United States: SEC Adopts New Rules On 10b5-1 Plans [UPDATED]

[This post revises and updates my earlier post primarily to provide a more detailed discussion of the contents of the adopting release.]

At an open meeting in December last year—happy new year!—the SEC voted to adopt new rules regarding Rule 10b5-1 plans. The vote was unanimous—albeit somewhat grudgingly in one case. Still, the notion of unanimity on an important Corp Fin regulation has seemed like something of a pipe dream in the last several years. Commissioner Mark Uyeda was even complimentary of the process employed for this rulemaking—and he is typically quite critical of the process (see this PubCo post)—noting that the process employed this time facilitated the development of more responsive final rules. And did I detect a note of relief in the Chair's voice? Perhaps the unanimity was in part the result of concerns long expressed about potential abuse of Rule 10b5-1 plans—from studies reported in media to letters from Senators to recent probes conducted by the SEC and DOJ (see this PubCo post, this PubCo post and this PubCo post). These concerns have been percolating for many years, and the adoption of rules adding new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: Rule 10b5-1 plans, he said in 2021, "have led to real cracks in our insider trading regime" and called for a proposal to "freshen up" these rules. (See this PubCo post.) The final amendments add new conditions to the availability of the Rule 10b5-1(c) affirmative defense, including cooling-off periods for directors, officers and persons other than issuers, and create new disclosure requirements. According to Gensler,

Here is the final rule, the press release and the fact sheet.

Background of the rule

Corporate executives, directors and other insiders are constantly exposed to material non-public information, making it sometimes difficult for them to sell company shares without the risk of insider trading, or at least claims of insider trading. To address this issue, in 2000, Congress developed the Rule 10b5-1 affirmative defense. In general, Rule 10b5-1 allows a person, when acting in good faith and not aware of MNPI, to establish a formal trading contract, instruction or plan that specifies pre-established dates or formulas or other mechanisms—that are not subject to the person's further influence—for determining when the person can sell shares, without the risk of insider trading. According to the SEC, people are "aware" of MNPI "if they know, consciously avoid knowing, or are reckless in not knowing that the information is material and nonpublic." To be effective, the contract, instruction or plan must also conform to the specific requirements set forth in the Rule. In effect, the Rule provides an affirmative defense designed to demonstrate that a purchase or sale was not made "on the basis of" MNPI. If a 10b5-1 contract, instruction or plan is properly established, the issue is not whether the person had MNPI at the time of the purchase or sale of the security; rather, that analysis is performed at the time the instruction, contract or plan is established.

After the plan has been established, under current rules, there is no requirement for a cooling-off period—that is, the plan can provide for immediate trades. In addition, the person can modify it, so long as he or she is not aware of MNPI at the time of the modification, and can terminate it at any time—even if the insider is in possession of MNPI at the time. Why is that? Because the termination (and related cancellation of any planned trades) is not "in connection with the purchase or sale of any security." Under existing rules, a person can adopt multiple plans that provide for trades, and there is no prohibition on overlapping plans. Although there are requirements that insiders report transactions on Forms 4 and 144, there is no independent public reporting requirement for 10b5-1 plans (other than the requirement on Form 144 to provide the date of plan adoption if the sale was under a 10b5-1 plan). However, some insiders do provide that information voluntarily.

The perceived wide berth the Rule gives insiders to conduct transactions under these plans, together with the absence of public information requirements, has long fueled controversy about Rule 10b5-1 plans. Back in 2007, as reported in the Washington Post, the SEC Enforcement Chief worried that "executives are taking advantage of a legal safe harbor to sell their stock and profit before their companies report bad news....[A]cademic studies suggest that the rule may be a cover for improper activity....If executives are in fact trading on inside information and using a plan for cover, they should expect the 'safe harbor' to provide no defense.'" (See this Cooley News Brief.) A few years later, a study conducted by the WSJ seemed to indicate favorable results from trading by insiders under 10b5-1 plans that appeared to be more than serendipitous. The article identified a number of problems with 10b5-1 plans, including the absence of public disclosure about the plan or changes to it and the absence of rules about how long the plans must be in place before trading under the plans can begin. (See this Cooley News Brief.) These have now become familiar themes.

