On December 14, 2022, the Securities and Exchange Commission amended insider trading rules by adopting new trading restrictions and disclosures to address potential abuses by executives. According to SEC Chair Gary Gensler's statements in the SEC's press release these amendments are needed to fill "potential gaps" where insiders trade "opportunistically on the basis of material nonpublic information." The new rules amend Rule 10b5-1's affirmative defense provisions to insider trading liability, create new reporting requirements for issuers, and update beneficial ownership reporting requirements for insiders.
The SEC amended the Rule 10b5-1(c)(1) affirmative defense to require:
- A cooling-off period for directors and officers of the later of: (1) 90 days following plan adoption or modification; or (2) two business days following the disclosure in certain periodic reports of the issuer's financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification) before any trading can commence under the trading arrangement;
- A cooling-off period of 30 days for persons other than issuers or directors and officers before any trading can commence under the trading arrangement or modification;
- A condition for directors and officers to include a representation in their Rule 10b5-1 plan certifying, at the time of the adoption of a new or modified plan, that: (1) they are not aware of material nonpublic information about the issuer or its securities ("MNPI"); and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5;
- A limitation on the ability of anyone other than issuers to use multiple overlapping Rule 10b5-1 plans;
- A limitation on the ability of anyone other than issuers to rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period; and
- A condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to that plan.
In addition to the amendments to Rule 10b5-1, the SEC added new issuer disclosure requirements, including annual disclosure relating to a company's insider trading policies and procedures, quarterly disclosure concerning the use of Rule 10b5-1 plans by directors and officers, and disclosure about awards of options in proximity to the release of MNPI and related policies and procedures.
The new rules also require:
- Form 4 and 5 filers to indicate by a checkbox that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c); and
- Insiders to report all bona fide gifts of securities on Form 4.
Effective Date
The final rules 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. The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies.
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