On December 15, 2021, the U.S. Securities and Exchange Commission (the “Commission”) proposed amendments to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including changes to the rules governing the affirmative defense available under Rule 10b5-1(c), and certain enhancements to related disclosure requirements, as well as equity compensation disclosure requirements. In connection with the Proposing Release (available here), the Commission also provided a Fact Sheet (available here) that addresses the impacts and consequences of the proposed amendments. Issuers and insiders should be aware of the proposed amendments and examine their plans and policies in light of the proposed changes.

The proposed amendments largely reflect the revisions recommended by the Commission’s Investor Advisory Committee (IAC) on September 9, 2021, including implementing a cooling-off period before trading may commence pursuant to a plan, prohibiting overlapping plans, increasing public disclosure and modifying Form 4 disclosures. The proposed amendments also enhance required disclosure regarding certain equity awards made to, and gifts made by, directors and officers required to file reports with the Commission under Section 16 of the Exchange Act (“Section 16 officers”).

Background of Rule 10b5-1 Trading Plans

Rule 10b5-1(c) was adopted in 2000 to permit insiders to assert an affirmative defense to a claim that a purchase or sale occurred in violation of Section 10(b) of the Exchange Act when the insider was in possession of material nonpublic information. An insider is able to use the affirmative defense when, before becoming aware of material nonpublic information, the insider adopts a trading plan in good faith that complies with the requirements of the rule (a “Trading Plan”). Currently, any person or entity can establish a Trading Plan as long as the person or entity is not aware of any material nonpublic information and so long as the Trading Plan is not part of a plan or scheme to evade the insider trading prohibitions of Rule 10b-5. Trading Plans offer a number of benefits for insiders, including allowing them to more predictably diversify their personal holdings or obtain greater liquidity by monetizing equity compensation. Trading Plans, however, have come under increased scrutiny as courts, commentators and government officials have expressed concern that Trading Plans may allow insiders to take advantage of the Rule 10b5-1(c) affirmative defense even though a trade may have been made on the basis of material nonpublic information. The proposed amendments are primarily intended to reduce potentially abusive practices that could be associated with Trading Plans.

Highlights of Proposed Amendments

If adopted, the Commission’s proposed amendments will impose the following new conditions on Trading Plans and limitations on the affirmative defense provided by Rule 10b5-1(c):

• Cooling-off Periods.
  
  
  • a 120-day cooling-off period between the date a Trading Plan is adopted or modified (including canceling a trade) by a director or Section 16 officer and the date that trading can commence;
    
    
  • a 30-day cooling-off period between the date a Trading Plan is adopted or modified (including canceling a trade) by an issuer and the date that trading can commence.
    
    
• Director and Officer Certifications. Directors and Section 16 officers who adopt a Trading Plan would be required to promptly furnish to the issuer, and retain for 10 years, a written certification that they are not aware of material nonpublic information about the issuer or its securities and that they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Exchange Act Section 10(b) and Rule 10b-5.
  
  
• Overlapping Trading Plans. The affirmative defense would not apply to multiple overlapping Trading Plans for open market trades in the same class of securities. However, this limitation would not apply to transactions in which a person acquires securities directly from the issuer, such as participation in employee stock ownership plans or dividend reinvestment plans.
  
  
• Single-Trade Trading Plans. For Trading Plans designed to execute a single trade, the affirmative defense protections would be limited to one Trading Plan per 12-month period.

If adopted, the Commission’s proposed amendments will also require enhanced disclosure regarding trading arrangements, insider trading policies and procedures and options grants, including:

• Quarterly Reporting. Issuers would be required to disclose on a quarterly basis whether the issuer or any of its directors or Section 16 officers adopted or terminated a Trading Plan or other trading arrangement and the material terms of any such plan or arrangement.

• Section 16 Reports. Directors and Section 16 officers would be required to check a box on Forms 4 and 5 to indicate if a reported transaction was made pursuant to a Trading Plan.
  
  
• Policies and Procedures. Issuers would be required to disclose in their annual report any insider trading policies and procedures adopted by the issuer.
  
  
• Equity Compensation Awards. Issuers would be required to disclose in their annual report any grants of equity compensation awards, including tabular disclosure of grants made within 14 days of the release of material nonpublic information and the market price of the underlying securities on the trading day before and after the release of that information.
  
  
• Gifts of Securities. Directors and Section 16 officers would be required to report on Form 4 within two business days any gifts of securities, which previously could be reported on a delayed basis using Form 5.

The proposed amendments do not incorporate all of the recommendations of the ICA and Commission Chair Gary Gensler. For example, Chair Gensler’s recommendation to impose limitations on how and when a single Trading Plan can be canceled, such as canceling Trading Plans once any material nonpublic information is learned, is absent from the proposed amendments. Instead, the proposed amendments would impose a cooling-off period after the cancellation and restrict cancellation if overlapping trades are involved. Also, the ICA recommended disclosure on Form 8-K of the adoption, modification or cancellation of Rule 10b5-1 plans; however, the proposed amendments only require such disclosure on Form 10-Q and Form 10-K with respect to the quarterly period.

Public Comment Period

The Commission will accept comments on the issues raised in the Proposing Release for 45 days after the release is published in the Federal Register.

If you have questions regarding the matters contained in this publication, please contact one of the lawyers listed below or consult your regular Baker Botts contact.

ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.