Recommendations for addressing potential problems with 10b5-1 plans were also the subject of a rulemaking petition from the Council of Institutional Investors in 2013 (see this Cooley News Brief), unsuccessful Congressional efforts in 2019 and 2021 (see this PubCo post and this PubCo post), as well as recommendations from the SEC Investor Advisory Committee in 2021 (see this PubCo post). Indeed, concerns have also been expressed about other vehicles that may inadvertently permit companies and insiders to opportunistically trade on the basis of MNPI with little transparency. For example, issues have been raised about "spring-loaded" awards to executives, that is, awards made in coordination with the release of MNPI. The concern accelerated following events involving Eastman Kodak Co.'s stock. Kodak's stock surged in July 2020 to its highest level in six years shortly after the company and a federal agency announced the company was set to receive a $765 million loan to help make drugs to protect against coronavirus. Kodak handed out options to executives the day before the loan was officially announced. Those options, some of which vested the day they were granted, soared in value with the stock." The WSJ reported that one executive "stood to reap more than $95 million from the stock increase if he had exercised options at then-current prices," although he did not in fact exercise at the time. Then, the SEC's Office of the Chief Accountant and Corp Fin released Staff Accounting Bulletin No. 120, which provided guidance about proper recognition and disclosure of compensation cost for "spring-loaded" awards made to executives. (See this PubCo post.)

Issues have also come to light about the potential for opportunistic timing of executive gifts of shares while aware of MNPI. As reported in this article in the WSJ, a new academic study looked at "insider giving," or, as the study authors described it, "opportunism posing as, or at least muddled with, ordinary philanthropy." In essence, according to the WSJ, with insider giving, the donor "tim[es] the donation of a stock to a charity around inside information about the stock. That way, you take a tax deduction before bad news sends the share price tumbling or after good news sends the price higher—and the gift delivers a bigger deduction than you would have gotten otherwise." The donation is not only tax deductible, it's also exempt from capital gains tax that would be due on the appreciation in value upon the sale. The study authors argued that the practice is "far more widespread than previously believed," and relied on by insiders, including large investors. Insider giving, they concluded, "is a potent substitute for insider trading." (See this PubCo post.)

Collectively, the SEC's new rules are designed to address these concerns by filling those "potential gaps" to which Gensler referred and, according to the press release, by "strengthen[ing] investor protections concerning insider trading and [helping] shareholders understand when and how insiders are trading in securities for which they may at times have material nonpublic information."

The final rules

The new final amendments add new conditions to the affirmative defense of Rule 10b5-1(c) designed to address concerns about abuse of the rule by opportunistic trading on the basis of MNPI. In addition, the amendments include requirements for new disclosures regarding

• companies' insider trading policies and procedures, and the use of 10b5-1 plans and certain other similar trading arrangements by directors and officers;
• director and executive equity compensation awards made close in time to company to disclosure of MNPI; and
• bona fide gifts of securities on Forms 4 by Section 16 filers and transactions under 10b5-1 plans on Forms 4 and 5.

Amendments to Rule 10b5-1(c)

Under the new rules, Rule 10b5-1(c)(1) is being amended to apply a cooling-off period to persons other than the issuer, impose a good-faith certification requirement on directors and officers, limit the ability of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans, limit the use of single-trade plans by persons other than the issuer to one single-trade plan in any 12-month period, and add a condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to that plan.

Cooling-off periods

The proposed amendments would have added a 120-day cooling-off period for directors and officers after entry into, or modification of, the plan and a 30-day cooling-off period for issuers. (Note that no cooling-off period was originally proposed for other persons under 10b5-1 plans.) The 120-day period was designed to extend beyond the fiscal quarter in which the plan was established, with the result that trading under the plan would not occur until after the company had announced its financial results for that quarter. The proposal would also have added a note to Rule 10b5-1(c)(1) stating that any modification or amendment to a plan would be deemed to be the termination of the plan and adoption of a new plan.

While some commenters favored the 120-day period, a number of commenters thought it was too long and would ultimately be counterproductive. Some suggested shortening the period but also taking into account when the company made its earnings announcement. Some commenters asked that a hardship exemption be made available. And many commenters objected to any cooling-off period for companies, contending that it would impede their ability "to effectively carry out share repurchases and other transactions used by issuers to manage their capital," was unnecessary in light of existing safeguards and would increase market volatility. Some commenters also asked the SEC to clarify that immaterial or administrative modifications would not trigger a new cooling-off period. Some commenters also suggested that the proposed cooling-off period should apply more broadly to all traders or all natural persons.

