On December 14, 2022, the SEC adopted1 amendments to Rule 10b5-1 as well as related new disclosure requirements for companies. In addition, Forms 4 and 5 are amended to require the identification of transactions made pursuant to Rule 10b5-1, and dispositions by bona fide gift are now required to be reported on Form 4 within two business days.
Notably, the new requirements for 10b5-1 plans for the most part do not apply to issuer 10b5-1 plans, nor do the new Form 10-K/Form 10-Q disclosure requirements for trading plans adopted or terminated apply to issuer plans. The SEC is considering whether to adopt new rules that apply to issuer repurchases.2
What changes did the SEC adopt?
- New conditions to satisfying the requirements for the affirmative defense under Rule 10b5-1, including new cooling-off periods, a certification requirement, modifications to the good faith requirement, and restrictions on multiple and single trade plans (subject to certain exceptions). Rule 10b5-1 plans entered into prior to the effective date of February 27, 2023 continue to be governed by Rule 10b5-1 as in effect prior to the effective date, unless modified (in the manner described in amended Rule 10b5-1(c)(iv)).
- New quarterly disclosure requirements for companies regarding the adoption, modification, and termination of 10b5-1 and non-10b5-1 trading plans, new annual disclosures regarding insider trading policies (including a requirement to file policies as exhibits), and new disclosures regarding options granted close in time to material disclosures by a company.
- Forms 4 and 5 are amended to require the identification of transactions made pursuant to Rule 10b5-1, and dispositions by bona fide gift must now be reported on Form 4 within two business days.
What are the new requirements for 10b5-1 plans for Section 16 officers3 and directors?
- A new cooling-off period after plan adoption before trades may be executed.
- A new certification requirement.
- Restrictions on using multiple plans
- A limitation on the ability to use the affirmative defense for more than one single-trade plan during any consecutive 12-month period.
- A new condition that the person relying on the affirmative defense must act in good faith in connection with the operation of the plan.
These new requirements are explained in more detail below and are also applicable to insiders of smaller reporting companies, emerging growth companies, and foreign private issuers.
What are the new quarterly and annual disclosure requirements for issuers?
- Quarterly disclosures regarding the adoption or termination of 10b5-1 plans and non-10b5-1 trading plans by Section 16 officers and directors.
- Annual disclosures regarding whether a company has adopted insider trading policies and procedures (and filing such policies and procedures as an exhibit to the Form 10-K).
These new requirements are explained in more detail below and are also applicable to smaller reporting companies and emerging growth companies. Foreign private issuers are not subject to the quarterly disclosures, but their annual reports on Form 20-F must include disclosures about the companies' insider trading policies and procedures, and such policies and procedures are required to be filed as an exhibit to the Form 20-F.
What is the new checkbox on Forms 4 and 5; how are gifts reported?
- There is a new Rule 10b5-1(c) checkbox on these forms, which is required to be checked if a transaction under a 10b5-1 plan is reported. In addition, the date of adoption of the plan needs to be disclosed in the “Explanation of Responses” section of the form.
- Dispositions of equity securities by bona fide gift now must be reported on Form 4 within two business days, rather than optionally deferred to a year-end Form 5.4 Acquisitions by gift may continue to be reported on Form 5.
What are the new disclosures for options and similar instruments?
- Tabular and narrative disclosures regarding awards of options, stock appreciation rights, and other optionlike instruments granted to insiders shortly before or after the release of material nonpublic information.
These new requirements are explained in more detail below and are also applicable to smaller reporting companies and emerging growth companies.
Footnotes
1. See Insider Trading and Arrangements and Related Disclosures, Release No. 34-96492 (December 14, 2022).
2. In the adopting release, the SEC states that a corporation is considered an insider with regard to its duty to either disclose or abstain from trading when purchasing its own shares on the basis of material nonpublic information. The SEC further comments that the misuse of material nonpublic information by issuers when trading in their own securities can result in significant harm to investors.
3. Rule 16a-1(f) defines an officer as “an issuer's president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer. Officers of the issuer's parent(s) or subsidiaries shall be deemed officers of the issuer if they perform such policy-making functions for the issuer. In addition, when the issuer is a limited partnership, officers or employees of the general partner(s) who perform policy-making functions for the limited partnership are deemed officers of the limited partnership. When the issuer is a trust, officers or employees of the trustee(s) who perform policy-making functions for the trust are deemed officers of the trust.”
4. Many insiders already voluntarily report gifts on Form 4.
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