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On December 14, 2022, the SEC adopted <a href="https://www.sec.gov/rules/final/2022/33-11138.pdf" target="_blank" rel="noreferrer noopener">final rules</a> relating to Rule 10b5-1 insider stock trading plans, company insider trading policies and procedures, and certain equity grants. While the final rules are similar in many respects to the initial proposals announced in December 2021, the SEC made several meaningful changes from the proposals.

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The final rules will be effective 60 days after publication in the Federal Register. In addition, the SEC adopted the following transition periods for the new SEC disclosures and Section 16 reporting changes: &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

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Rule 10b5-1 is a safe harbor established to allow company insiders to trade shares during trading blackouts pursuant to a written plan, binding contract or instruction to another person (generally referred to collectively as a “plan”), where such plan was adopted while the insider was not in possession of material nonpublic information.

The final rules resulted in a number of amendments to Rule 10b5-1, including additional conditions to the availability of the defense, as described further below. In a change from the initial proposal, at this time, the amendments to Rule 10b5-1 stock trading plans described below do not apply to the company stock repurchase programs structured under Rule 10b5-1, with the exception of the good faith condition. These amendments also will not affect the affirmative defense available under an existing plan entered into by an insider prior to the effective date of the new rules (except, in certain cases, to the extent the plan is modified after the effective date).&nbsp;&nbsp;&nbsp;

The amendments also impose new disclosure requirements regarding Rule 10b5-1 and other trading arrangements by directors and officers, insider trading policies and procedures, and option grants. <a>Many of these new disclosures will need to be tagged in iXBRL.</a>

Director and Officer Trading Arrangements

Companies will be required to provide quarterly disclosures regarding the adoption, termination or modification (which counts as both a termination and an adoption), and certain material terms of, any Rule 10b5-1 or certain other trading arrangements by directors and officers, pursuant to new Item 408(a) of Regulation S-K. Material terms include (i) the name and title of the director or officer, (ii) date of adoption, modification or termination, and the duration, of the trading arrangement, and (iii) the aggregate number of securities to be sold or purchased. (Unlike in the initial proposal, pricing information is not required.)

In addition, companies will be required to indicate whether the trading arrangement is pursuant to Rule 10b5-1 or is a non-Rule 10b5-1 trading arrangement. Non-Rule 10b5-1 trading arrangements are other pre-planned trading contracts, instructions, or plans, as defined in the rule.

Disclosures will need to be provided in quarterly reports on Form 10-Q (under Item 5. Other Information) and annual reports on Form 10-K (under Item 9B. Other Information). Foreign private issuers will not be required to provide these disclosures.

As a result of concerns regarding “spring-loaded” options (i.e., option grants timed to occur immediately before the release of positive material nonpublic information), companies will be required to provide the following information with respect to grants of options, SARs and other option-like instruments (collectively referred to as “options” in this section):

Number of securities underlying the award

Exercise price of the award ($/Sh)

Grant date fair value of the award

Percentage change in the closing market price of the securities underlying the award between the trading day ending immediately prior to the disclosure of material nonpublic information and the trading day beginning immediately following the disclosure of material nonpublic information

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1. Smaller reporting companies and emerging growth companies are only required to include the named executive officers as provided under Item 402(l).&nbsp;&nbsp;

These disclosures will be required in annual reports on Form 10-K (which can be incorporated by reference from the proxy statement) and proxy statements, pursuant to new section (x) of Item 402 of Regulation S-K.&nbsp;

<a>Beneficial ownership reports on Forms 4 and Forms 5 will include a mandatory check box that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c); if checked, the date of adoption of the plan will need to be disclosed under “Explanation of Responses.”</a>

In addition, dispositions by gift will be required to be reported on Form 4 within two business days (rather than being permitted to be included on a Form 5 following the year-end). Acquisitions by gift may still be reported on Form 5. The Rule 10b5-1 affirmative defense is available for gifts; in the release, the SEC noted that insiders may enter into a binding arrangement instructing their attorney or tax advisor to gift shares to a charitable organization, with the amount of shares gifted determined according to a traditional algorithm or formula, or instead according to some tax objective, such as the amount of shares that would maximize the individual’s annual charitable contribution deduction.

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

https://admin.thompsonhine.com/wp-content/uploads/2022/12/ESG-Collaborative-Update-Rule-10b5-1-Plans-and-Insider-Trading.pdf

SEC Issues Final Rules on Rule 10b5-1 Insider Stock Trading Plans and Insider Trading Policies and Procedures

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