In crafting the final rules, the SEC took many of the public comments into account, adopting a modified cooling-off period applicable to all persons other than the issuer, with a longer period for directors and "officers" (as defined in Rule 16a-1(f)). According to the adopting release, the cooling-off period is designed to reduce information asymmetries and to minimize the ability of an insider to benefit from any MNPI by providing a time interval between the adoption of, and the commencement of trading under, the plan. However, the SEC ultimately agreed with commenters that 120 days was longer than necessary to address the SEC's concerns.

Under the final rule for directors or officers, the cooling-off period has a fixed and a variable component: the plan must provide that "trading under the plan will not begin until the later of (1) 90 days after the adoption [which includes "modification" as defined] of the Rule 10b5-1 plan or (2) two business days following the disclosure of the issuer's financial results in a Form 10-Q or Form 10-K for the fiscal quarter in which the plan was adopted or, for foreign private issuers, in a Form 20-F or Form 6-K that discloses the issuer's financial results," but, in any event, the maximum cooling-off period is 120 days. The period of two business days following filing of financial results was selected to provide a short period for market participants to analyze those results. Given the strong incentives for officers and directors to rely on Rule 10b5-1 plans for an affirmative defense, the SEC did not believe that the 90-day time period selected would significantly reduce the appeal of 10b5-1 plans. In the end, the SEC believed that the final cooling-off period "strikes the proper balance in deterring insider trading without unduly discouraging the adoption of Rule 10b5-1 plans."

The SEC did decide to require cooling-off periods for persons other than directors, officers or the issuer, but abbreviated the time to 30 days. The rule reflects the SEC's balance of the need for some cooling-off period when any insider enters into a Rule 10b5-1 plan and the recognition that a cooling-off period may impose "heightened burdens...on insiders who are not directors or officers, and who may have more limited financial resources." In light of the practical difficulties of assessing financial hardship, the SEC determined not to adopt a financial hardship exception from the cooling-off period.

Given that, under the proposed rule, any modifications to an existing 10b5-1 plan could trigger a new cooling-off period, some commenters asked the SEC to limit the types of modifications that would have that effect. The SEC concurred, adopting a new paragraph providing that a "modification or change to the amount, price, or timing of the purchase or sale of the securities (or a modification or change to a written formula or algorithm, or computer program that affects the amount, price, or timing of the purchase or sale of the securities)" underlying a 10b5-1 plan will be considered a termination of the plan and the adoption of a new plan that will trigger a new cooling-off period. The new paragraph is consistent with prior SEC guidance about the effect of modifications. Accordingly, under the final rules, "modifications that do not change the sales or purchase prices or price ranges, the amount of securities to be sold or purchased, or the timing of transactions under a Rule 10b5-1 plan (such as an adjustment for stock splits or a change in account information) will not trigger a new cooling-off period."

In response to many comments opposing a cooling-off period for issuers, the SEC determined not to require a cooling-off period for issuers at this time, but rather to continue to consider whether further rulemaking was "needed to mitigate any risk of investor harm from the misuse of Rule 10b5-1 plans by the issuer." In addition to impairing the ability of issuers to effectively manage their capital, some commenters contended that a cooling-off period for issuers "was unnecessary because existing safeguards under the Federal securities laws and market practices protect investors from issuer abuse of Rule 10b5-1 plans." The SEC asserted, in the adopting release, that, "in general, a corporation is considered an insider with regard to its duty to either disclose or abstain when purchasing its own shares on the basis of material, nonpublic information."

Director and officer certifications

The SEC had proposed to require officers and directors, as a condition of the affirmative defense, to furnish promptly to the company, when adopting a new plan, a certification that they were not aware of any MNPI and were adopting the plan in good faith. The proposed certification would not serve as "an independent basis of liability for directors or officers under Section 10(b) and Rule 10b-5," but rather was intended to "underscore the certifiers' awareness of their legal obligations under the Federal securities law related to trading in the issuer's securities."

