United States: SEC Adopts Significant Amendments Regarding 10b5-1 Trading Plans And Augmented Trading-Related Disclosure Requirements

On December 14, 2022, the U.S. Securities and Exchange Commission (the "SEC") adopted amendments (the "Amendments") to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and new disclosure requirements relating to trading activity of corporate insiders and trading policies of issuers. Most significantly, the Amendments:

• add significant new conditions to the availability of Rule 10b5-1's affirmative defense to insider trading liability, including:
  
  
  • a cooling-off period;
  • certification of no material, nonpublic information;
  • limitations on overlapping and single trade plans;
  • a requirement to act in good faith;
    
    
• create new disclosure requirements regarding:
  
  
  • the adoption, modification and termination of Rule 10b5-1 and other trading arrangements by directors and officers subject to the beneficial ownership reporting requirements of Section 16 of the Exchange Act ("Section 16 officers");
  • insider trading policies and procedures of issuers;
  • the timing of option awards to named executive officers made in close proximity to the issuer's release of material, nonpublic information; and
    
    
• augment the reporting obligations under Section 16 of the Exchange Act of transactions made pursuant to a Rule 10b5-1 trading arrangement and gifts.

The key provisions of the Amendments are further discussed below. The full text of the Amendments is available here.

These 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 will be required to comply with the new disclosure 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. Reporting companies with a calendar year fiscal year will therefore be required to comply with the new disclosure requirements on their Form 10-Q for Q2 2023.

Background. The SEC adopted Rule 10b5-1 in August 2000. Rule 10b5-1 provides for affirmative defenses to insider trading liability under Section 10(b) and Rule 10b-5 of the Exchange Act. In particular, under Rule 10b5-1(c)(1), a person's purchase or sale of a security is deemed to be not "on the basis of" material, nonpublic information if, before becoming aware of material, nonpublic information, the person had: (i) entered into a binding contract for the transaction, (ii) instructed another person to execute the trade for the instructing person's account or (iii) adopted a written plan for trading securities (each, a "Rule 10b5-1 trading arrangement"). The Amendments seek to address concerns that the Rule 10b5-1(c)(1) affirmative defense is abused by corporate insiders—a priority issue for Chair Gensler that he has repeatedly highlighted since joining the SEC in 2021.

New Conditions to Availability of Rule 10b5-1(c)(1) Affirmative Defense. The Amendments add significant new conditions to the availability of the affirmative defense under Rule 10b5-1(c)(1). These new conditions will become effective for trading plans that are adopted or amended after the effective date of the Amendments. Existing plans that are not amended are not required to comply with the new conditions.

• Mandatory Cooling-Off Period. Directors and Section 16 officers will be subject to a cooling-off period extending to the later of: (i) 90 days after the adoption or modification of a Rule 10b5-1 trading plan; and (ii) two business days following the disclosure of the issuer's financial results in a Form 10-Q or Form 10-K (or Form 20- F or Form 6-K for foreign private issuers) for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following adoption or modification of the plan). Persons other than directors and officers are subject to a cooling-off period of 30 days before any trading can commence under the trading arrangement or modification. Issuers will not be subject to any mandatory cooling-off period, although the SEC noted that they believe further consideration of such requirements to issuers is warranted.
• Certification of No Material, Nonpublic Information. Prior to the adoption or modification of a Rule 10b5-1 trading arrangement, directors and officers will be required to include a representation in the plan certifying that at the time of the adoption of a new or modified trading arrangement: (i) they are not aware of material, nonpublic information about the issuer or its securities; and (ii) they are adopting the trading arrangement in good faith and not as part of a plan or scheme to evade the prohibitions of Section 10(b) and Rule 10b-5. Issuers will not be required to make representations when adopting or modifying a Rule 10b5-1 trading arrangement.
• Overlapping Trading Arrangements and Single-Trade Arrangements. The affirmative defense under Rule 10b5-1(c)(1) will not be available for any trades by a person, other than the issuer, that has established multiple overlapping trading arrangements. This condition would preclude separate, overlapping arrangements where each relates to a different class of securities of the same issuer. However, plans with separate brokers will be deemed to constitute a single plan where, taken together, the plans otherwise satisfy the conditions of Rule 10b5-1(c)(1). This condition would not restrict a person from maintaining separate trading arrangements at the same time, so long as trades under the later-commencing plan do not commence until the completion or expiration of the earlier plan (plus any effective cooling-off period, to the extent the earlier plan was terminated). An overlapping plan that provides for only "sell-to-cover" sales necessary to satisfy tax withholding obligations also will not violate this condition under certain circumstances. In addition, other than for the issuer, the affirmative defense under Rule 10b5-1(c)(1) will only be available for one plan designed to effect a single trade in any 12-month period.
• Good Faith. A trader that has entered into a Rule 10b5-1 trading arrangement is required to act in good faith with respect to the trading arrangement (in addition to the current requirement that a Rule 10b5-1 trading arrangement be entered into in good faith), thereby making clear that the affirmative defense will not be available to a trader that cancels or modifies a plan in an effort to benefit their trading results, such as by using their influence to affect the timing of the announcement of material, nonpublic information, or otherwise attempting to evade the prohibitions of the rule.

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