SEC Reforms Rule 10b5-1 to Improve Insider Trading Plans and Transparency
To strengthen investor protections against insider trading, the Securities and Exchange Commission adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 and new disclosure requirements today. Updates to Rule 10b5-1(c)(1), which provides an affirmative defense to insider trading liability under Section 10(b), and Rule 10b-5 are among the changes.
The final rules aim to strengthen investor protections against insider trading and to assist shareholders in understanding when and how insiders trade in securities for which they may have material nonpublic information.
“The SEC established Exchange Act Rule 10b5-1 about 20 years ago. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock in good faith — before becoming aware of material nonpublic information,” said SEC Chair Gary Gensler. However, we’ve heard from courts, commentators, and members of Congress over the last two decades that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information.
Today’s amendments, I believe, will help fill those potential gaps. These issues reflect investors’ confidence in the markets. It’s always a good thing when we can boost investor confidence in the markets. It assists investors in deciding where to put their money. It reduces the cost of capital for businesses looking to raise capital, grow, and innovate, facilitating capital formation.”
The rule changes bring the conditions for the 10b5-1 affirmative defense up to date. The amendments, in particular, impose cooling-off periods for persons other than issuers before trading can begin under a Rule 10b5-1 plan. They also include a requirement that all parties who enter into a Rule 10b5-1 plan do so in good faith.
The amendments also require directors and officers to include representations in their plans attesting that: (1) they are not aware of any material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.
The amendments restrict the use of multiple overlapping trading plans and limit the ability of all persons other than issuers to rely on the affirmative defense for a single-trade plan to one single-trade plan per twelve-month period.
The amendments will require more detailed disclosure about issuers’ insider trading policies and procedures, including quarterly disclosure by issuers about the use of Rule 10b5-1 plans and certain other trading arrangements by its directors and officers for trading its securities.
The final rules require issuers to disclose their policies and practices regarding the timing of option grants as well as the release of material nonpublic information. The rules will require issuers to report any option awards beginning four business days before the filing of a periodic report or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information, including earnings information, and ending one business day after a triggering event on a new table.
Insiders who file Forms 4 or 5 will be required to checkbox whether a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and to disclose the date the trading plan was adopted. Finally, genuine gifts of securities that were previously permitted to be reported on Form 5 must now be reported on Form 4.
The final rules will go into effect 60 days after the adopting release is published in the Federal Register. Section 16 reporting persons must comply with the Forms 4 and 5 amendments for beneficial ownership reports filed on or after April 1, 2023.
In the first filing that covers the first full fiscal period that begins on or after April 1, 2023, issuers will be required to comply with the new disclosure requirements in Exchange Act periodic reports on Forms 10-Q, 10-K, and 20-F, as well as any proxy or information statements. The final amendments postpone compliance with the additional disclosure requirements for smaller reporting companies by six months.
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