To eliminate the additional burden of separate documentation, the final rule will require, instead of a separate certification, that directors and officers include a representation in the plan "certifying that at the time of the adoption of a new or modified Rule 10b5-1 plan: (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are adopting the contract, instruction, or plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5." The SEC indicated that the certification is intended to "reinforce directors' and officers' cognizance of their obligation not to trade or enter into a trading plan while aware of material nonpublic information about the issuer or its securities, that it is their responsibility to determine whether they are aware of material non-public information when adopting Rule 10b5-1 plans, and that the affirmative defense under Rule 10b5-1 requires them to act in good faith and not to adopt such plans as part of a plan or scheme to evade the insider trading laws." In addition, the SEC believes that companies will likely request that these representations be made available to them to facilitate their compliance with the new disclosure requirement of Reg S-K Item 408(a). The SEC did not adopt the proposed instruction to retain a copy of the certification for ten years, concluding that the requirement was unnecessary. Nor did the SEC adopt the view that the "certification should instead allow a trader to certify that any material nonpublic information the trader holds at the time the plan is entered into will be either public or no longer material at the time of the trade." To the consternation of Commissioner Hester Peirce (see below), the SEC contended that a trader would face too many difficulties "in assessing at the time of certification whether the information will become nonpublic or no longer material at the time of their future trading."

Multiple overlapping and single trade plans

The SEC has recognized that multiple overlapping plans could be used strategically for hedging purposes and in other ways that might allow MNPI to "'factor into the trading decision' of an insider." To address this concern, the SEC proposed that, as a condition of the affirmative defense, the "person who has entered the plan has no outstanding (and does not subsequently enter into another) Rule 10b5-1 plan for open market purchases or sales of the same class of securities," with an exception for ESOPs and DRIPs. The SEC also cited recent research showing that "single-trade plans are consistently loss-avoiding and their adoption often precedes stock price declines." As a result, the SEC also proposed that the affirmative defense would be available for only one single-trade plan during any 12-month period, a formulation that would still allow the use of single-trade plans to address one-time liquidity needs.

The final rules make some modifications to the proposal in response to comments. For example, the final rules do not apply either of these limitations to issuers, provisions that the SEC believes, like the cooling-off period, warrant further consideration. Both of these limitations will, however, apply to persons other than officers and directors, as these persons are subject to only 30-day cooling-off periods and may also "opportunistically manipulate their trading" upon receipt of MNPI without the benefit of the transparency of Section 16 reporting.

As adopted, the amendments prohibit the use of multiple overlapping plans, adding a condition to the affirmative defense that "persons, other than issuers, may not have another outstanding (and may not subsequently enter into any additional) contract, instruction or plan that would qualify for the affirmative defense under the amended Rule 10b5-1 for purchases or sales of any class of securities of the issuer on the open market during the same period." In addition, because the values of different classes of securities of a given issuer are highly correlated and therefore susceptible to opportunistic behavior, the SEC eliminated the reference to "same class of securities," so that the multiple overlapping plans restriction will apply to 10b5-1 plans for any class of securities of the issuer.

Three additional modifications are included in the final rules related to overlapping plans in response to comments:

• Different brokers. A person may use multiple brokers to execute trades of securities held in different accounts under a single Rule 10b5-1 plan. To address this issue, the final rules provide that a series of separate contracts with different broker-dealers or other agents may be treated as a single "plan," provided that, when taken together as a whole, the contracts "meet all of the applicable conditions of and remain collectively subject to the provisions of Rule 10b5-1(c)(1)." A modification of any of the contracts will be a modification of all of them. To allow persons to move accounts, the rules provide that brokers may be substituted as long as the instructions are identical, "including with respect to the prices of securities to be purchased or sold, dates of the purchases or sales to be executed, and amount of securities to be purchased or sold."
• Later commencing plans. It is permissible to maintain two separate Rule 10b5-1 plans at the same time so long as trading under the later-commencing plan cannot begin "until after all trades under the earlier-commencing plan are completed or expire without execution." In addition, the first trade under the later-commencing plan cannot occur during what would have been the applicable cooling-off period had the later-commencing plan been adopted on the date of termination of the earlier-commencing plan.
• Sell-to-cover transactions. Modifications will be permitted for plans authorizing certain "sell-to-cover" transactions, that is, transactions in which the insider instructs the agent to sell only enough securities to satisfy tax withholding obligations at the time an award vests and the insider does not otherwise exercise control over the timing of the sales. Plans that authorize only qualified sell-to-cover transactions are eligible for the affirmative defense even if the person has another 10b5-1 plan in place. This modification will not apply to sales incident to the exercise of options, which "could create a risk of opportunistic trading," although sell-to-cover instructions to meet the tax withholding obligations incident to an option or similar award exercise would be permitted.

