It may not have been a white Christmas where you are, but the SEC ended 2021 with a flurry of rule proposals, all related to trading by companies and their officers and directors.

Rule 10b5-1 “Trading” Plans and Insider Trading

On December 15, the SEC proposed amendments to Rule 10b5-1 under the Exchange Act.  The proposed changes to so-called “trading” plans under the Rule include the following:

  • cooling-off periods would be required before trading under a plan may commence (for individuals, a 120-day cooling-off period following the original adoption or modification of a plan, and for companies, 30-day cooling-off periods);
  • officers and directors would be required to certify that they are not aware of material nonpublic information about the issuer or the security when adopting or modifying a plan;
  • the affirmative defense to insider trading charges would not be available for multiple overlapping trading plans for open market trades in the same class of securities; and
  • trading plans covering a single trade would be limited to one plan for any 12-month period.

In addition, quarterly reports would have to provide disclosure concerning the adoption and termination of Rule 10b5‑1 trading arrangements and other trading arrangements by directors, officers, and issuers, as well as the terms of such trading arrangements.  Further, Forms 4 and 5 would include a box to indicate whether a reported transaction was made pursuant to a trading plan; many Section 16 filers already include this information in footnotes to their filings.

In the same release, the SEC also proposes to require “enhanced” disclosures regarding option grants and insider trading policies and procedures, including:

  • disclosure in annual reports whether or not (and if not, why not) the company has adopted insider trading policies and procedures, as well as disclosure of such policies and procedures; and
  • disclosure in annual reports of the company’s option grant policies and practices, including tabular disclosure showing grants made within 14 days of the release of material nonpublic information and the market price of the underlying securities on the trading day before and after the release of such information.

An additional proposal would require Section 16 filers to disclose promptly – i.e., within two business days – gifts of securities on Form 4. Currently, the rules permit deferred reporting of gifts on Form 5.

A Sleeper – More Disclosure of Option Grants

Included in the relatively succinct (163-page) proposal is a proposed amendment of Item 402 of SEC Regulation S-K, the rule containing disclosure requirements for executive compensation. New subsection (x) of Item 402 would require disclosure of option grant policies and practices, including tabular disclosure of grants made within 14 days of the release of material non-public information and the market price of the underlying securities on the trading days before and after the release of such information.  These disclosures would include:

  • how the board determines when to grant options;
  • whether the board or compensation committee takes material nonpublic information into account when determining the timing and terms of an award;
  • whether the company has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation; and
  • tabular disclosure of each option award granted within 14 calendar days before or after the filing of a periodic report, an issuer share repurchase, or the filing or furnishing of a current report on Form 8-K that contains material nonpublic information.

Evidently, the SEC seems to feel that the practices adopted by many companies in the wake of the options backdating scandal some years ago have not adequately addressed the timing of grants.  Notably, these requirements would apply to emerging growth companies and smaller reporting companies as well as more established companies. 

And let’s not overlook the not necessarily unrelated issuance of Staff Accounting Bulletin 120, dealing with so-called “spring-loaded” option grants.  

Issuer Stock Repurchases

On the same day – December 15 – the SEC also announced proposed rule amendments designed to shed more light on stock buybacks, another area that the current SEC views with a high degree of skepticism.  The proposals not only would expand the current requirements for periodic reporting of buybacks, but also would implement new rules, as follows:

  • First, a new Form SR would have to be furnished to the SEC within one business day following each share repurchase.  Form SR would have to provide information such as the date of the repurchase, the average price paid per share, and whether the repurchase was made under a Rule 10b5-1 trading plan.
  • Periodic disclosure would be expanded to include the rationale for the repurchases and the process or criteria used to determine the amount to be repurchased; policies or procedures relating to insider purchases during a buyback program; and whether the repurchases were made under a Rule 10b5-1 plan and/or in reliance upon Rule 10b-18, which spells out a number of procedural requirements for share repurchases.

These proposals are subject to public comments for 45 days, a relatively brief comment period that strongly suggests that the SEC plans to adopt final rules as quickly as possible.

Please direct any questions or observations to Gunster securities law and corporate governance practice leader Bob Lamm.


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