On December 14, 2022, the Securities and Exchange Commission adopted amendments to Rule 10b5-1. The amendments are intended to strengthen insider trading protections and fill gaps left open by the original rule. The following provides a brief discussion of the new requirements imposed by the amendments to Rule 10b5-1.
Requirement of Good Faith
The good faith requirement of Rule 10b5-1 is expanded by the amendments. Now, any plan entered into under Rule 10b5-1 must be entered into in good faith, and any person using the defense provided by Rule 10b5-1 must have acted in good faith with respect to the 10b5-1 plan.
The amendments also lay out cooling-off periods that must be met before trading can commence. If a 10b5-1 plan is modified or newly adopted, officers and directors cannot rely on Rule 10b5-1 unless the plan specifies that trading will not begin until the later of: (a) 90 days after adoption of the plan, or (b) 2 business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K. For employees who are not directors or officers, the cooling-period is 30 days after adoption of the plan.
Director and Officer Certifications
Directors and officers of an issuer must now include a representation in 10b5-1 plans that the director or officer utilizing the plan is not aware of any material nonpublic information when entering into the plan. Additionally, the representation must state the 10b5-1 plan was adopted in good faith and not as a part of a plan or scheme to evade the prohibitions of Rule 10b5-1.
Restrictions on 10b5-1 Plans
The amendments restrict the use of multiple overlapping trading plans, barring a person from having multiple outstanding plans that would qualify under Rule 10b5-1. Further, a person is limited to relying on the Rule 10b5-1 affirmative defense for only one single-trade plan during any consecutive 12-month period.
Policies and Procedures
The amendments include comprehensive disclosure requirements regarding an issuer’s policies and procedures on insider trading. Registrants are required to disclose whether insider trading policies and procedures have been adopted. If insider trading policies and procedures have not been adopted, the issuer must explain why. The disclosure is required in a Form 10-K as well as proxy and information statements.
An issuer is also required to disclose policies and practices regarding the timing of option grants, or similar option-like instruments, and the release of material nonpublic information. If, during the last completed fiscal year, options were granted to an executive officer within 4 days before filing a Form 10-Q, Form 10-K, or Form 8-K and ended 1 business day after filing such report, the issuer must disclose certain information regarding each award as required by the amended Rule 10b5-1.
Form 4 & Form 5
Form 4 and Form 5 required by Section 16 will now include a checkbox that requires the filer to indicate whether reported transactions were made pursuant to Rule 10b5-1 as amended.
Bona Fide Gifts
Filers will also be required to report dispositions of bona fide gifts, including bona fide gifts of securities, on Form 4, rather than Form 5.
The amendments to Rule 10b5-1 will become effective February 27, 2023. The new reporting requirements for Form 4 and Form 5 will become effective for forms filed on or after April 1, 2023. The new required disclosures will first be required in the filing that covers the first full fiscal period beginning on or after April 1, 2023. A six-month delay will be applied to smaller reporting companies.
The amended Rule 10b5-1 will impose significant new requirements for relying on the rule and its affirmative defense. Issuers will need to be proactive in addressing the above requirements to ensure compliance with the amended Rule 10b5-1.
If you have questions about the Rule 10b5-1 amendments and how the amendments apply to your company, please reach out to Julie Herzog or Tim Spiel.