As adopted, to benefit from the affirmative defense, a person may have only one single-trade plan during any 12-month period, i.e., a "plan that was designed to effect the open-market purchase or sale of the total amount of securities subject to that plan in a single transaction." However, the SEC does "not intend for a plan that is ineligible for the affirmative defense to preclude the affirmative defense for another plan, even if both trades are single-trade plans." Accordingly, the defense will be available for a single-trade plan if the person had not, during the preceding 12-month period, adopted another single-trade plan that qualified for the affirmative defense under Rule 10b5-1.

To address potential ambiguity or uncertainty around the concept of a single-trade plan, the final rules add the concept of "designed to effect" the trade in a single transaction. When is a plan "designed to effect" the purchase or sale of securities as a single transaction? When the plan has "the practical effect of requiring such a result." That would not include a plan that allows the person's agent discretion over whether to execute the plan as a single transaction. Nor would it include a plan that, instead of allowing discretion, provides that "the agent's future acts will depend on events or data not known at the time the plan is entered into, such as a plan providing for the agent to conduct a certain volume of sales or purchases at each of several given future stock prices" and "it is reasonably foreseeable at the time the plan is entered into that the contract, plan, or instruction might result in multiple transactions." The SEC agreed with commenters that a person "should not be at risk of losing the benefit of the affirmative defense due to decisions outside the insider's control when the insider did not design the Rule 10b5-1 plan to effect the authorized purchases or sales in a single transaction.

In addition, in response to comments, as with the multiple overlapping plan limitation, the final rules modify the proposed single-trade limitation to allow qualified sell-to-cover transactions.

Good faith condition

Under the rule, a plan must be entered into in good faith and not as part of a plan or scheme to evade the prohibitions of the rule. The SEC had proposed to add a requirement that the plan also be "operated" in good faith. The SEC was concerned that, after entering into the plan, insiders would, for example, manipulate the timing of corporate disclosure to make a planned trade more profitable or to avoid a loss. Many commentators, however, complained that the term "operated in good faith" was too ambiguous. In response, the SEC modified the phrase in the final rules to provide that the insider must "act[] in good faith" with respect to the plan. The change is designed to extend this familiar concept of good faith from the time of adoption through the duration of the Rule 10b5-1 plan to preclude the use of MNPI in decisions to trade under these plans. Because the amendment relates to "activities within the control of the insider," the SEC confirmed that "cancellations directed by the issuer where such cancellations are outside the control or influence of the insider may not, by themselves, implicate the good faith condition."

Additional new disclosures

Currently, the only disclosure required about 10b5-1 plans is the notice on Form 144, and the SEC believes that this lack of transparency "may allow improper trading to go undetected." In addition, issuers are not currently required to disclose their insider trading policies; however, the SEC believes that the availability of more information about these policies and procedures could "improve investor confidence, and in turn, potentially contribute to market liquidity and capital formation." To address this lack of transparency, the SEC proposed to require: (1) quarterly disclosure of the use of Rule 10b5-1 and other trading arrangements by an issuer and its directors and officers, (2) annual disclosure of an issuer's insider trading policies and procedures and (3) amendments to Forms 4 and 5 to require insiders to identify whether a reported transaction was executed pursuant to a 10b5-1 plan.

Quarterly reporting of Rule 10b5-1 and non-Rule 10b5-1 trading arrangements

Under proposed new Reg S-K Item 408(a), issuers would have been required to disclose, in Forms 10-Q and 10-K, whether, during the most recent quarter, the issuer or any officer or director adopted or terminated any contract, instruction or written plan to purchase or sell securities of the issuer, whether or not intended to satisfy Rule 10b5-1(c), and provide a description of the material terms of the contract. While many commenters supported the proposed requirement, some commenters raised issues about disclosure of terms such as pricing, which, they argued, could allow strategic trades in front of the transaction. Commenters also criticized the disclosure about "non-10b5-1 plans," a terms that they contended was ambiguous and overly broad.

