SEC Proposes Significant Amendments to Insider Trading Regulations, Additional Requirements for Rule 10b5-1 Plans, and Enhancements to Disclosure Rules

Securities and Exchange Commission Chair Gary Gensler warned us back in June this was coming. On December 15, 2021, the Commission proposed amendments to Rule 10b5-1 under the Securities Exchange Act of 1934. The amendments follow September 2021 recommendations from the Commission’s Investment Advisory Committee related to Rule 10b5-1 plan reform we previewed in the third quarter.

In the proposing release the Commission describes several rule and form amendments to address “potentially abusive practices associated with Rule 10b5-1 trading arrangements, grants of options and other equity instruments with similar features and the gifting of securities.” Specifically, the proposals would:

  • Require a Rule 10b5-1 trading plan entered into by officers or directors to include a 120-day mandatory cooling-off period before any trading can commence under the plan after its adoption (including adoption of a modified trading arrangement);
  • Require a Rule 10b5-1 trading plan entered into by issuers to include a 30-day mandatory cooling-off period before any trading can commence under the plan after its adoption (including adoption of a modified trading arrangement);
  • Require officers and directors to personally certify that they are not aware of material nonpublic information about the issuer or the security when they adopt a Rule 10b5-1 trading plan;
  • Enhance existing corporate disclosures and require new quarterly disclosure regarding the adoption and termination of Rule 10b5‑1 trading plans of directors, officers, and issuers, and the terms of such trading arrangements, and require that the disclosure be reported using a structured data language (specifically, Inline eXtensible Business Reporting Language (“Inline XBRL”));
  • Provide that the affirmative defense under Rule 10b5-1 does not apply to multiple overlapping Rule 10b5‑1 trading arrangements for open market trades in the same class of securities. In other words, Rule 10b5-1’s protections would no longer apply when multiple trading plans are in play;
  • Limit the availability of the affirmative defense under Rule 10b5-1 for a single-trade plan to one single-trade plan during any consecutive 12-month period;
  • Require an issuer to disclose in its Form 10-K whether or not (and if not, why not) the issuer has adopted insider trading policies and procedures that govern the purchase, sale, or other disposition of the registrant’s securities by directors, officers, and employees that are reasonably designed to promote compliance with insider trading laws, rules, and regulations. If the issuer has adopted such policies and procedures, the issuer would be required to disclose such policies. Such disclosures would be subject to the principal executive and principal financial officer certifications required by Section 302 of the Sarbanes-Oxley Act, and required to be tagged using Inline XBRL;
  • Require new disclosure regarding grants of equity compensation awards such as stock options and stock appreciation rights close in time (14 days before or after) with respect to the issuer’s disclosure of material nonpublic information (including earnings releases and other major announcements) and require that the quantitative disclosure be reported using Inline XBRL; and
  • Require prompt disclosure of dispositions by gifts of securities by insiders on Form 4 within two business days after such a gift is made and identification of transactions made pursuant to a Rule 10b5-1 trading plan.

In a separate release also published on December 15, 2021, the Commission proposed amendments to “modernize and improve” disclosure about repurchases of an issuer’s equity securities registered under Section 12 of the Exchange Act. These proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase.

  • The Form SR would be required to be furnished to the Commission one business day after execution of an issuer’s share repurchase order.
  • The proposed amendments also would enhance the existing periodic disclosure requirements about these purchases, including additional detail regarding the structure of the issuer’s repurchase program.

Issuers currently are not required to, and typically do not, disclose the specific dates on which they will execute trades pursuant to an announced repurchase plan or program. Investors and other market participants normally do not become aware of an issuer’s actual share repurchase-related trading activity until they are reported in an issuer’s periodic reports, long after the trades have been executed.

We expect final rules to be adopted in the first half of 2022.

Should you have any questions or need assistance, please contact us.

James C. Kennedy
513.579.6599
jkennedy@kmklaw.com 

F. Mark Reuter
513.579.6469
freuter@kmklaw.com

Allison A. Westfall
513.579.6987
awestfall@kmklaw.com

Christopher S. Brinkman
513.579.6953
cbrinkman@kmklaw.com 

Michael W. Goldman
513.579.6961
mgoldman@kmklaw.com

KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.

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