On December 14, 2022, the SEC announced that it had adopted amendments to Rule 10b5-1 under the Exchange Act. The headline of the announcement states that the amendments “modernize” the rule – which governs so-called insider trading plans – but it’s questionable if they achieve that goal, or whether in fact that was the goal in the first place. What the amendments do accomplish is to add extensive new procedural and disclosure requirements with respect to those plans.
The major changes effected by the amendments are as follows:
- “Cooling-off” periods before trading under a plan can commence. The cooling-off period for directors and officers of the issuer is the later of 90 days following the adoption or modification of a plan or two business days following disclosure of the issuer’s financial results for the quarter in which the plan was adopted, subject to a maximum of 120 days following plan adoption or modification. For others, the cooling off period is 30 days.
- Plans for directors and officers must now include a representation that, at the time of adoption or modification of a plan, they are (1) not aware of any material nonpublic information about the issuer or its securities and (2) 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 10b5-1 plans.
- A limitation on the ability of anyone other than issuers to rely upon the affirmative defense for a single-trade plan during any consecutive 12-month period.
- A condition that all persons entering into a plan must act in good faith with respect to the plan.
If you think that some of these amendments suggest that the SEC assumes people act in bad faith, you’re not alone. Moreover, it is unclear why the SEC believes that someone inclined to evade the rules will not do so merely because she says she won’t.
The amendments also create new disclosure requirements, including:
- Quarterly disclosure by issuers regarding the use of 10b5-1 plans and certain other written trading arrangements by directors and officers.
- Annual disclosure of insider trading policies and procedures.
- Disclosures regarding awards of options close in time to the release of material nonpublic information and related policies and procedures.
- Tagging of the required disclosures.
- A new checkbox on Forms 4 and 5 indicating that a reported transaction was intended to satisfy the conditions of Rule 10b5-1.
The rules will become effective 60 days following publication of the adopting release in the Federal Register; the amendments to Forms 4 and 5 will take effect for reports filed on or after April 1, 2023; and the new disclosure requirement for periodic reports will be effective for the first filing that covers the first full fiscal period beginning on or after April 1, 2023. However, smaller reporting companies may defer compliance for six months.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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