March 3, 2023

Disclosing “Non-Rule 10b5-1 Trading Arrangements”: What Does That Even Mean?

Because trading under a plan that complies with the new requirements of Rule 10b5-1 is not an exclusive affirmative defense, the SEC’s newly effective rules on this topic also require quarterly disclosures of “non-Rule 10b5-1 trading plans” adopted by insiders. This Nelson Mullins blog from Gary Brown & Charles Vaughn asks, “what does that even mean?”

The blog offers a side-by-side comparison of a “real” Rule 10b5-1 plan & a “non-Rule 10b5-1 trading plan” – and closely analyzes whether any distinction actually exists. Here’s the conclusion:

The side-by-side comparison and analysis of a “non-Rule 10b5-1 trading arrangement” and a “Rule 10b5-1 plan” reveals that the only real differences are the cooling off periods and the certification requirements for issuer officers and directors under a “Rule 10b5-1 plan.” No one would realistically dispute that they may not enter into a trading arrangement with a lack of good faith or with the intent to circumvent the securities laws. The prohibition on multiple or overlapping plans is somewhat of a “throwaway”; courts had already ruled that those arrangements were indicators of a lack of good faith in entering into such plans, which resulted in those plans failing to provide an affirmative defense.

Does that mean that a “non-Rule 10b5-1 trading arrangement” is simply one that either:

– does not contain the required “cooling off” period; or

– if adopted by a director or officer, did not contain the required certification?

Take the examples of the limit orders referenced above – if you added a cooling off period and a certification to either order, would that convert it into a “real” Rule 10b5-1 plan? If that indeed is the case, the only difference is that one provides an affirmative defense while the other simply negates proof of “scienter” – an element of a Rule 10b-5 case.

Gary & Charles say that the confusing definition & its related disclosure requirement is going to result in a lot of extra work. Here’s why:

Absent additional SEC guidance, companies must approach these new requirements with extreme care and, in our judgment, err on the side of providing more disclosure than may be necessary regarding “non-Rule 10b5-1 trading arrangements.” That path will require quarterly inquiries to corporate officers and directors about those arrangements. Section 16 reports generally report only trades; therefore, a review of those filings might not reflect the adoption, modification or termination of either “non-Rule 10b5-1 trading arrangements” or “real” Rule 10b5-1 plans.

For companies to meet their new quarterly disclosure obligations, their insider trading policies – which must be filed with the SEC as exhibits – must now require pre-clearance and approval of not only “real” Rule 10b5-1 plans but the host of transactions that might constitute “non-Rule 10b5-1 trading arrangements.”

The blog concludes with language that could’ve made the rule more clear. Unfortunately, that’s not the world we’re living in.

Liz Dunshee