SEC puts spotlight on insider trading with new disclosure requirements

10 January 2023 | Americas | Articles

Following the publication of its Strategy Plan for fiscal years 2022 through 2026, the SEC has adopted amendments to Rule 10b5-1 in the form of new disclosure requirements to enhance investor protections against insider trading. The rules will become effective on February 27, 2023.

What is Rule 10b5-1, and why is it being amended?

According to SEC Chair Gary Gensler, Exchange Act Rule 10b5-1 was established to provide “affirmative defences for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith — before becoming aware of material non-public information”. In other words, the SEC adopted these rules with the goal to significantly reduce opportunities for corporate insiders to misuse Rule 10b5-1 to trade on the basis of material non-public information (MNPI). He adds: “Over the past two decades, though, we’ve 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 non-public information.”  Chair Gensler’s proposed amendments are designed to provide more transparency into trading by corporate insiders and reduce abuse of the 10b5-1 program.

What this means for advisers

The main goal of the new amendments is to add greater transparency around 10b5-1 Plans and insider trading policies by adding disclosure requirements. Below is a summary of the requirements:

Applying a good faith condition, requiring those entering into 10b5-1 Plans to act in good faith with respect to the plan.

New requirements for cooling-off periods for persons other than issuers. Under the amended Rule, directors or officers who adopts or modifies a Rule 10b5-1 plan cannot rely on the Rule’s affirmative defense unless the plan provides that trading under the plan will not begin until:

1. 90 days after the adoption of the Rule 10b5-1 plan, and
2. Two business days following the disclosure of the issuers’ financial results in a Form 10-Q or Form 10-K for the fiscal quarter that the plan was adopted. For foreign private issuers, these are Form 10-F and Form 6-K.

Directors and Officers now being required to certify that they are not aware of MNPI about the issuer or its securities, and that they adopted the plan in good faith and not as a part of a scheme to evade prohibitions of Rule 10b-5.

Restricting multiple overlapping trading plans, limiting the reliance on the affirmative defense for a single-trade plan to one single-trade plan per 12-month period. In addition, the affirmative defense will only be available if the person had not adopted another single-trade plan during the previous 12-month period that also qualified for the affirmative defense.

New quarterly and annual disclosure requirements where registrants must disclose:

1. Quarterly: whether they have adopted or terminated a written plan or trading arrangement and indicate whether the arrangement is a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement.
2. Annually: whether they have adopted insider trading policies and procedures governing the purchase, sale and other arrangements of their securities by directors, officers and employees.
3. The issuers must also disclose the adoption of policies and practices around the timing of options grants, and the release of material non-public information. The rules will require that issuers report on a new table any option awards, applying a very specific reporting timeline for registrants.
4. There are additional reporting requirements on trading regarding Forms 4 and 5. You will have to indicate by check mark whether a transaction was made pursuant to the Rule 10b5-1 plan that is intended to satisfy the affirmative defense. In addition, you will also have to report arrangements of bona fide gifts of equity securities.

It’s important to note that the amendments to Rule 10b1-5 applies to domestic (US) issuers and foreign private issuers differently. Foreign private issuers will be subject to the new rules regarding insider trading policies, but not to the disclosure on 10b5-1 plans or option granting practices.

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