Overview

On December 15, 2021, the SEC proposed amendments to Rule 10b5-1 and certain other provisions of the securities laws to attempt to mend what Chair Gary Gensler previously referred to as “cracks” in the insider trading regime.  The proposed rules address “potentially abusive practices” by corporate insiders related to 10b5-1 trading arrangements, grants of options and other similar equity instruments, and gifts of securities.  Separately on the same day, the SEC also proposed amendments to update disclosure requirements associated with stock purchases by issuers, as a result of similar concerns regarding misuse of material nonpublic information (“MNPI”).

Summary of Proposed Rules

Proposed Amendments to Rule 10b5-1

• Add as a condition to the affirmative defense made available under Rule 10b5-1(c)(1) a cooling-off period between the date of adoption or amendment of a Rule 10b5-1(c)(1) trading arrangement and the date on which trading can commence under that arrangement or amended arrangement, as follows:

  • 120 days for plans of directors and officers

  • 30 days for plans of issuers

• Clarify that modification of an existing trading plan, including cancelling one or more trades, is deemed equivalent to termination of the plan and adoption of a new one

• Add as a condition to the affirmative defense made available under Rule 10b5-1(c)(1) a requirement that a director or officer who adopts a Rule 10b5-1 trading arrangement must make certain certifications at the time of adoption:

  • The director or officer is not aware of MNPI regarding the issuer or its securities

  • The director or officer is adopting the plan in good faith and not as part of a plan or scheme to evade the securities laws

• Restrict overlapping trading arrangements by eliminating the affirmative defense for those with multiple overlapping trading arrangements for purchases or sales of the same class of securities (this would apply only to open market trades and not to transactions such as an ESOP in which securities are acquired directly from an issuer)

• Limit the availability of the affirmative defense in connection with single-trade plans by making it available for only one single-trade plan in any 12-month period

• Require that 10b5-1 trading plans also be “operated” in good faith, in addition to existing requirements that they be entered into in good faith

Proposed Amendments to Form 10-Q and Form 10-K (via new Item 408 of Regulation S-K)

• Require quarterly disclosure in Form 10-Q of the use of Rule 10b5-1 trading arrangements or other pre-planned trading arrangements by a registrant and its directors and officers

  • Disclosures would include the fact of the adoption or termination of a trading plan and a description of the material terms of the plan

  • Disclosures would be subject to the certifications required by Section 302 of the Sarbanes-Oxley Act and would be tagged in iXBRL

• Require annual disclosure in Form 10-K of a registrant’s insider trading policies and procedures

  • Disclosures would include whether such policies and procedures have been adopted (including as part of a Code of Ethics) and if so, a description of them

  • Disclosures would be subject to the certifications required by Section 302 of the Sarbanes-Oxley Act and would be tagged in iXBRL

Proposed Amendments to Forms 4 and 5

• Require a filer of a Form 4 or Form 5 to indicate whether a sale or trade disclosed on the form was made pursuant to a Rule 10b5-1(c) trading arrangement (and, if so, include the date of adoption of the plan and other relevant information) (a mandatory checkbox)

• Allow a filer of a Form 4 or Form 5 to indicate whether a sale or trade disclosed on the form was made pursuant to a pre-planned instruction or plan that is not a Rule 10b5-1(c) arrangement (an optional checkbox)

• Require gifts to be reported on Form 4, within 2 business days of the gift

  • Currently eligible for delayed reporting on Form 5 within 45 days after the issuer’s fiscal year end

Proposed Amendments to Item 402 of Regulation S-K

• When Item 402 disclosure must be contained in a filing, require a new table listing each option award granted to named executive officers or directors within 14 calendar days before or after the filing of a periodic report, an issuer share repurchase, or disclosure of MNPI on a Form 8-K

  • In addition to information that typically accompanies option grant disclosures, the table would also include the market price of the underlying securities on the trading day prior to release of the MNPI and on the day after the release of the MNPI

• Require narrative disclosure regarding the issuer’s option grant policies, including timing considerations regarding the timing of grants and release of MNPI, and whether the board takes MNPI into account when setting the timing and terms of an award

• Information would be tagged in iXBRL

• SRCs and EGCs would not be exempt, but scaled disclosure would apply

The deadline for comments on the proposed rules is 45 days after publication in the Federal Register.