On December 14, 2022, the SEC adopted final rules amending Rule 10b5-1 under the Securities Exchange Act of 1934 (the Exchange Act) and adding new disclosure requirements to Regulation S-K to enhance investor protections against insider trading by giving shareholders more visibility into the trading practices of company insiders and the policies and procedures implemented by issuers to address insider trading concerns. The final rules do not generally apply to Rule 10b5-1 plans adopted by issuers, which the SEC states are still under consideration.

Scope of the New Requirements

• Substantive Changes to Rule 10b5-1: Rule 10b5-1(c)(1) under the Exchange Act provides an affirmative defense to trading on the basis of material nonpublic information if the conditions of the rule are satisfied. The new rules amend Rule 10b5-1(c)(1) to require that any contract, instruction, or plan providing for the purchase or sale of an issuer’s securities that is entered into in reliance on the rule (commonly referred to as a “Rule 10b5-1 Plan”) must comply with the following additional conditions:

• • Mandatory Cooling-Off Periods — Trades under such plans may not begin until the expiration of the applicable “cooling-off” period:

    • For directors and officers (for purposes of these rules, “officer” means an officer as defined by Rule 16a-1(f) under the Exchange Act), trades may not begin until at least 90 days after adoption or modification of the plan, or if longer, two business days following the disclosure of the issuer’s financial results in a Form 10-K or Form 10-Q for the completed fiscal quarter in which the plan was adopted (but in any event, the required cooling-off period shall not exceed 120 days).

    • For persons other than issuers and directors and officers, trades may not begin until 30 days after adoption or modification of the plan.

• • Multiple Overlapping Plans Prohibited — No person, other than an issuer, may implement multiple, overlapping Rule 10b5-1 Plans. The new rules contain exceptions for each of the following:

    • Contracts with multiple brokers covering securities held in different accounts that, when viewed together, constitute a single plan and meet the applicable conditions.

    • Rule 10b5-1 Plans under which trading will not commence until the current plan has expired and the applicable cooling-off period has lapsed (using the expiration date of the current plan as the “adoption” date for purposes of calculating the cooling-off period).

    • Rule 10b5-1 Plans designed as “sell-to-cover” plans to fund tax withholding obligations resulting from the vesting of equity awards.

• • Additional Representations by Directors and Officers — Directors and officers must include a representation in their Rule 10b5-1 Plans certifying that at the time of the adoption of a new or modified plan, they (i) are not aware of material nonpublic information about the issuer or its securities and (ii) are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.

• • Limitations on Single-Trade Plans — No person, other than an issuer, may rely on Rule 10b5-1(c)(1) for more than one single-trade plan (i.e., a plan to effect an open market purchase or sale of the total amount of securities under the plan in a single transaction) during any consecutive 12-month period. This prohibition does not apply to “sell-to-cover” plans described above.

• • Additional Good Faith Requirement — The person adopting the Rule 10b5-1 Plan must act in good faith “with respect to” the plan. This new language expands the good faith requirement, which previously only required such persons to act in good faith in connection with the adoption of the plan.

• New Disclosures Regarding Trading Plans and Insider Trading Policies: New Item 408 under Regulation S-K mandates the following new disclosures by issuers:

• • Quarterly Disclosures of Director and Officer Trading Plans — In each Form 10-Q and Form 10-K (or the corresponding form for a foreign private issuer), issuers must (i) disclose whether, during the issuer’s last fiscal quarter, any director or officer adopted or terminated a Rule 10b5-1 Plan or other trading plan (a “non-Rule 10b5-1 trading arrangement” as defined in the rules) relating to the issuer’s securities, (ii) identify whether the trading plan is intended to qualify as a Rule 10b5-1 Plan, and (iii) provide a description of the material terms of such plan, such as:

    • The name and title of the director or officer

    • The date on which the plan was adopted or terminated

    • The duration of the plan

    • The aggregate number of securities to be purchased or sold

Of note, Item 408 expressly provides that pricing information with respect to the plan is not required to be disclosed.

