& Securities

• Would mandate a 30-day cooling-off period for Issuer Rule 10b5-1 share repurchase plans and a 120-day cooling-off period for director and Section 16 officer plans
• Would require quarterly disclosure by issuers of the adoption, modification, or termination of Rule 10b5-1 plans and other trading arrangements by issuers, directors and Section 16 officers
• Would require gifts by insiders to be reported on Form 4

On December 15, 2021, the U.S. Securities and Exchange Commission (SEC) proposed an amendment to Rule 10b5-1(c)(1) under Securities Exchange Act of 1934 (Exchange Act) and proposed several enhancements to its disclosure rules regarding Rule 10b5-1 trading arrangements, equity grants and material nonpublic information, and issuer insider trading policies and procedures. Companies likely will find certain aspects of the proposals to be objectionable. Because the comment period on the proposals ends in a mere 45 days after publication in the Federal Register, companies should not delay in reviewing and evaluating the proposed amendments.

The following summary is principally taken from the SEC’s fact sheet on the proposals. The SEC’s proposing release, which includes the full text of the proposed amendments, is available here.

Proposed Amendments to Rule 10b5-1

The proposed amendments would add new conditions to the availability of the Rule 10b5- 1(c)(1) affirmative defense to insider trading liability, including:

• 10b5-1 trading arrangements entered into by corporate officers or directors must include a 120-day cooling-off period before any trading can commence under the trading arrangement after its adoption, including adoption of a modified trading arrangement;
• 10b5-1 trading arrangements entered into by issuers must include a 30-day cooling-off period before any trading can commence under the trading arrangement after its adoption, including adoption of a modified trading arrangement;
• Officers and directors must certify that they are not aware of material nonpublic information about the issuer or the security when adopting a new or modified trading arrangement;
• The affirmative defense under Rule 10b5-1(c)(1) does not apply to multiple overlapping Rule 10b5-1 trading arrangements for open market trades in the same class of securities;
• 10b5-1 trading arrangements to execute a single trade are limited to one plan per 12-month period; and
• 10b5-1 trading arrangements must be entered into and operated in good faith.

Enhanced Disclosures

The proposed rules would require enhanced disclosure regarding Rule 10b5-1 trading arrangements, option grants and issuer insider trading policies and procedures, including:

• A requirement for an issuer to disclose in its annual reports whether or not (and if not, why not) the issuer has adopted insider trading policies and procedures. Additionally, issuers would be required to disclose their insider trading policies and procedures, if they have adopted such policies and procedures;
• A requirement for an issuer to disclose in its annual reports its option grant policies and practices, and to provide tabular disclosure showing grants made within 14 days of the release of material nonpublic information and the market price of the underlying securities on the trading day before and after the release of such information;
• A requirement for an issuer to disclose quarterly the adoption, modification, or termination of Rule 10b5‑1 trading arrangements and other trading arrangements by directors, officers and issuers, and the terms of such trading arrangements (e.g., the duration and aggregate amount of securities to be sold or purchased); and
• A requirement that Section 16 officers and directors disclose by checking a box on Forms 4 and 5 whether a reported transaction was made pursuant to a 10b5-1(c) trading arrangement.

Finally, the proposed amendments would require corporate insiders subject to the reporting requirements of Exchange Act Section 16 to disclose promptly bona fide gifts of securities on Form 4.

Cost of Proposed Rules

The SEC proposing release discusses a variety of benefits, costs and alternatives to the proposed rules if adopted. For example, the SEC observes that “all else equal, the proposed conditions on the use of Rule 10b5-1 plans would make it more complicated for insiders and companies to sell or buy shares under such plans.” “The proposed conditions . . . could result in decreased liquidity of the insider’s holdings, including reduced ability to meet unanticipated liquidity needs (such as emergency or unplanned expenses), as well as potential constraints on portfolio rebalancing and achieving optimal portfolio diversification and tax treatment. Greater difficulty of selling shares under Rule 10b5-1 plans would impose illiquidity costs on insiders and potentially reduce the value of their compensation.” For issuers, “the proposed 30-day cooling-off period could decrease a company’s flexibility in implementing and modifying Rule 10b5-1 plans.” “The costs of the proposed amendments could result in an inefficient decrease in repurchases.”

Related SEC Proposed Rule Making

Companies should be aware that on the same day by means of a separate rulemaking, the SEC proposed rules that, among other things, would require next day reporting by companies of share repurchases on a proposed Form SR and require new periodic enhanced disclosures. We discuss these proposals here.