The SEC made several modifications in the final rules, including eliminating the disclosure requirement with regard to adoption of plans by issuers, excluding pricing terms from the description of material terms and defining "non-Rule 10b5-1 trading arrangement." Under the final rules, issuers will be required to disclose whether, during the last quarter, any director or "officer" (as defined in Rule 16a-1(f)) has adopted or terminated any 10b5-1 plan or "non-Rule 10b5-1 trading arrangement," as defined in Item 408(c), and describe the material terms, other than pricing, such as whether or not the plan is a 10b5-1 plan, the name and title of the director or officer, the date of adoption or termination, duration of the plan and aggregate number of securities to be sold or purchased under the trading arrangement. Note again that certain modifications are deemed to be terminations. The SEC believes that the information will add important context and permit the SEC and market participants to observe how these trading arrangements are used.

The definition adopted by the SEC of a "non-Rule-10b5-1 trading arrangement" is consistent with the Rule 10b5-1 affirmative defense adopted by the SEC in 2000. More specifically, an officer's or director's trading arrangement would be a "non-Rule 10b5-1 trading arrangement" if the director or officer asserts that,

Essentially, these appear comparable to 10b5-1 plans that don't satisfy the new bells and whistles. Arguably, however, the definition remains broad enough that it could still raise interpretive issues.

Annual disclosure of insider trading policies and procedures

The proposal required companies to disclose, in Forms 10-K and 20-F and in proxy statements, whether or not (and if not, why not) the issuer has adopted insider trading policies and procedures governing the purchase, sale or other disposition of company securities by directors, officers and employees reasonably designed to promote compliance with insider trading laws, rules and regulations, including any applicable listing standards. Companies would also have been required to disclose those insider trading policies and procedures. The final rules retains those requirements largely as proposed; however, in lieu of requiring descriptions of the policies in the text of the Forms 10-K, 20-F and proxy statements, the final rules require companies to file their policies as exhibits to Forms 10-K and 20-F. The SEC notes that the disclosures will be subject to SOX 302 certifications.

Identification of Rule 10b5-1 and non-Rule 10b5-1 transactions on Forms 4 and 5

The SEC had proposed to add a Rule 10b5-1 checkbox to Forms 4 and 5 (filed under Section 16), along with the date of adoption of the plan, as well as an optional non-Rule-10b5-1 plan checkbox. In response to comments, the SEC is eliminating the optional non-Rule-10b5-1 plan checkbox and modifying the language accompanying the checkboxes to state that a reported transaction is pursuant to a plan that is "intended to satisfy the affirmative defense conditions" of Rule 10b5-1(c).

Option grant disclosure

Concerns have long been raised about spring-loading and bullet-dodging option grants. That is, making the grant immediately before the release of positive MNPI (spring-loading) can result in a grant that will likely be "in the money" as soon as the MNPI is released. Likewise, delaying a grant until after the release of negative MNPI could result in lower-priced awards (bullet-dodging). The SEC believes that engagement by companies in these practices would likely be material to investors, especially when they vote on say-on-pay proposals, approve executive comp or vote for directors. Although current rules require tabular disclosure of information about equity granted to NEOs, information about grants that may be bullet-dodging or spring-loaded is not required to be separately presented. To address transparency issues about potential opportunistic timing of grants in relation to the release of MNPI, the SEC proposed to require narrative disclosure of information about company award policies and a new table, presented in Inline XBRL, requiring specified disclosures about options and other awards granted in a 14-day window before or after an issuer share repurchase or the filing (or furnishing, as the case may be) of a periodic report or Form 8-K that contained MNPI. Smaller reporting companies and emerging growth companies would be permitted to limit their disclosure consistent with the applicable scaled disclosure requirements.

Many commenters objected to the duration of the 14-day window, contending that the proposed disclosure would capture a large number of routine equity awards and that the grant of awards is typically based on the meeting schedule for directors established months in advance without consideration of MNPI. Commenters also suggested that including awards close in time to share repurchases could result in disclosure of virtually every award. In response to comments, the SEC adopted as proposed the narrative disclosure requirement, but made a number of modifications to the tabular disclosure.

The final rules will require narrative disclosure, under new Reg S-K Item 402(x), of the issuer's "policies and practices," if any, on the timing of awards of stock options, SARs and/or similar option-like instruments in relation to the disclosure of MNPI, including "how the board determines when to grant such awards (for example, whether such awards are granted on a predetermined schedule); whether, and if so, how, the board or compensation committee takes material nonpublic information into account when determining the timing and terms of an award, and whether the registrant has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation."