• • Annual Disclosure of the Issuer’s Insider Trading Policies and Procedures —

• • • Issuers are required to disclose whether they have adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of the issuer’s securities by directors, officers, and employees, or the issuer itself. If the issuer has not adopted such policies and procedures, it must explain why it has not done so.

      • These disclosures are required in an issuer’s Form 10-K or 20F and in proxy and information statements under Schedules 14A and 14C. Note that because this information is required under Part III of Form 10-K, issuers may incorporate it by reference from a definitive proxy or information statement involving the election of directors if filed within 120 days of the end of the issuer’s fiscal year.

• • • Issuers must file a copy of their insider trading policy and procedures as an exhibit to their Form 10-K.

• • Inline XBRL Tagging — Issuers will be required to tag the information required under Item 408 in Inline XBRL.

• Disclosure Regarding Option Grant Practices: The new rules require certain tabular and narrative disclosures regarding options and similar incentives (such as stock appreciation rights) that are awarded close in time to the release of material nonpublic information. Although many issuers currently describe their grant timing practices in their CD&A, this new mandated disclosure is specifically designed to highlight “spring-loaded” or “bullet-dodging” grants. Specifically, new Item 402(x) of Regulation S-K requires issuers to:

• • Discuss the issuer’s policies and practices on the timing of awards of options in relation to the disclosure of material nonpublic information by the issuer.

• • Provide specific tabular disclosure if, during the last completed fiscal year, any option-like awards were granted to the issuer’s named executive officers during the period beginning 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, and ending one business day after the filing or furnishing of such report.

• • Tag the information required under new Item 402(x) in Inline XBRL.

These disclosures are required in the issuer’s Form 10-K and in proxy and information statements under Schedules 14A and 14C (incorporation by reference in Part III of the Form 10-K is permitted as described above).

• Changes to Section 16 Reporting Requirement: The new rules revise required disclosures by insiders under Section 16 as follows:

• • Form 4 Reporting of Gifts — Dispositions of issuer stock via a bona fide gift must be reported within two business days of such disposition on a Form 4. Previously, insiders were required to include bona fide gifts of stock on a Form 5 filed after the end of the fiscal year. This change does not apply to acquisitions of stock via a bona fide gift or inheritance, which are still reportable on a Form 5.

• • Rule 10b5-1(c) Checkbox — Forms 4 and 5 will be amended to include a checkbox to indicate if a reported transaction was executed pursuant to a Rule 10b5-1 Plan and reporting persons must also provide the date of adoption of the plan in the remarks section of the applicable form.

Implementation Timeline

• Effective Date: The final rules will become effective 60 days following publication of the adopting release in the Federal Register.

• Transition Periods: 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 will be required in the first filing that covers the first full fiscal period that begins on or after:

  • For smaller reporting companies — October 1, 2023

  • For all other issuers — April 1, 2023

• Insiders: The changes to Section 16 reports will be effective for reports filed on or after April 1, 2023.

Next Steps

• Update D&O Questionnaires: Many issuers are in the process of preparing and circulating D&O questionnaires to their insiders. Consider whether additional information should be solicited regarding the status of any current trading plans. We expect that many issuers will be aware of trading plans maintained by their directors and officers either through pre-clearance requirements included in the issuer’s insider trading policy or through preparation and/or review of their insiders’ Section 16 reports. However, obtaining specific confirmation of the existence or lack of such plans will be useful in evaluating the impact of these rules on the issuer’s insiders.

• Notify Insiders of Pending Section 16 Changes: Ensure directors and officers are aware of the pending accelerated timeline for reporting gift transactions. These changes will implicate many trust transactions and other estate and financial planning efforts by insiders and their advisors.

• Review Existing Insider Trading Policies: Review insider trading plans and procedures to determine if changes or enhancements are necessary or desired in connection with the changes to Rule 10b5-1 and the related disclosure requirements, including notification requirements to ensure information is timely received. For issuers that do not currently have formal policies or procedures in place, consider implementing them.

• Review Option Grant Practices: Review option grant practices to determine if historical practices would trigger the new disclosures, and consider whether changes are necessary to such practices in the future.