On December 14, 2022, the Securities and Exchange Commission (the “Commission”) adopted final rules (the “Final Rules”) which will affect trading by directors and officers of listed issuers and disclosure about such transfers.

The Final Rules amend Rule 10b5-1(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) to clarify the requirements pursuant to which directors, officers and persons (other than the issuer) can engage in trading arrangements while taking advantage of the affirmative defense to liability for insider trading under Section 10(b) of the Exchange Act and Rule 10b-5. The Final Rules also require more robust disclosure from directors and officers about these trading arrangements, and issuers will be required to provide additional disclosure about their insider trading policies.

This client advisory will review relevant sections of the Final Rules which can be found here and the Commission’s fact sheet can be found here.

Amendment to Rule 10b5-1(c)(1)

Rule 10b5-1(c) of the Exchange Act establishes an affirmative defense to liability under Section 10(b) and Rule 10b-5, such that trading would be deemed not to have been made on the basis of material nonpublic information if the person can demonstrate, among other things, that the trade was made pursuant to a binding contract containing an instruction to another person to execute the trade for the instruction person’s account or a written plan for the trading of securities (each a “Rule 10b5-1 trading plan”) adopted at the time that the person was not aware of material nonpublic information.

The Final Rules amend the affirmative defense of Rule 10b5-1(c)(1) to:

Include a cooling-off period applicable to directors and officers (as defined in Rule 16a-1(f) promulgated under the Exchange Act) and a shorter cooling off period applicable to all other persons other than the issuer;
Include a certification condition for directors and officers;
Limit the ability of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans;
Limit the ability of these persons to rely on the affirmative defense for a single-trade plan to one single-trade plan during any consecutive 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.

New Disclosure Requirements Regarding Rule 10b5-1 Trading Arrangements

The Final Rules add new Item 408(a) of Regulation S-K, which requires registrants to disclose in Forms 10-Q and 10-K whether, during the registrant’s last fiscal quarter, any director or officer has adopted or terminated a Rule 10b5-1 trading plan and/or a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c)). Registrants must also provide a description of the material terms of the Rule 10b5-1 trading plan or non-Rule 10b5-1 trading arrangement.

Disclosure of Insider Trading Policies

New Item 408(b) of Regulation S-K requires registrants to disclose whether they have adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of their securities by directors, officers, and employees, or the registrant itself that are reasonably designed to promote compliance with insider trading laws, rules, and regulations, and any listing standards applicable to the registrant. If a registrant has not adopted such an insider trading policy and procedures, it must explain why it has not done so. Pursuant to corresponding amendments to Item 601 of Regulation S-K and Form 20-F, registrants must file a copy of their insider trading policies and procedures as an exhibit to Forms 10-K and 20-F, respectively.

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

The Final Rules require persons subject to Section 16 reporting to indicate in a checkbox on Forms 4 and 5 whether a transaction reported on the form was made pursuant to a Rule 10b5-1 trading plan.

Disclosure Regarding Equity Instruments Made Close in Time to the Release of Material Nonpublic Information

The Final Rules add Item 402(x) to Regulation S-K, which will provide that, if, during the last completed fiscal year, option-like instruments were awarded to an named executive officer within a period starting four business days before the filing of a periodic report on Form 10-Q or Form 10-K, or the filing or furnishing of a Current Report on Form 8-K that discloses material nonpublic information, other than a current report on Form 8-K disclosing a material new option award grant under Item 5.02(e), and ending one business day after a triggering event, the registrant must provide certain information concerning each such award for the named executive officer on an aggregated basis in a required tabular format. The Final Rules also require narrative disclosure which discusses the registrant’s policies and practices on the timing of awards of stock options, SARs and/or similar option-like instruments in relation to the disclosure of material nonpublic information by the registrant.

Reporting of Gifts on Form 4

Under the Final Rules, Section 16 reporting persons will be required to report dispositions of bona fide gifts of equity securities on Form 4 (rather than Form 5) in accordance with the Form 4 filing deadline.

Structured Data Requirements

The Final Rules require registrants to tag the information specified by new Items 402(x), 408(a), and 408(b)(1) of Regulation S-K, and new Item 16J(a) of Form 20-F, in Inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.

Smaller reporting companies (“SRCs”) will be required to provide and tag the disclosures after an additional six-month transition period.

Phase-In Period

The Commission has provided the following compliance dates for the Final Rules:

Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023;
All issuers other than smaller reporting companies (“SRCs”) will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023; and
SRCs will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after October 1, 2023.

Kelley Drye lawyers are available to assist in navigating and preparing for compliance with these new 10b5-1 rules.

SEC Issues Final Rules on Rule 10b5-1 and Insider Reporting Changes