The SEC adopted several revisions to the proposed tabular disclosure:

• narrowed the disclosure window to require reporting of awards made in the four business days before the filing of a periodic report or filing or furnishing of a Form 8-K that discloses MNPI (including earnings information) and ending one business day after a triggering event;
• removed the share repurchase disclosure trigger;
• provide that a Form 8-K reporting only the grant of a material new option award under Item 5.02(e) does not trigger this disclosure (because the disclosure would be redundant);
• combined the last two columns of the proposed table that would have required disclosure of the market value of the underlying securities for two trading days into a single column that discloses the percentage change in the market value of the securities underlying the award between the dates one trading day before and one trading day after disclosure of MNPI (to make it easier to "understand the impact that spring-loading may have on the potential value realizable by the NEO").

The new table will require information about each NEO award within the prescribed window on an award-by-award basis, including the name of the NEO, award grant date, number of underlying securities, per-share exercise price, grant date fair value (using the same GAAP methodology as in the company's financial statements), and percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and one trading day following the disclosure of MNPI. According to the release, the purpose of the new table is to highlight those grants that "may be more likely than most to have been made at a time that the board of directors was aware of material nonpublic information affecting the value of the award."

Reporting gifts on Form 4

Currently, Section 16 filers need to report bona fide gifts of equity on Form 5 within 45 days after fiscal year end. However, the SEC has noted that the length of the filing period provides time to permit insiders to "engage in problematic practices," such as making gifts of equity while in possession of MNPI or backdating a stock gift to maximize a donor's tax benefit. To address these concerns, the SEC proposed to amend Rule 16a-3 to require that dispositions by bona fide gifts of equity securities be reported on Form 4 within two business days. Although many commenters were displeased with the two-business-day deadline, the SEC determined to adopt the rule change as proposed.

In the proposing release, the SEC noted that the insider trading laws apply to gifts because the Exchange Act does not require that a "sale" of securities be for value. As an example, the SEC indicated that a donor violates Section 10(b) in giving a company's security "in fraudulent breach of a duty of trust and confidence" when the donor was aware of MNPI, and "knew or was reckless in not knowing that the donee would sell the securities prior to the disclosure of such information." In the adopting release, the SEC agreed with academic authors who observed that "a gift followed closely by a sale, under conditions where the value at the time of donation and sale affects the tax or other benefits obtained by the donor, may raise the same policy concerns as more common forms of insider trading." In particular, the SEC noted its concurrence that "a gift made with the knowledge that the donee will soon sell can be seen as in effect a sale for cash followed by gift of the cash." The SEC clarified, however, that "the affirmative defense of Rule 10b5-1(c)(1) is available for any bona fide gift of securities, including a gift that might otherwise cause the donor to be subject to liability under Section 10(b), because when making the gift the donor was aware of material nonpublic information about the security or issuer and knew or was reckless in not knowing that the donee would sell the securities prior to the disclosure of such information. In our view, the terms 'trade' and 'sale' in Rule 10b5-1(c)(1) include bona fide gifts of securities."

Inline XBRL

Disclosures required by Reg S-K Items 402(x) and 408(a) and (b)(1), and by Item 16J of Form 20-F must be tagged using Inline XBRL.

Effective date and transition

The final rules will become effective on February 27, 2023, which is 60 days following publication of the adopting release in the Federal Register on December 29, 2022. There are several compliance dates applicable to the different components of the rules.

• Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for reports filed on or after April 1, 2023.
• Issuers will be required to comply with the new disclosure requirements in periodic reports on Forms 10-Q, 10-K, and 20-F and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.
• Smaller reporting companies will have an additional six months to comply with the additional disclosure requirements, i.e., in the first filing that covers the first full fiscal period that begins on or after October 1, 2023..

In addition, with regard to pre-existing plans, the release provides that the amendments to Rule 10b5-1(c)(1) "would not affect the affirmative defense available under an existing Rule 10b5-1 plan that was entered into prior to the revised rule's effective date, except to the extent that such a plan is modified or changed in the manner described in Rule 10b5-1(c)(iv) [generally, amount, price or timing] after the effective date of the final rules. In that case, the modification or change would be equivalent to adopting a new trading arrangement, and, thus, amended Rule 10b5-1(c)(1) would be the applicable regulatory affirmative defense that would be available for that modified arrangement."

