SEC Issues New Guidance on Rule 10b5-1 Plan Amended Rules

August 29, 2023

On August 25, 2023, the SEC issued five new CDIs providing additional guidance on certain features of the newly amended rules covering Rule 10b5-1 plans. Earlier this year we provided detailed guidance on the amended rules, which were adopted on December 14, 2022 and have already become effective for most companies with a compliance date of April 1, 2023 (or October 1, 2023 for smaller reporting companies). These new CDIs expand on the guidance the SEC provided in May of 2023, which was focused on compliance dates and the rules regarding cooling off periods.1

Refresher on 10b5-1 Amended Rules

As a refresher, the amended rules related to Rule 10b5-1 plans:

  • impose new mandatory “cooling-off” periods for 10b5-1 plans;
  • create new prohibitions on “overlapping” 10b5-1 plans;
  • provide new limitations on more than one “single-trade” 10b5-1 plans per 12-month period;
  • include a new requirement to act in good faith with respect to 10b5-1 plans in addition to the existing requirement that all 10b5-1 plans be entered into in good faith;
  • require issuers to make quarterly and annual disclosures about the operation and implementation of 10b5-1 plans and to file their insider trading polices (if any) as exhibits to their annual reports; and
  • implement a new checkbox on Form 4 and Form 5 indicating whether a reported transaction was effected pursuant to a 10b5-1 plan.

The final rules also add new disclosure requirements related to grants of options and similar instruments made close in time to disclosure of material nonpublic information. The rules also eliminated an exemption that had allowed insiders to report “bona fide” gifts of securities on an annual basis on Form 5, rather than on a current basis on Form 4 like other dispositions of securities.2

Overview of SEC’s New Guidance

The new CDIs, summarized below, address calculation of the cooling-off period, overlapping plans involving 401(k) plans, the new Form 4 checkbox and Form 10-Q and Form 10-K disclosures about the expiration of trading arrangements and the scope of arrangements covered by the disclosure requirement.

  • Question 120.29: Calculation of the required cooling-off period for Section 16 officers and directors.

The required cooling-off period for directors and officers subject to Exchange Act Section 16 reporting is the later of 90 days after the adoption of the contract, instruction, or plan or “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted.”

For purposes of calculating the cooling-off period specified in Rule 10b5-1(c)(1)(ii)(B)(1), the date of disclosure of the issuer’s financial results is the filing date of the relevant Form 10-Q or Form 10-K, and the first business day would be the next business day that follows the filing date.

For example, if the relevant form is filed on a Monday, trading may commence under the contract, instruction, or plan on Thursday (assuming no intervening Federal holidays). In addition, whether a form is filed before or after trading opens on a given day has no bearing on the calculation.

Amended Rule 10b5-1 to generally prohibit the availability of the affirmative defense under Rule 10b5-1(c) when a person (other than an issuer) has “overlapping” 10b5-1 plans whereby trades under two separate 10b5-1 plans may be effected during the same period of time.

However, the SEC clarified in this CDI that if a participant relies on Rule 10b5-1 to participate in a 401(k) plan, the Rule 10b5-1 affirmative defense would also be available to the participant for a concurrent plan for purchases or sales on the open market.

Even though participants elect how much to contribute to their individual 401(k) accounts, an open-market transaction conducted at the direction of the plan administrator, and not at the direction of the plan participant, to match a contribution by the participant with employer stock would not be an overlapping plan for purposes of Rule 10b5-1(c)(1)(ii)(D) that would disqualify a plan participant’s reliance on Rule 10b5-1 for a concurrent open market trading plan.

  • Question 120.31: Application of Form 4 checkbox to 10b5-1 plans adopted prior to the effective date of the amendments.

The Rule 10b5-1(c) check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan does not apply to trading plans that were adopted prior to the effective date of the amendments to Rule 10b5-1.

The Rule 10b5-1 check box on Form 4 applies to transactions that are made pursuant to a contract, instruction, or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of amended Rule 10b5-1(c).

Item 408(a)(1) of Regulation S-K requires disclosure under Item 5 of Form 10-Q and Item 9B of Form 10-K of 10b5-1 plan terminations, however the SEC clarified that this requirement does not apply to a plan that ends due to its expiration or completion.

  • Question 133A:02: Application of disclosure requirement when a director has a pecuniary interest in covered securities.

Item 408(a) of Regulation S-K requires disclosure under Item 5 of Form 10-Q and Item 9B of Form 10-K of whether any director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter.

The SEC clarified that Item 408(a) applies to any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate.

No Guidance on Item 408(a) Negative Disclosure Requirement

Despite the helpful guidance the SEC included in these new CDIs, there remains a need for explicit clarification regarding if Item 408(a) disclosure is required in Forms 10-Q or Forms 10-K when there is no reportable event. Item 408(a) requires disclosure of whether a director or officer has adopted or terminated a reportable trading arrangement, including a Rule 10b5-1 plan or a “non-Rule 10b5-1 trading arrangement.” The use of the word “whether” has led many companies to include negative disclosure under Item 5 of Form 10-Q and Item 9B of Form 10-K to affirm “none” if no director or officer entered into a reportable plan.

Market practice is split on the appropriate approach as companies wait for additional guidance from the SEC, which is informally reported to still be reviewing the issue. For now, the most conservative approach would be to include the negative disclosure until the SEC explicitly clarifies that such disclosure is not required under Item 408(a).

 

1 See CDIs 120.26, 120.27 and 120.28 here: https://www.sec.gov/divisions/corpfin/guidance/exchangeactrules-interps#120.26.

2 For a detailed discussion of the new requirements under the amended rules, please see our client alert published on January 11, 2023: https://www.huntonak.com/en/insights/sec-unanimously-approves-new-10b5-1-plan-conditions-and-expands-required-disclosures.html