TheCorporateCounsel.net

The rapidly approaching effective date for the Rule 10b5-1 amendments coincides with an open window period for calendar year-end companies right after they have filed their Form 10-K, so insiders will soon be making decisions as to whether to use Rule 10b5-1 plans under the amended rule. As we noted in the January-February 2023 issue of The Corporate Counsel, the changes to Rule 10b5-1 and the new disclosure requirements adopted by the SEC may make reliance on the affirmative defense significantly less attractive to many insiders. Companies that have heretofore required or strongly encouraged insiders to use Rule 10b5-1 plans for transactions in company securities may need to revisit those policies given the changes to the rule. In any event, not using Rule 10b5-1 is always an option, so long as the insider engages in transactions while not aware of material nonpublic information and abides by all of the procedures specified in the company’s insider trading policy (e.g., pre-clearance and trading restrictions).

Those insiders who elect to implement new Rule 10b5-1 plans beginning next week (or those who elect to make substantive modifications to an existing plan) will likely be using the form of Rule 10b5-1 plan that is provided by their broker. Brokerage firms have been working to update their form of Rule 10b5-1 plan to address the new conditions set forth in Rule 10b5-1(c). It is important for the company to review the insider’s Rule 10b5-1 plan under the pre-clearance procedures established by the insider trading policy so that the company can ensure that: (i) the plan is consistent with Rule 10b5-1(c); (ii) the plan is consistent with the company’s Rule 10b5-1 plan guidelines; and (iii) the company’s rights with respect to the plan (i.e., the company’s termination rights) are properly reflected in the plan.

Given all of this, now is a good time to remind insiders of their obligations to pre-clear Rule 10b5-1 plans with the company and to request that they provide the new form of Rule 10b5-1 plan to the company for its review as soon as possible. And then get ready for the onslaught!

– Dave Lynn