December 15, 2022

Rule 10b5-1: SEC Adopts Amendments to Conditions & Disclosure Requirements

Yesterday, the SEC adopted amendments to Rule 10b5-1 imposing new conditions & disclosure requirements for 10b5-1 plans and securities transactions by companies and insiders. Here’s the 252-page adopting release, and here’s the two-page fact sheet. According to the fact sheet, the changes amend the Rule 10b5-1(c)(1) affirmative defense to include:

– A cooling-off period for directors and officers of the later of: (1) 90 days following plan adoption or modification; or (2) two business days following the disclosure in certain periodic reports 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) before any trading can commence under the trading arrangement;

– A cooling-off period of 30 days for persons other than issuers or directors and officers before any trading can commence under the trading arrangement or modification;

– A condition for directors and officers to include a representation in their Rule 10b5-1 plan certifying, at the time of the adoption of a new or modified plan, that: (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are 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 Rule 10b5-1 plans;

– A limitation on the ability of anyone other than issuers to rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period; and

– A condition that all persons entering into a Rule 10b5-1 plan must act in good faithwith respect to that plan.

In addition to the amendments to Rule 10b5-1, the SEC added new disclosure requirements, including annual disclosure relating to a company’s insider trading policies and procedures, quarterly disclosure concerning the use of Rule 10b5-1 plans by its directors & officers, and disclosure about awards of options in proximity to the release of MNPI and related policies and procedures.  The new rules will also require Form 4 and 5 filers to indicate by a checkbox that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)

The final rules contain a few tweaks to the SEC’s original proposal. These include modifying the duration of the mandatory cooling off period (and eliminating the proposed cooling off period for issuers), allowing officer & director certifications to be included in the plan itself rather than being separately delivered to the issuer, and permitting issuers (but not insiders) to use multiple overlapping 10b5-1 plans. Overall, however, the amendments largely track the original proposal.

I said last month that we’d let you know if the SEC adopted anything by other than a 3-2 partisan vote, so I want to note for the record that the commissioners voted unanimously to approve the amendments.  We’ll be posting memos in our “Rule 10b5-1” Practice Area.

The rules go into effect 60 days after publication in the Federal Register, and we’re scheduling a webcast for next month on the implications of the changes for companies & insiders. Stay tuned for more details.

John Jenkins