After months of individual Commissioners and the Chair promising to do so, on December 15, 2021, the US Securities and Exchange Commission (SEC) issued proposed amendments to Rule 10b5-1 of the Securities Exchange Act of 1934, as well as proposing a number of additional disclosure requirements. According to the SEC’s press release, the purpose of the proposal is to address insider trading gaps and improve public reporting concerning corporate insiders’ transactions in company securities.

The Proposed Rule adds new conditions to the now more than 20 year old Rule 10b5-1, which provides an affirmative defense for corporate insiders to potential insider trading liability. Specifically, in terms of trading plans, the amendments contemplate a cooling off period, prior to any trading through the plan, of 120 days for officers or directors and 30 days for issuers, after the adoption of a new or modified trading plan. Officers and directors adopting or modifying a 10b5-1 plan would have to certify that they are not aware of material nonpublic information when entering into a plan. In addition, the affirmative defense will not apply where there are multiple, overlapping 10b5-1 plans that apply to the same publicly traded security. Further, 10b5-1 plans that are designed to execute only one trade would be limited to only one plan per 12 month period.

The rule proposal also provides for additional disclosures related to these plans and to trading in company securities by corporate insiders. Issuers would be required to disclose in their annual reports whether or not the company has adopted insider trading policies and procedures, and the substance of those policies. Needless to say, if an issuer has not adopted such policies and procedures, the Commission would like that to be disclosed, as well, along with an explanation. Under the new proposal, issuers must disclose options grant practices, as well as publicly disclosing those grants, in the form of a table that includes pricing information, where such grants are made within 14 days of the company’s release of any material nonpublic information. Issuers would further be required to disclose the adoption or termination of any Rule 10b5-1 trading plans and the terms of those plans. The proposal also contemplates changes to Forms 4 and 5, adding a check box, so that Section 16 officers and directors can note whether the reported transactions were subject to a 10b5-1 trading plan. Finally, under the proposal, those same Section 16 officers and directors will also be required to disclose on Form 4 any gifts of securities.

The Proposed Rule has the full support of three of the five Commission members, with Commissioner Peirce and Commissioner Roisman generally supporting amendments to Rule 10b5-1 and recognizing the need for a rulemaking here, but taking issue with the disclosure provisions (Peirce), and the rulemaking process generally and scope of the amendments overall (Roisman). As such, once comments are in, we can expect that the amendments, in some form, will be adopted.

This rule proposal is subject to public comment for 45 days after publication in the Federal Register, after which the Commission and its staff will determine whether revisions are needed, prior to promulgating final rule amendments. Should you have interest in commenting, or if you have questions about the proposal, please let us know and we would be happy to assist.

Author

Amy serves as the Co-Chair of Baker McKenzie's North America Financial Regulation & Enforcement Practice, which provides clients with a full range of regulatory advice and enforcement counseling. Amy also serves on the steering committees of the Firm's Global Financial Services Regulatory and Global Financial Institutions Groups.