INTRODUCTION

This Annual Review ("Review") was prepared by the Subcommittee on Annual Review of Federal Securities Regulation ("Subcommittee") of the ABA Business Law Section's Committee on Federal Regulation of Securities. The Review is a survey of significant developments in federal securities laws and regulations, as well as developments relating to accounting pronouncements and securities litigation matters, in 2022. The Review is divided into three sections: regulatory actions, accounting statements, and caselaw developments.

The Review is prepared by and for securities practitioners and securities litigators. This results in an emphasis on significant developments under the federal securities laws relating to companies, shareholders, and their respective counsel. Our discussion is limited to those developments that are of greatest interest to a wide range of practitioners and addresses only final rules.

The U.S. Securities and Exchange Commission (the "Commission" or "SEC") proposed thirty-five rules relating to such matters as enhancing investor protections in initial public offerings by special purpose acquisition companies, requiring registrants to provide certain climate-related information in their registration statements and annual reports, and standardizing disclosures regarding cybersecurity risk management. However, during 2022, there were only seventeen final regulations adopted by the Commission.

Generally, the Review does not discuss proposed regulations or rules that are narrowly focused. For example, the Review generally does not address regulation of over-the-counter derivatives, hedge fund and other private fund-related rulemaking, or rulemaking related to registered investment companies, registered investment advisers, registered broker-dealers, or municipal advisors. Cases are chosen for both their legal concepts as well as factual background. While the Subcommittee tries to avoid making editorial comments regarding regulations, rules, or cases, we attempt to provide a practical analysis of the impact of the developments in the law and regulations on the day-to-day practice of securities lawyers.

Regulatory Developments 2022

A. INSIDER TRADING ARRANGEMENTS AND RELATED DISCLOSURES

On December 14, 2022, the Commission unanimously adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (the "Exchange Act") and related disclosure obligations for public companies.1 The amendments (i) add new conditions to the availability of the affirmative defense to insider trading liability contained in Rule 10b5-1 designed to address concerns about the rule's abuse by insiders to trade securities on the basis of material nonpublic information ("MNPI") and (ii) enhance public disclosure by issuers and insiders of trading plans designed to comply with Rule 10b5-1.2

1. BACKGROUND

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit purchases or sales of a security on the basis of MNPI about that security or the issuer, in breach of a duty owed to such issuer or the shareholders of such issuer or to any person who is the source of that MNPI.3 This prohibited conduct is more commonly referred to as "insider trading." Rule 10b5-1 provides an affirmative defense to insider trading liability for trades undertaken pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person's account or a written plan (collectively, a "10b5-1 Plan") adopted when the trader was not aware of MNPI.4 10b5-1 Plans must be entered into in good faith and not as part of a scheme to evade the prohibitions of insider trading rules.5

Since adoption of Rule 10b5-1 in 2000, the Commission, courts, members of Congress, academics, and others have grown increasingly concerned that Rule 10b5-1 has allowed traders to escape liability by trading on the basis of MNPI while still technically satisfying the Rule's requirements. In order to address these concerns, the Commission issued a proposal a little over a year ago consistent with prior statements made by Commission Chair Gary Gensler, as well as recommendations made to the Commission by its Investor Advisory Committee, with respect to 10b5-1 Plans.6 The proposal included new conditions to the availability of the Rule 10b5-1 affirmative defense, such as cooling-off periods between adoption of a 10b5-1 Plan and the first trade thereunder, limitations on multiple overlapping 10b5-1 Plans, and limits on single-trade 10b5-1 Plans, as well as new disclosure requirements.7 The Commission received over 180 comment letters regarding the proposed amendments.

2. AMENDMENTS TO RULE 10b5-1

Cooling-Off Periods for Directors and Officers. Prior to the effective date of the amendments, Rule 10b5-1 did not require any waiting or "cooling-off " periods between the date on which a 10b5-1 Plan is adopted and the date of the first transaction made pursuant to such plan, although some plans voluntarily included, and some companies required, such a cooling-off period.8 Under the amendments, in order to qualify for the affirmative defense provided by Rule 10b5-1:

  • Trading under a 10b5-1 Plan adopted by a director or "officer," as defined in Rule 16a-1(f ), must not begin until the later of (1) ninety days following plan adoption or "modification" (as described below) and (2) two business days following disclosure 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); and
  • Trading under a 10b5-1 Plan for persons other than issuers or directors and officers (which includes non-officer employees who enter into 10b5-1 Plans) must not begin until thirty days following plan adoption or modification.9

For purposes of the director and officer cooling-off period, the amendments provide that an issuer will be considered to have disclosed its financial results at the time it files a quarterly report on Form 10-Q or an annual report on Form 10-K, or, in the case of foreign private issuers (FPIs), when such FPIs file a Form 20-F or furnish a Form 6-K that discloses financial results.10

In an important change from the proposal, issuers are not subject to a coolingoff period.11 The amendments clarify that a "modification" of an existing 10b5-1 Plan would be deemed to be a termination of such 10b5-1 Plan and would restart the applicable cooling-off period.12 The amendments provide that "any modification or change" to the amount, price, or timing of the purchase or sale of the securities underlying a 10b5-1 Plan is treated as a termination of the plan and the adoption of a new plan.13 To the extent that insiders seek to continue to rely on the affirmative defense, they would be subject to a new coolingoff period.14 Additionally, cancellation of one or more trades would constitute a "modification."15 However, modifications that do not change the sales or purchase prices or price ranges, the amount of securities to be sold or purchased, or the timing of transactions under a 10b5-1 Plan (such as an adjustment for stock splits or a change in account information) will not trigger a new coolingoff period.16 The amendments do not provide any de minimis modification exception. In other words, a modification need not be "material" in order for it to trigger a new cooling-off period.

Director and Officer Certifications. Under the amendments, at the time a 10b5-1 Plan is adopted (or modified), directors and officers are required to include a representation in the 10b5-1 Plan certifying they (i) are not aware of MNPI about the issuer or its securities and (ii) are adopting (or modifying) the 10b5-1 Plan in good faith and not as part of a scheme to evade the prohibitions of the Exchange Act's section 10(b) or Rule 10b-5.17 In a change from the proposal, and to eliminate any additional burden separate documentation may create, directors and officers are required to include the certification in the plan documents as representations rather than as a separate certification to the issuer.18 The final rules do not require directors and officers to retain the certification for ten years, as was originally proposed, although it is prudent for them to maintain accurate records, including the representations, to establish they have satisfied the conditions of the affirmative defense.19

Prohibition on Overlapping 10b5-1 Plans and Limits on Single-Trade 10b5-1 Plans. The amendments eliminate Rule 10b5-1's affirmative defense for trades by any trader other than the issuer (i.e., beyond directors and officers) who establishes multiple overlapping 10b5-1 Plans.20 The proposal had included issuers within this prohibition, and it is a significant change that issuers are not subject to this aspect of the amendments.

The amendments provide a few limited exceptions to the multiple overlapping plan prohibition. To address an insider's use of multiple brokers to execute trades pursuant to a single 10b5-1 Plan that covers securities held in different accounts, the amendments treat a series of formally distinct contracts with different broker-dealers or other agents as a single "plan," if taken together, the contracts otherwise satisfy the applicable conditions of Rule 10b5-1.21 In addition, the amendments provide that a broker-dealer or other agent executing trades on behalf of the insider pursuant to the 10b5-1 Plan may be substituted by a different broker-dealer or other agent as long as the purchase or sales instructions applicable to the substituted broker and the substitute are identical, including with respect to the prices of securities to be purchased or sold, the dates of the purchases or sales to be executed, and the amount of securities to be purchased or sold.22 This means an insider will not lose the benefit of the affirmative defense when closing a securities account with a financial institution and transferring the securities to a different financial institution. An insider also may maintain two separate Rule 10b5-1 Plans at the same time, so long as trading under the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or expire without execution, subject to compliance with applicable cooling-off period requirements.23

The amendments also authorize certain "sell-to-cover" transactions in which an insider instructs its agent to sell securities in order to satisfy tax-withholding obligations at the time an award vests so the insider will not lose the benefit of the affirmative defense with respect to an otherwise eligible 10b5-1 Plan if the insider has another plan in place that would qualify for the affirmative defense, so long as the additional plan or plans only authorize qualified sell-to-cover transactions.24 A plan authorizing sell-to-cover transactions qualifies for the new provision if the plan authorizes an agent to sell only such securities as are necessary to satisfy tax-withholding obligations incident to the vesting of a compensatory award, such as restricted stock or stock appreciation rights, and the insider does not otherwise exercise control over the timing of such sales.25

Transactions with the issuer not executed on the open market, such as employee stock purchase plans ("ESPPs") or dividend reinvestment plans ("DRIPs"), would be excluded from the prohibition on overlapping plans.26

The amendments also limit the availability of the affirmative defense by persons other than the issuer to one "single-trade" 10b5-1 Plan during any twelve-month period.27

Acting in Good Faith. Rule 10b5-1 previously required that 10b5-1 Plans be entered into in good faith and not as part of a plan or scheme to evade the insider trading rules.28 In order to clarify that cancellations or modifications of a 10b5-1 Plan may not be conducted in a manner to benefit from MNPI, the amendments require that 10b5-1 Plans be entered into in good faith and the person who has entered into the plan must act in good faith throughout the duration of the trading arrangement.29

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Footnotes

1. See Insider Trading Arrangements and Related Disclosures, 87 Fed. Reg. 80362 (Dec. 29, 2022) (to be codified at 17 C.F.R. pts. 229, 232, 240 & 249).

2. Id. at 80362.

3. Id. at 80363.

4. Id.

5. Id. at 80365.

6. See generally Rule 10b5-1 and Insider Trading, 87 Fed. Reg. 8686 (proposed Feb. 15, 2022) (to be codified at 17 C.F.R. pts. 229, 232, 240 & 249).

7. Id.

8. Insider Trading Arrangements and Related Disclosures, supra note 1, at 80371.

9. Id. at 80401.

10. Id. at 80370.

11. Id. at 80371–72.

12. Id. at 80405.

13. Id.

14. Id.

15. Id. at 80367.

16. Id. at 80371.

17. Id. at 80373.

18. Id. at 80405.

19. Id.

20. Id. at 80405–06.

21. Id. at 80406.

22. Id. at 80377.

23. Id.

24. Id. at 80378.

25. Id.

26. Id. at 80375.

27. Id.

28. Id. at 80373.

29. Id. at 80379.

Originally published by ABA Business Law.

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