SEC Proposes Amendments Regarding Rule 10b5-1 Trading Plans and Share Repurchase Disclosure Rules
The Situation: On December 15, 2021, the U.S. Securities and Exchange Commission ("SEC") proposed amendments that would significantly alter the ways in which (i) issuers, directors, and officers adopt and utilize Rule 10b5-1 trading plans, and (ii) issuers disclose share repurchases.
The Potential Result: The proposed amendments would, among other things, institute a prescribed cooling off period before issuers, directors, and officers are permitted to execute trades after adopting or modifying Rule 10b5-1 plans. With regard to share repurchases, the proposed amendments would require more frequent and comprehensive disclosures.
Looking Ahead: The proposed amendments are subject to a 45-day comment period, and any final amendments to the current framework could reflect additional modifications made by the SEC in response to comments received on the proposed amendments.
Rule 10b5-1 Trading Plans
Proposed Amendments to Rule 10b5-1
Rule 10b5-1(c) under the Securities Exchange Act of 1934 ("Exchange Act") provides corporate insiders an affirmative defense to insider trading claims if a trade is made, subject to certain conditions, through a binding contract, an instruction to another person to execute the trade for the instructing person's account, or a written plan adopted when the trader is not aware of material nonpublic information. Under the proposal, the following amendments would modify the current requirements to qualify for this Rule 10b5-1(c) affirmative defense:
- After adopting or modifying a Rule 10b5-1 plan, (i) an issuer must wait 30 days before trading can commence, and (ii) a director or officer must wait 120 days before trading can commence.
- Directors and officers must provide a written certification to the issuer at the time they enter into or modify a Rule 10b5-1 plan that they are (i) not aware of material nonpublic information about the issuer or its securities, and (ii) adopting the Rule 10b5-1 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 and Rule 10b-5 thereunder.
- The affirmative defense would not be available to (i) parties who maintain multiple overlapping Rule 10b5-1 plans for open market purchases and sales of the same class of securities, or (ii) a single-trade plan if the party purchased or sold securities pursuant to another single-trade plan in the previous 12 months.
- The proposals reinforce that Rule 10b5-1 plans must be entered into and operated in good faith (i.e., the affirmative defense would not be available to a person who cancels or modifies their plan to evade the prohibitions of the rule or uses their influence to affect the timing of corporate disclosure to occur before or after a planned trade under an arrangement to make such trade more profitable or to avoid or reduce a loss).
The proposed amendments would also require more detailed disclosures relating to Rule 10b5-1 plans, option grants, and issuer insider trading policies and procedures. Specifically:
- Under new Item 408 of Regulation S-K, (i) quarterly disclosure of the use of Rule 10b5-1 plans and other trading arrangements by issuers and their directors and officers for trading of the issuer's securities, and (ii) annual disclosure of an issuer's insider trading policies and procedures. These disclosures would be subject to the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002.
- Amendments to Forms 4 and 5 to require insiders to identify whether a reported transaction was executed pursuant to a Rule 10b5-1 plan.
- New subparagraph (x) to Item 402 of Regulation S-K would require tabular disclosure of each option award granted within 14 calendar days before or after the filing of a report that contains material nonpublic information, along with disclosure of the market price of the underlying securities on the trading days before and after the disclosure of the relevant material nonpublic information.
- Amendments to Rule 16a-3 of the Exchange Act to require reporting of the disposition of bona fide gifts of equity securities on Form 4 (i.e., cannot report later on Form 5).
Share Repurchase Disclosure Rules
Issuers currently disclose information regarding share repurchases upon adoption of a repurchase plan and on a quarterly basis thereafter, with the information itself aggregated monthly and by class with the average price paid. Issuers may voluntarily provide timely updates about share repurchases, but are not required to make such disclosures. The proposed amendments would heighten these disclosure requirements in the following ways:
- Issuers (including foreign private issuers) would be required to disclose share repurchases by the end of the next business day after the repurchase by furnishing a new Form SR, which would require information such as the date of the purchase, class of securities purchased, the total amount purchased, the average price paid and the total amount purchased in reliance on Rule 10b-18 and Rule 10b5-1(c).
- Issuers would be required to disclose whether Section 16 officers and directors purchased or sold shares within 10 business days of the announcement of a share repurchase program.
- Issuers would be required to provide additional information related to share repurchases, including the rationale for the share repurchase program, the criteria used to determine the amount of repurchases, any policies related to purchases and sales of securities by officers and directors during the repurchase program (including any restriction on such transactions) and whether the issuer made repurchases pursuant to Rule 10b-18 and Rule 10b5-1(c).
- The proposed amendments would apply to any purchase made by or on behalf of the issuer or any affiliated purchaser of securities registered under Section 12 of the Exchange Act.
Molly McGreavy, in the New York Office, assisted in the preparation of this Commentary.
Four Key Takeaways
- Rule 10b5-1 plan participants and brokers that facilitate trades pursuant to Rule 10b5-1 plans will need to evaluate current plans, practices, and strategies to prepare for the potential rule changes. This includes plans, practices, and strategies for many repurchase transactions, including accelerated share repurchases.
- Rule 10b5-1 purchases and sales will need to be evaluated in light of prescribed cooling off periods if the amendments are adopted and any practices around cooling off periods will need to be reassessed.
- Issuers will need to prepare for enhanced disclosure requirements, including reporting share repurchases within one business day after execution if the amendments are adopted, which would be a significant change from the current requirement, in particular for foreign private issuers.
- The proposed amendments seek to address perceived abuse of Rule 10b5-1 plans and a lack of disclosure regarding Rule 10b5-1 plans and share repurchases. Failing to adjust plans, practices, and strategies and develop related disclosure if the amendments are adopted could increase enforcement and litigation risk.
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