16 officers. While the commissioners expressed differing views on certain aspects of the proposed amendments, the likelihood that they will be adopted in some form is high given the SEC Chair's focus on addressing perceived abuse and investor concerns in this area. The SEC's Agenda targets April 2023 as the date for final action on this proposal. For more information about the SEC's proposed rule on Rule 10b5-1 trading plans and augmented tradingrelated disclosure requirements, please see our Debevoise Update here.

Proposed Cybersecurity Rules

On March 9, 2022, the SEC released a series of proposed cybersecurity rules, which expand upon the SEC's 2018 guidance on cybersecurity disclosures² by promulgating a substantial new cybersecurity regulatory framework that creates significant new disclosure obligations for public companies. The proposed rules place particular emphasis on timely and detailed disclosures of material cybersecurity incidents, as well as on periodic disclosure about cybersecurity risk management and governance.

One of the key elements of the proposed rules is a new Form 8-K line item requirement to disclose certain information within four business days of determining that a cyber incident is material. To avoid delays in assessing materiality, proposed Form 8-K Item 1.05 requires the determination of materiality to be made "as soon as reasonably practicable after discovery of the incident." This new Form 8-K requirement was an area of particular concern expressed in a number of comment letters, including a letter submitted by Debevoise & Plimpton,³ due to the burdens associated with current disclosure of an ongoing cybersecurity incident. Additionally, proposed Item 106(d)(1) of Regulation S-K would require an issuer to disclose any material changes from the disclosures made in the initially filed Form 8-K Item 1.05 in the issuer's Quarterly Report on Form 10-Q or Annual Report on Form 10-K, as applicable, and proposed Item 106(d)(2) of Regulation S-K would require periodic disclosure of immaterial cybersecurity incidents that become material in the aggregate. Lastly, proposed Item 106(b) and (c) of Regulation S-K would increase the scope and detail of issuer disclosures on cybersecurity risk management, strategy and governance. The full text of the proposed amendments is available here.

The comment period for this rule proposal closed on May 9, 2022, but the SEC has yet to adopt final rules. While the reporting requirements have drawn criticism, it is uncertain whether the SEC will implement any substantive changes in the final rules. The SEC's Agenda targets April 2023 as the date for final action on this proposal. For more information about the SEC proposed rule on cybersecurity risk management, strategy, governance and incident disclosure, please see our more detailed Debevoise In Depth here.