On August 25, 2023, the Staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission issued new guidance on the amendments to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the trading plan disclosure requirements contained in Item 408(a) of Regulation S-K, which were discussed in our prior client update here. The guidance is included in three new Exchange Act Rules Compliance & Disclosure Interpretations (“C&DIs”) available here and two new Regulation S-K C&DIs available here.

Background

The new Exchange Act Rules C&DIs relate to the following requirements under the Rule 10b5-1 amendments:

• the required cooling-off period for directors and Section 16 officers, before trading under a trading plan structured to take advantage of the affirmative defense provided by Rule 10b5-1(c) of the Exchange Act (“Trading Plan”) can commence, of the later of (1) 90 days after the adoption of the Trading Plan or (2) two business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the fiscal quarter in which the Trading Plan was adopted (but not to exceed 120 days);
  
  
• the prohibition on persons other than issuers having multiple overlapping Trading Plans for purchases or sales of the issuer’s securities on the open market, subject to certain exceptions; and
  
  
• the requirement for Section 16 filers to indicate on Form 4 by means of a new check box if a reported transaction was made pursuant to a Trading Plan.

The new Regulation S-K C&DIs relate to the requirement under Item 408(a) of Regulation S-K to disclose on a quarterly basis whether any director or Section 16 officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement.

Key Takeaways

The new Exchange Act Rules C&DIs clarify that:

• For purposes of calculating two business days with respect to the required cooling-off period, the filing date of the relevant Form 10-Q or Form 10-K does not count as the first business day.Instead, the first business day is the business day immediately following the filing date of the relevant Form 10-Q or Form 10-K.
  
  
• If a participant relies on Rule 10b5-1 to participate in a 401(k) plan, the Rule 10b5-1 affirmative defense would also be available to the participant for a concurrent plan for purchases or sales on the open market. Even though participants elect how much to contribute to their individual 401(k) accounts, an open-market transaction conducted at the direction of the plan administrator to match a contribution by the participant with employer stock would not be an overlapping plan.
  
  
• The new Form 4 check box does not apply to transactions made pursuant to Trading Plans adopted before the effective date of the Rule 10b5-1 amendments (February 27, 2023). Rather, it applies to transactions made pursuant to trading plans intended to satisfy the affirmative defense conditions of the amended Rule 10b5-1(c).

The new Regulation S-K C&DIs clarify that:

• Disclosure of the termination of a plan under Item 408(a) is not required for a plan that expires or completes (e.g., by its terms and without any action by an individual).
  
  
• Disclosure under Item 408(a) is required for any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement covering securities in which a director or Section 16 officer has a direct or indirect pecuniary interest that is reportable under Section 16 that such person has adopted or terminated.

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The new C&DIs are shown below:

Exchange Act Rules

Question 120.29

Question: Under Rule 10b5-1(c)(1)(ii)(B)(1), the required cooling-off period for directors and officers subject to Exchange Act Section 16 reporting is the later of 90 days after the adoption of the contract, instruction, or plan or “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted.” Does the filing date count as the first business day for the purposes of the Rule 10b5-1(c)(1)(ii)(B)(1) required cooling-off period?

Answer: No. For purposes of the cooling-off period specified in Rule 10b5-1(c)(1)(ii)(B)(1), the date of disclosure of the issuer’s financial results is the filing date of the relevant Form 10-Q or Form 10-K, and the first business day would be the next business day that follows the filing date. To determine the filing date of the relevant form, refer to Rule 13(a)(2) of Regulation S-T. For example, if the relevant form is filed on a Monday, trading may commence under the contract, instruction, or plan on Thursday (assuming no intervening Federal holidays). In addition, whether a form is filed before or after trading opens on a given day has no bearing on the calculation. [August 25, 2023]

Question 120.30

Question: Under a 401(k) plan, an issuer advances cash to the plan administrator who purchases stock in the open market to make matching grants of the issuer’s common stock to plan participants. If a participant relies on Rule 10b5-1 to participate in the 401(k) plan, would the Rule 10b5-1 affirmative defense be available to the participant for a concurrent plan for purchases or sales on the open market?

Answer: Yes. Even though participants elect how much to contribute to their individual 401(k) accounts, an open-market transaction conducted at the direction of the plan administrator, and not at the direction of the plan participant, to match a contribution by the participant with employer stock would not be an overlapping plan for purposes of Rule 10b5-1(c)(1)(ii)(D) that would disqualify a plan participant’s reliance on Rule 10b5-1 for a concurrent open market trading plan. [August 25, 2023]

Question 120.31

Question: Does the Rule 10b5-1(c) check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan apply to trading plans that were adopted prior to the effective date of the amendments to Rule 10b5-1?

Answer: No. The Rule 10b5-1 check box on Form 4 applies to transactions that are made pursuant to a contract, instruction, or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of amended Rule 10b5-1(c). See Release No. 33-11138 (Dec. 14, 2022). [August 25, 2023]

Regulation S-K

Question 133A.01

Question: Under Item 408(a)(1) of Regulation S-K, does the requirement to disclose plan terminations require disclosure of a plan that ends due to its expiration or completion (e.g., the plan ends by its terms and without any action by an individual)?

Answer: Disclosure regarding termination of a plan is not required for a plan that ends due to its expiration or completion. [August 25, 2023]

Question 133A.02

Question: Item 408(a) of Regulation S-K requires disclosure of whether “any director or officer (as defined in § 240.16a–1(f) of this chapter)” adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter. Does this disclosure requirement apply to any such trading arrangement covering securities in which a director or officer has a pecuniary interest?

Answer: Item 408(a) applies to any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate. [August 25, 2023]

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

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