At the open meeting

Commissioner Hester Peirce supported the final rules, but without much enthusiasm—the rules are "more prescriptive and restrictive" than she would have preferred, but she supported it "for likely doing more good than bad." She approved of the changes from the proposal related to elimination of the application to issuers of many of the rules, elimination of the requirement to disclose plan pricing information, the new definition of a non-10b5-1 plan and the more reasonable scoping of some of the disclosure requirements. However, she still considered the rule to be too restrictive in many respects. She questioned the need for quarterly disclosure about non-10b5-1 plans, the need to file insider trading policies on EDGAR (as opposed to a website post), the two-business-day requirement to report gifts on Forms 4, and the absence of a hardship exemption. She also criticized the failure to reexamine the requirement that individuals not be aware of MNPI when they entered the plan, even if the MNPI became public before trading under the plan. She also considered the cooling-off periods to still be too long, the "act in good faith" condition to be unnecessary, and the "granular tabular requirement" to be "more noise than signal." Other than that, she believed that "addressing the kind of regulatory gaps that may have enabled the abuse of 10b5-1 plans is an excellent example of what should occupy the Commission's rulemaking agenda." Although some of the policy choices were not to her liking, she was pleased that that she and her colleagues "were able to settle on a final rule that I could support."

Commissioner Caroline Crenshaw observed that, under the original 10b5-1 rules adopted 20 years ago, the plans "could be modified with ease, and without public disclosure. Because the plans were so flexible, executives could avail themselves of the affirmative defense, while at the same time amending their plans in advance of corporate announcements that would likely move stock prices. As written, those rules have ceased to provide appropriate investor protection and, data show, have routinely been abused." The protections provided by the new rules "should help limit the scope of 10b5-1 plans to situations where insiders are truly trading without the unfair benefit of material non-public information, and protect against opportunistic trading. And, in so doing, they should help bolster confidence to the public and the market that the proverbial deck is not stacked in favor of the house."

As noted above, Uyeda was highly complimentary of how well the process had worked, highlighting the modifications made in response to comments, such as the phase-in for SRCs and the elimination of the cooling-off period for issuers. He noted that the process started with a "detailed comment summary" that helped his understanding of commenters' issues and ultimately "facilitated thoughtful conversations" with fellow commissioners and staffs "to help outline a final rule that the Corporation Finance staff could further develop." He observed that 10b5-1 plans can provide some benefits, such as decreasing market volatility and allowing employees to "monetize equity compensation while complying with the insider trading laws"; limiting these plans could make that compensation less valuable. In that regard, he did express some concerns. While he recognized the basis for the rules applicable to overlapping plans and single-trade plans, he worried that the "final rule's use of prophylactic prohibitions to address both situations may unnecessarily restrict the use of overlapping plans or single-trade plans established for legitimate reasons." He also questioned whether the "broad concept of 'good faith'"—an "inherently subjective determination"—could, in hindsight, create uncertainty, making amended rule 10b5-1 "difficult to implement." With respect to the use of XBRL, he criticized the "random and piecemeal" approach to its implementation. Finally, he observed that the amendments to Reg S-K Item 402 were the "third change to that item since I became a commissioner five-and-a-half months ago." He was "puzzled" by the additional requirement: the narrative was arguably already required by CD&A and the tabular information "is otherwise publicly available. Before we reach the end of the alphabet for Item 402, I hope that the Commission carefully weighs the effectiveness of future executive compensation disclosure versus its costs." While Uyeda supported the final rules, he hoped that "market participants will provide the Commission with feedback on whether the right balance was struck."

In his statement, Commissioner Jaime Lizárraga observed that "[i]nsider trading is not a victimless crime. It erodes trust in our markets, undermines market integrity, distorts shareholder value, and harms investors. When ordinary investors see that corporate executives can legally manipulate the rules for their own benefit and, in doing so, misuse material, non-public information without consequences, it raises valid questions about whether these practices undermine fairness and transparency in our markets....Closing some of the rule's loopholes, as we're doing today, will provide investors with the confidence that there's a level playing field." The rule in place today, he said, does not require much information about the use of 10b5-1 plans, which "prevents investors from assessing whether corporate insiders may be misusing material, non-public information for personal gain, which undercuts the rule's effectiveness. To be clear, the confidential information of issuers belongs to the company and its shareholders, not to insiders, so investors have a right to understand how issuers protect material, non-public information from being misused."

Happy New Year!

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