SEC Imposes New Requirements on the Use of Rule 10b5-1 Plans

The SEC adopted amendments to Exchange Act Rule 10b5-1 ("Trading 'on the Basis of' Material Nonpublic Information in Insider Trading Cases"). The amendments will increase obligations for parties seeking the safe harbor provision of Rule 10b5-1(c)(1), including expanded disclosure requirements.

Rule 10b5-1 allows corporate insiders that are likely to have inside information as to an issuer to establish an "automated" forward plan to buy or sell securities of the issuer. Such a plan allows trading from the insider's account to continue even in periods when the insider has material nonpublic information (MNPI), on the theory that the plan would have been established at a time when the insider did not have MNPI so there is no justification for interrupting the automatic operation of the plan. However, as reported in the SEC's proposing and adopting releases, a number of studies have found that the execution of 10b5-1 plans resulted in trading profits or avoidance of losses that suggested such plans were being misused to allow insiders to trade at advantageous prices.

Amendments

The safe harbor of Rule 10b5-1(c)(1) that provides an affirmative defense against allegations of insider trading will now be subject to numerous new conditions, to include:

• cooling off periods between the entry into plan and the initiation of trading under the plan -- up to a 120-day period for officers and directors for any new or modified trading plan and a 30-day period for persons other than directors and officers;
• a prohibition on persons other than issuers using multiple overlapping Rule 10b5-1 plans;
• with the exception of issuers, a limitation on single-trade plans to one plan per consecutive 12-month period;
• the requirement that officers and directors certify "good faith" and a lack of knowledge of MNPI when entering into or modifying a trading plan;
• an expansion of the existing "good faith" requirement, such that all plans must be entered into and operated in "good faith";
• new Regulation S-K and other annual issuer disclosures as to the registrant’s insider trading policies and procedures; and
• the requirement that plans must provide for a very specific determination, by formula, as to the amount of the securities that should be bought or sold, the acceptable trading prices and the permitted trading days; and
• the requirement that issuers disclose in quarterly reports their director, officer and issuer trading plan adoptions and terminations under 10b5-1, as well as the terms of such arrangements.

Dates

Section 16 officers and directors will be required to disclose 10b5-1(c) trading arrangements and gifts of securities on Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023. Issuers will be required to comply with the new disclosure requirements on Forms 10-Q, 10-K and 20-F, and in any proxy or information statements, in the first filing that covers the first full fiscal period beginning on or after April 1, 2023.

The amendments will go into effect 60 days following publication in the Federal Register, but defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies.