Key Takeaways: SEC Amends Rule 10b5-1 Insider Trading Arrangements and Related Disclosures

Rule 10b5-1 governs how executives with insider information can sell company stock without running afoul of insider trading laws. According to the SEC, the recently published amendments “are designed to significantly reduce opportunities for corporate insiders to misuse Rule 10b5-1 to trade on material nonpublic information (MNPI). Further, the amendments will increase transparency regarding the use of Rule 10b5-1 plans, [company] insider trading policies and procedures, and their policies and practices with respect to awards of options, SARs, and/or similar option-like instruments close in time to the release of MNPI.” 

Key provisions include a minimum cooling-off period; restrictions on multiple overlapping plans and single-trade plans; identification of transactions on Forms 4 and 5 to satisfy affirmative defense conditions; and new disclosure requirements regarding gifts of securities, quarterly reporting, reporting of gifts, certain equity compensation awards, company insider trading policies and the adoption, termination and modification of Rule 10b5-1 and certain other trading arrangements.

Key Takeaways

Minimum Cooling-Off Period:

Under the amended rule, before trading can commence under a trading arrangement, officers and directors must abide by a minimum cooling off-period which is the later of: 

• 90 days after the adoption or modification of the Rule 10b5-1 plan, or
• 2 business days following the disclosure of the issuer’s financial results in Form 10-Q or Form 10-K (or 20-F or 6-K in which financial results are published) for the fiscal quarter in which the plan was adopted or modified
• Maximum of 120 days

For all others, the cooling off period is 30 days. The new rule will also require a new cooling-off period when certain plan modification are made (including changes to the amount, price, or timing of the purchase or sale of the securities, changes to a written formula or algorithm, or computer program that affects these factors).

Restriction on Multiple Overlapping Plans

The affirmative defense will not be available for any individuals who maintain multiple overlapping 10b5-1 plans for any class of securities of the issuer. This does not apply to employer plans.

Individuals can maintain two separate 10b5-1 plans, so long as trading under the second plan does not commence until after all trades under the first plan are completed or expire without execution. Where the first plan is terminated early, trades in the second plan also need to abide by the cooling off period as if the second plan were adopted on the date of early termination of the earlier plan. There is also an exception in the rules for “sell-to-cover” plans in connection with the vesting of equity.

Quarterly Reporting of Rule 10b5-1 and non-Rule 10b5-1 Plans

Under the amendment, a disclosure will be required when an officer or director has adopted or terminated a 10b5-1 plan or a non-Rule 10b5-1 trading arrangement. 

This disclosure needs to include:

• The name and title of the officer or director,
• The date of adoption or termination,
• The duration of the contract, and
• The aggregate amount of securities involved.

The disclosure does not need to include the price at which the individual is authorized to trade. 

Reporting of Gifts

Section 16 insiders will now be required to report any bona fide gifts of equity securities on Form 4 before the end of the second business day following the date of the transaction.

Gifts previously had to be reported on Form 5 within 45 days of the end of the registrant’s fiscal year.

Additional Important Provisions

Restriction on Single-Trade Plans

• The affirmative defense will not be available for a single-trade plan if the individual purchased or sold securities in another single-trade plan within 12 months.

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

• Under the new rule, Section 16 insiders will have to check a box on Forms 4 and 5 to indicate whether a reported transaction was made pursuant to a 10b5-1 plan. Previously, a disclosure was not required on Form 4. A footnote will also be required to identify the date the plan was implemented.

Good Faith Requirement

• An individual must enter into a 10b5-1 plan in good faith and must act in good faith with respect to the plan.

Director and Officer Certifications

• When a new plan is adopted or modifications are made to an existing plan, officers or directors must certify that they are not aware of MNPI (about the issuer or its securities) and that they are adopting or modifying the plan in good faith, and not as part of a plan or scheme to evade the prohibitions against insider trading.

Disclosure of Insider Trading Policies and Procedures

• Issuers must disclose in their 10-K or 20-F and proxy statements whether (and if not, why not) they have adopted insider trading policies and procedures with respect to transactions in their securities by directors, officers and employees, and the company itself. Companies will also be required to file a copy of their insider trading policy and procedures as an exhibit to Form 10-K and 20-F.

Key Dates (including deadlines)

• The Rule 10b5-1 and Rule 16a-3 changes will become effective February 27, 2023 and applies to individual plans created and/or modified after the effective date.
• Section 16-insiders will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.
• Issuers will be required to comply with the new disclosure requirements in Forms 10-Q, 10-K and 20-F, and in proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.
• The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies.

For more on 10b5-1 plan changes, watch a replay of our webinar where Jonathan Barber, head of Goldman Sachs Ayco’s Compensation and Benefits Policy Research Group, Timothy Ostrander, a financial advisor to corporate executives who participate in 10b5-1 plans, and Casey Plant, head of the 10b5-1 business within Goldman Sachs Private Wealth Management, discussed insights on how companies and executives can best navigate the new 10b5-1 environment.