SEC Proposes Amendments to Rule 10b5-1 Plans

On December 15, 2021, the Securities and Exchange Commission (the “SEC”) issued a proposal to amend Rule 10b5-1 (the “Rule”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the goals of enhancing transparency around the use of 10b5-1 plans and bolstering investor confidence (the “Proposed Amendment”). The full text of the Proposed Amendment can be found here. Comments on the Proposed Amendment are due 45 days after the publication in the Federal Register.

Current Rule: 10b5-1 Affirmative Defense

Rule 10b5-1(c)(1) provides an affirmative defense (the “Affirmative Defense”) to Rule 10b-5 insider trading liability if a trade was made pursuant to a binding contract, an instruction from an individual to execute the trade for the instructing person’s account, or a written plan. An individual asserting a Rule 10b5-1(c)(1) defense must satisfy the following conditions:

  • The person must show that before becoming aware of material nonpublic information, such person had entered into a binding contract to purchase or sell the security, instructed another person to execute the trade for the instructing person’s account, or adopted a written plan for trading securities.
  • The person must show that the applicable contract, instruction, or plan:
    • specified the amount of securities to be purchased or sold, the price and date;
    • has a written algorithm, or computer program for determining the amounts, prices, and dates; or
    • did not permit the person to exercise any subsequent influence over how, when, or whether to effect the purchases or sales (and, additionally, that any other person who exercised such influence was not aware of the material nonpublic information while doing so).
  • The person must show that the purchase or sale was pursuant to the prior contract, instruction, or plan. (The purchase or sale does not constitute “pursuant” to a contract, instruction or plan under the Rule if the person who entered into the arrangement altered or deviated from such contract, instruction, or plan, or entered into or altered a corresponding or hedging transaction).
  • The Affirmative Defense is only available if the trading arrangement was entered into “in good faith and not as part of a plan or scheme to evade prohibitions” of the Rule.

Proposed Amendment

The Proposed Amendment is intended to reduce potentially abusive practices associated with Rule 10b5-1(c)(1) trading arrangements by adding new conditions to the availability of the Affirmative Defense.

Mandatory Cooling-Off Periods

Under the current Rule, a trader may adopt a Rule 10b5-1(c)(1) trading arrangement and execute a trade on the same day; there is no cooling-off period requirement. A cooling-off period is the time between when a plan is implemented and when the first trade is executed under the plan. The Proposed Amendment requires a Rule 10b5-1 trading arrangement entered into by officers or directors of an issuer to include a minimum 120-day cooling-off period before any trading may commence under the arrangement, including adoption of a modified trading arrangement. Furthermore, the Proposed Amendment imposes a minimum 30-day cooling-off period for issuers, who often enter into Rule 10b5-1 plans in connection with share repurchase programs. The SEC anticipates that the Proposed Amendment, if adopted, would deter officers, directors, and issuers from adopting or modifying their Rule 10b5-1 plans on the basis of material nonpublic information and trading immediately pursuant to the arrangement.

Director and Officer Certifications

Although already a part of many Rule 10b5-1 plan templates, the Proposed Amendment requires directors and officers of an issuer to personally certify that they are not aware of material nonpublic information about the security or issuer when they adopt a Rule 10b5-1 plan and that they are adopting the contract, instruction, or plan in good faith and not as part of a plan or scheme to evade the prohibitions of Section 10(b) of the Exchange Act or Rule 10b-5 thereunder. The director or officer must keep this certification for ten years.

Restriction on Multiple Overlapping Plans

The Proposed Amendment seeks to eliminate the Affirmative Defense for any trades made by a trader who has established multiple overlapping trading arrangements for open market purchases or sales of the same class of securities. However, such change would not apply to transactions where a person acquires or sells securities directly from the issuer, such as share acquisitions through an employee stock ownership plan (ESOP) or dividend reinvestment plan (DRIP).

Restrictions on Single Trade Plans

The Proposed Amendment also limits the availability of the Affirmative Defense to one single-trade plan within a 12-month period.

Good Faith

The Proposed Amendment adds a condition that any contract, plan, or instruction must be “operated” in good faith.

Enhanced Disclosure Requirements

Lastly, the Proposed Amendment requires enhanced disclosure regarding Rule 10b5-1 trading arrangements, option grants, and issuer insider trading policies and procedures, including:

  • New quarterly disclosure regarding the adoption and termination of Rule 10b5-1 trading arrangements and other trading arrangements of directors, officers, and issuers and the material terms of such arrangements.
  • Disclosure in the issuer’s annual report of whether the issuer has adopted (and if not, why not) insider trading policies and procedures that govern the purchase, sale, or other disposition of the issuer’s securities by directors, officers, and employees, and, if the issuer has adopted such policies and procedures, disclosure of such policies and procedures.
  • Disclosure in the issuer’s annual report of equity compensation grants made within 14 days of the release of material nonpublic information (including earnings releases and other major announcements) and the market price of the underlying securities on the trading days before and after the release of such information.
  • Reports by Section 16 officers and directors of gifts of securities made by such insiders (currently eligible for deferred reporting on Form 5) on Form 4 within two business days.
  • Disclosure by Section 16 officers and directors (via checking boxes on Forms 4 and 5) of whether a purchase or sale was made under a Rule 10b5-1(c) trading arrangement, and the date such arrangement was adopted.

Share Repurchase Proposal

On December 15, 2021, the SEC also issued a proposal to enhance disclosure of share repurchases by public companies. Please see the Share Repurchase Proposal Client Alert for a discussion of this proposal.

For additional information related to anything contained in this Client Alert, please contact Margaret D. Farrell, James R. Burke, Kaitlin M. Humble, Emily M. Covey, or any member of our Securities Law Practice Group.

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