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Issuers are now filing their Form 10-Qs and questions continue to arise about the new trading arrangement disclosure that is required in Item 5 of Part II of Form 10-Q. Item 408(a)(1) of Regulation S-K requires issuers to disclose whether, during the issuer’s last fiscal quarter, any director or officer adopted or terminated: (i) any contract, instruction or written plan for the purchase or sale of securities of the issuer intended to satisfy the affirmative defense conditions of Rule 10b5–1(c); and/or (ii) any “non-Rule 10b5–1 trading arrangement.”

One of the persistent questions during this reporting season has been whether any disclosure is required at all pursuant to Item 5 of Part II of Form 10-Q when no director or officer has adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5–1 trading arrangement during the quarter. The practice has been decidedly mixed on this point in the Form 10-Qs filed to date, with some issuers indicating “None” in response to Item 5 or omitting Item 5 in its entirety, while other issuers have included “negative” disclosure in response to Item 5, along the lines of: “None of the Company’s directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended June 30, 2023.” In talking with other practitioners, it seems that advisers have different views on this particular point.

Emblematic of the debate, a member recently asked this question on our “Q&A Forum” (#11,752):

If a company didn’t adopt, terminate or modify any 10b5-1 plans in the prior quarter, do you think they have to include disclosure saying none were adopted in the 10-Q under the new rules or can the disclosure under that item just say ‘None’?

John responded:

Unfortunately, the Staff hasn’t weighed in on that issue, but I know that the use of the term “whether” in Item 408(a)(1) and (a)(2) has led some people to take the position that disclosure is required even if no plans were adopted or terminated. I have spoken to one practitioner who has said that his firm is encouraging inclusion of the item number and either a sub-caption such as “Rule 10b5-1 Plan Adoptions and Modifications” and saying “None” (“not applicable” doesn’t fit well) or a fuller statement such as “During the quarter ended [date], no director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.”

Another member responded:

I agree that not applicable doesn’t fit well. Although I can see the argument that a definitive response is required because of the “whether” language in S-K 408, the instructions to Form 10-Q say that “any item which is inapplicable or to which the answer is negative may be omitted and no reference thereto need be made in the report.” It seems like there’s an argument that in this case the answer is “negative” (i.e. we had no insider trading arrangement activity) and thus we could omit the heading. Do you think the staff would accept that argument? I wonder if everyone is going to end up having this boilerplate in every 10-Q going forward that there was not such activity.

And John responded:

Personally, I think that’s a pretty good argument, but I also think the Staff’s willingness to accept it would turn on “whether” (sorry) it interpreted Item 408(a) to impose an affirmative disclosure obligation concerning the absence of any plan adoptions, terminations or modifications during the quarter. If so, then I don’t think it would construe that required disclosure as falling within the scope of the instruction permitting registrants to omit any disclosure to which the answer is negative.

I tend to be in the “negative” disclosure camp here, and have been advising issuers to include the disclosure in the absence of further guidance from the Staff. I do think there will be some evolution of this disclosure over time, so I doubt that the Staff will be issuing “gotcha” comments on this disclosure (or the lack thereof) in its reviews. In the meantime, I guess you will just have to pick a side in this scintillating debate!

– Dave Lynn