In December 2021, the Securities and Exchange Commission (“SEC”) proposed amendments (the “Amendments”) to Rule 10b5-1 (the “Rule”) under the Securities Exchange Act of 1934 to enhance disclosure requirements relating to, and investor protections against, insider trading.
Rule 10b-5 under the Exchange Act prohibits the purchase or sale of a security on the basis of material nonpublic information (i.e., “insider trading”). However, Rule 10b5-1 contains an affirmative defense to insider trading, providing that a trade is not made on the basis of material nonpublic information where a person makes the trade: (i) pursuant to a binding contract; (ii) an instruction to another person to execute the trade for the instructing person’s account; or (iii) a written plan (“10b5-1 trading arrangements”), even if the person is aware of material non-public information at the time of the trade. The SEC is amending the Rule and adopting new disclosure requirements to combat a perception that corporate insiders have used the affirmative defenses to opportunistically trade securities on the basis of material nonpublic information.
Amendments to the Rule
The Amendments would change numerous parts of the existing Rule. Namely, the Amendments would:
- Condition reliance on Rule 10b5-1(c) upon a cooling-off period between when a 10b5-1 trading arrangement is adopted or modified (including cancelling one or more trades) and the date of the first transaction to be executed under the trading arrangement. The cooling-off period would be 120 days for a director or officer, and 30 days for an issuer.
- Require that a director or officer who adopts/modifies a 10b5-1 trading arrangement to furnish to the issuer a written certification at the time of the adoption/modification, certifying that the director/officer is not aware of material nonpublic information about the issuer or its securities and that they are adopting the trading arrangement in good faith. The director or officer would need to retain a copy of the certification for ten years.
- Make the Rule’s affirmative defense unavailable:
- to a trader who has overlapping 10b5-1 trading arrangements for open market purchases or sales of the same class of securities (other than where a person acquires/sells securities directly from/to the issuer e.g. pursuant to an employee stock ownership plan); and
- for a single-trade plan if the trader purchased or sold securities pursuant to another single-trade plan within a 12-month period.
- Require that a 10b5-1 trading arrangement be “entered into” and “operated” in good faith.
Additional Disclosures Regarding Trading Arrangements
To improve investors’ ability to assess whether insiders are misusing their access to material nonpublic information, the Amendments would require the use of any 10b5-1 Plan or other trading arrangement by an issuer or its officers or directors to be disclosed in 10-Q filings, and disclosure of an issuer’s trading policies and procedures (or an explanation of why there are none) to be included in each annual report of Form 10-K.
In addition, the Amendments would add a checkbox to Forms 4 and 5 requiring the filer to indicate whether a sale/purchase reported on that form was made pursuant to a Rule 10b5-1(c) trading arrangement, and the date they adopted the Rule 10b5-1 trading arrangement.
Disclosure Requirements for Equity Instruments Granted in Certain Time Periods
Pursuant to a new paragraph (x) in Item 402 of Regulation S-K, issuers would need to disclose (annually) option awards to named executive officers/directors made within a certain time of the release of material nonpublic information. Issuers would need to disclose:
- Details of any option award granted to a named executive director/officer within 14 calendar days before or after the release of material nonpublic information;
- The market price of the underlying securities the trading day before and after disclosure of the material nonpublic information; and
- An issuer’s option grant policies and practices regarding the timing of option grants and the release of material nonpublic information.
In a significant change from the existing rules, officers/directors and beneficial owners of 10% of an issuer would need to report a gift of securities on Form 4 before the end of the second business day following the date of execution of the transaction.
Insider trading is a focus of the SEC under the current administration and issuers should implement or review policies and procedures designed to ensure that they and their insiders comply with applicable securities laws. The Securities & Capital Markets team at Michael Best has attorneys that can guide issuers and insiders through the various insider trading laws. Please contact a member of our team for more information.