On December 15, 2021, the U.S. Securities and Exchange Commission proposed amendments to Rule 10b5-1 trading plans, as SEC Chairman Gary Gensler first previewed in June in the wake of increased scrutiny of the plans. A Rule 10b5-1 plan provides an affirmative defense to Rule 10b-5 liability for insider trading. If approved, the following amendments would, according to Chair Gensler, close potential gaps in the insider trading regime and build trust in the capital markets:
- Mandatory 120-day “cooling-off” periods. A cooling-off (or burn-in) period is the time between the plan’s implementation and the first trade under the plan. The Commission proposed a mandatory cooling-off period of 120 days for Section 16 officers and directors, and 30 days for issuers. The 120-day requirement would, as Chair Gensler put it, more distinctly separate between different fiscal quarters the establishment of the plan and actual trades under the plan. While virtually all Rule 10b5-1 plans for officers and directors include some cooling-off period (typically, 30 days), most plans do not include periods that are as long as 120 days. Issuers that rely on a Rule 10b5-1 plan to implement their stock repurchase programs should assess the implications of the proposed 30-day cooling-off period.
- Certification requirement. As a condition of the availability of Rule 10b5-1’s affirmative defense to an insider trading claim, Section 16 officers and directors will need to furnish to the issuer a written certification — at the time of the plan’s adoption — that the insider is not aware of any material nonpublic information about the issuer and is adopting the plan in good faith. Most brokerage firms’ Rule 10b5-1 plan templates already require similar undertakings from individuals setting up plans.
- Restriction on overlapping trading plans. The Commission proposed an amendment under which Rule 10b5-1’s affirmative defense would be available only if there is a single plan in place for a 12-month period. Chair Gensler’s rationale for restricting overlapping trading plans is to prevent insiders from picking between plans as they please, although insiders who do this may already risk losing the affirmative defense.
- Restriction on single-trade plans. Historically, some officers and directors adopted Rule 10b5-1 plans that provide for only a single trade of the issuer’s securities. Under the proposed rules, the affirmative defense for such Rule 10b5-1 plans is limited to one single-trade plan within a 12-month period.
- Disclosure requirements. The Commission proposed extensive amendments to its disclosure regulations across a number of topics:
- Rule 10b5-1 plans. The amendments would require issuers to include in their quarterly reports the adoption (and termination) of Rule 10b5-1 plans by the issuer itself and any of its directors and officers, as well as the terms of such trading arrangements.
- Insider trading policies. The proposed rules require issuers to disclose in their annual reports their insider trading policies and procedures. If an issuer has not adopted such policies and procedures, it would be required to explain why not.
- Section 16 filings. The SEC proposes to modify Form 4 so that issuers must check certain boxes to indicate whether a purchase or sale was made under a Rule 10b5-1 plan and the date of adoption of any such plan. In addition, officers and directors are no longer permitted to report gifts of securities on Form 5; such gifts are now subject to the two-day reporting requirements of Form 4.
- Option grant policies. The amendments would require issuers 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.
The proposed amendments are now subject to a 45-day comment period from the date of their publication in the federal register. It remains to be seen whether any final rules will include all of the provisions that are in the proposed rules. Public companies may want to consider whether they should proactively adopt some of the provisions in the proposed rules or wait until the final rules are adopted before implementing any changes.
Caroline H. BullerjahnPartner
James H. Hammons Jr.Knowledge Management Lawyer
Sean M. DonahuePartnerChair, Public Company Advisory Practice
Deborah S. BirnbachPartnerCo-Chair, Complex Litigation & Dispute Resolution