SEC Adopts Amendments to Rule 10b5-1

Who may be interested: Directors, Officers, and other persons who may qualify as a Reporting Person under Section 16 of the Exchange Act; Issuers. 

Quick Take: On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the Exchange Act to enhance investor protections concerning insider trading. The amended rule imposes new restrictions on the availability of the affirmative defense under Rule 10b5-1(c)(1) to insider trading liability and creates new disclosure requirements covering an issuer’s 10b5-1 plans, insider trading policies and procedures, and executive equity compensation awards made close in time to disclosure of material nonpublic information (MNPI). 

The SEC adopted Rule 10b5-1, in part, to provide an affirmative defense to insider trading liability for corporate insiders seeking to buy and sell company stock. The amendments substantially increase the qualifications for the affirmative defense and the required disclosures that issuers must provide in relation to their plans.

To qualify for the affirmative defense under the amendments, directors, officers, and other corporate insiders apart from the issuer must adhere to “cooling-off” periods during which they will be unable to trade securities of an issuer covered by the Rule 10b5-1 plan. Directors and officers will also be required to certify upon the adoption or modification of a 10b5-1 plan that they are not aware of MNPI about the issuer and are adopting the plan in good faith. 

The amendments create new requirements for issuers under Regulation S-K and in certain SEC forms to disclose, among other things, insider trading policies and procedures, updates to Rule 10b5-1 plans and other trading arrangements involving directors and officers, equity-based (including options) compensation awards made near the release of MNPI, and whether transactions were intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). 

In addition, the amendments generally prohibit overlapping Rule 10b5-1 plans and more than one single-trade plan during a 12-month period for anyone other than issuers.  This limitation, which contains certain limited exceptions, is designed to eliminate the ability of traders to use multiple plans to strategically execute trades or to selectively alter or cancel a plan, possibly on the basis of MNPI.  

The amendments will become effective 60 days after their publication in the Federal Register. Reporting Persons under Section 16 of the Exchange Act will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023. Issuers will be required to comply with new disclosure requirements for periodic reports with filings that cover full fiscal periods beginning on or after April 1, 2023, although smaller reporting companies will have an additional six months to comply.

The SEC’s Press Release can be found here.

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