A “Rule 10b5-1 plan” is intended to satisfy the affirmative defense provided in Rule 10b5-1(c), the rule that provides an affirmative defense to an allegation of having traded on the basis of material nonpublic information (“MNPI”). On Jan. 10, 2023, we issued an alert that summarized the requirements of the recently adopted Rule 10b5-1 amendments and related (and some unrelated) disclosures. Since then, we’ve been fielding a number of questions, the toughest being “So – what’s a ‘non-Rule 10b5-1 trading arrangement’?” and “What is the difference between a ‘non-Rule 10b5-1 trading arrangement’ and a ‘Rule 10b5-1 plan’?” Unfortunately, the answers to these questions are unclear.

We all need to figure that out soon, because beginning with fiscal periods that commence on or after April 1, 2023 (i.e., for most companies, the second quarter of 2023), companies must (a) gather information about these plans that their officers and directors adopt, modify or terminate during the quarter (think – “disclosure controls and procedures”) and (b) make quarterly disclosures based on that information in their Forms 10-Q and 10-K (the 10-K will disclose the information for the fourth quarter of the prior fiscal year). Here is a side-by-side comparison of the two defined terms:

So – let’s analyze these two terms step by step:

Awareness of MNPI – with a “real” Rule 10b5-1 plan, because it is an affirmative defense to a charge of illegal trading based upon possession of MNPI, a condition to the plan’s effectiveness as an affirmative defense is that the person must not be aware or in possession of MNPI when adopting the plan. While the “non-Rule 10b5-1 trading arrangement” does not provide the same affirmative defense, its requirement that a person assert that they are not aware of MNPI when adopting the plan nevertheless is intended to negate an essential element of illegal insider trading – “scienter.” Let’s think about this a moment – is there anyone planning a trade who would not intend to assert, if challenged, that they were not aware of MNPI? Obviously not. So, this element of the two types of trading arrangements (“non-Rule 10b5-1” and “real” Rule 10b5-1) would appear to be identical.

The Written Plan – interestingly, a “non-Rule 10b5-1 trading arrangement” must be in writing. That’s at least a theoretical difference from “real” Rule 10b5-1 plans. In addition to written plans for trading securities, the rule for “real” Rule 10b5-1 plans also allows persons, prior to becoming aware of MNPI, to enter into binding contracts to purchase or sell securities or give instructions for the trading of securities. The rule does not address whether contracts or instructions must be in writing. In most states, writings would technically not be required because Article Eight of the Uniform Commercial Code (Investment Securities), as adopted in most states, provides in Section 8-112:

A contract or modification of a contract for the sale or purchase of a security is enforceable whether or not there is a writing signed or record authenticated by a party against whom enforcement is sought, even if the contract or modification is not capable of performance within one year of its making.

Now – let’s talk reality. Have you tried to orally instruct a broker to purchase or sell securities? At a minimum, brokers typically require those instructions be given or confirmed in an email.

What is the difference between (a) “trading arrangements” that do not meet the requirements of Rule 10b5-1 and (b) “contracts,” “instructions” and “plans” under Rule 10b5-1? “Plans” have to be in writing and “contracts” or “instructions” do not, although either would constitute a “trading arrangement” if in writing. So – you cannot distinguish the two just by whether they are in writing. 

The Remaining Terms – The remaining terms specified in either of the types of plans (specification of amount, price and date; formula or algorithm; or written plan) are also identical, whether the person is adopting a “non-Rule 10b5-1 trading arrangement” or a “real” Rule 10b5-1 plan.

SEC Guidance to Date – In response to comments that the term “non-Rule 10b5-1 trading arrangements” was confusing and overly broad, the SEC stated that it defined the term to “clarify the types of pre-planned trading arrangements that should be disclosed” quarterly as required by Item 408(a) of Regulation S-K. 

Although the phrase “pre-planned” might have helped, that phrase didn’t make it into the final version of the Rule 10b5-1 amendments. If that phrase been included in the final version of the rule, would it have made a difference in the potential breadth of the term? That is doubtful – securities trading does not take place unexpectedly, without planning or by accident. Every securities transaction involves a contract, instruction or plan. Look at a simple limit order – instructing that transactions must be executed only at the limit price or lower (a “buy limit order”) or at the limit price or higher (“sell limit order”). Is that a “non-Rule 10b5-1 trading arrangement”? The answer appears to be “yes.”

The Differences – The side-by-side comparison and analysis of a “non-Rule 10b5-1 trading arrangement” and a “Rule 10b5-1 plan” reveals that the only real differences are the cooling off periods and the certification requirements for issuer officers and directors under a “Rule 10b5-1 plan.” No one would realistically dispute that they may not enter into a trading arrangement with a lack of good faith or with the intent to circumvent the securities laws. The prohibition on multiple or overlapping plans is somewhat of a “throwaway”; courts had already ruled that those arrangements were indicators of a lack of good faith in entering into such plans, which resulted in those plans failing to provide an affirmative defense.

Does that mean that a “non-Rule 10b5-1 trading arrangement” is simply one that either:

• does not contain the required “cooling off” period; or

• if adopted by a director or officer, did not contain the required certification?

Take the examples of the limit orders referenced above – if you added a cooling off period and a certification to either order, would that convert it into a “real” Rule 10b5-1 plan? If that indeed is the case, the only difference is that one provides an affirmative defense while the other simply negates proof of “scienter” – an element of a Rule 10b-5 case. 

Epilogue – Unfortunately, the SEC’s definition of “non-Rule 10b5-1 trading arrangement” provides little to no clarification and has left us with a confusing and overly broad term with which we all now must contend. Absent additional SEC guidance, companies must approach these new requirements with extreme care and, in our judgment, err on the side of providing more disclosure than may be necessary regarding “non-Rule 10b5-1 trading arrangements.” That path will require quarterly inquiries to corporate officers and directors about those arrangements. Section 16 reports generally report only trades; therefore, a review of those filings might not reflect the adoption, modification or termination of either “non-Rule 10b5-1 trading arrangements” or “real” Rule 10b5-1 plans. For companies to meet their new quarterly disclosure obligations, their insider trading policies – which must be filed with the SEC as exhibits – must now require pre-clearance and approval of not only “real” Rule 10b5-1 plans but the host of transactions that might constitute “non-Rule 10b5-1 trading arrangements.”

If the SEC thought that information about “non-Rule 10b5-1 trading arrangements” truly was important to investors, instead of imposing this confusing definition, they might have simply required companies to disclose (in addition to adoption, modification or termination of “real” Rule 10b5-1 plans):

whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), any director or officer (as defined in § 240.16a-1(f) of this chapter) adopted or terminated any contract, instruction or written plan for the purchase or sale of securities of the registrant or made any purchase or sale of securities of the registrant that were not pursuant to a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (§ 240.10b5- 1(c) of this chapter).

That’s at least clear and straight-forward regarding what is required; and better than trying to guess what the amended Rule 10b5-1 requires to be disclosed. 

Perhaps someone should submit the following request to the SEC with respect to its Rule 10b5-1 amendment: “Chairman Gensler – we note your definition of the term ‘non-Rule 10b5-1 trading arrangement.’ Please provide a description of the trading arrangements that would be included in, and those that would be excluded from, that definition. It would be particularly helpful if the SEC provided that guidance soon, given the timing within which identification and disclosures of those plans and ‘trading arrangements’ must be made.”