December 19, 2022
On December 14, 2022, the U.S. Securities and Exchange Commission (SEC) unanimously adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934, which adds new conditions to the use of the affirmative defense to insider trading liability available under Rule 10b5-1(c)(1), and imposed additional disclosure obligations regarding insider trading plans, policies and procedures.
Rule 10b5-1 provides an affirmative defense to insider trading liability under Section 10(b) of the Exchange Act and Rule 10b-5 in circumstances where, subject to certain conditions, the trade was pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person’s account or a written plan adopted when the trader was not aware of material nonpublic information (MNPI). The final rule and amendments generally follow the January 2022 proposed rules and amendments but include certain modifications, notably not imposing a cooling-off period or limitations on multiple plans or single-trade plans for issuers “at this time.”
The SEC’s stated dual aim of these amendments is to strengthen investor protections concerning insider trading and to help shareholders understand when and how insiders are trading in securities for which they may at times have MNPI.
Amendments to Rule 10b5-1
The amendments to Rule 10b5-1 update and add to the conditions that must be met for the affirmative defense to apply. Specifically, these new amendments:
With respect to existing Rule 10b5-1 trading plans, the SEC specifically provided that the amendments do not affect the affirmative defense available under such plans so long as they were entered into prior to, and are not modified or changed after, the effective date of the final rules (60 days from publication in the Federal Register).
New Disclosure Requirements
The amendments also create new, more comprehensive disclosure requirements, including:
Effective Date of Amendments
The amendments will become effective 60 days following publication of the adopting release in the Federal Register, and Section 16 reporting persons (i.e., the issuer’s directors and officers and shareholders who own more than 10% of a class of the issuer’s equity securities) 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 that are smaller reporting companies will be required to comply with the new disclosure and related XBRL tagging requirements in Exchange Act 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 October 1, 2023. All other issuers will be required to comply with the new disclosure requirements 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.
Continued Enforcement Focus Expected
In its announcement, the SEC noted that the amendments were in reaction to having heard from “courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information.” The SEC Enforcement Division’s focus on potential abuses of Rule 10b5-1 trading plans — evidenced by a recently settled administrative proceeding against the CEO and former president of an issuer for insider trading in connection with transactions under a Rule 10b5-1 trading plan entered into while in possession of MNPI — is expected to continue.
One potential area ripe for scrutiny is the gifting of securities. In this regard, the SEC reaffirmed its position that MNPI can be misused in the context of gifts, stating that the Exchange Act does not require the sale of securities to be for value; instead, it noted that “the terms ‘sale’ and ‘sell’ each include any contract to sell or otherwise dispose of.” The SEC also stated that “a donor of securities violates Section 10(b) if the donor gifts a security of an issuer in fraudulent breach of a duty of trust and confidence when 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.” It acknowledged, however, that “the affirmative defense under Rule 10b5-1(c)(1) is available for planned securities gifts.”
In light of the new Rule 10b5-1 amendments and disclosure obligations, issuers should take the following actions:
For additional guidance on the information in this alert, please contact any of the authors, any member of McGuireWoods’ securities and capital markets or securities enforcement and regulatory counseling teams, or your primary McGuireWoods contact.
McGuireWoods’ securities and capital markets team assists private and public companies in capital-raising efforts through private and public offerings, and assists public companies with their reporting obligations under the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, Section 16 reports and DEF 14A (proxy statements), as well as with Regulation FD and Regulation G compliance. We prepare insider trading policies, develop training programs and assist with other aspects of securities transactions engaged in by company officers, directors and significant security holders, including 10b5-1 plans and Rule 144 compliance.
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