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Proposed Rule2022-01140

Rule 10b5-1 and Insider Trading

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Published

February 15, 2022

Issuing agencies

Securities and Exchange Commission

Abstract

The Securities and Exchange Commission ("Commission") is proposing amendments to its rules under the Securities Exchange Act of 1934. The proposed amendments would add new conditions to the availability of an affirmative defense under an Exchange Act rule that are designed to address concerns about abuse of the rule to opportunistically trade securities on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets. The Commission is also proposing new disclosure requirements regarding the insider trading policies of issuers, and the adoption and termination (including modification) of certain trading arrangements by directors, officers, and issuers. In addition, the Commission is proposing amendments to the disclosure requirements for executive and director compensation regarding the timing of equity compensation awards made in close proximity in time to the issuer's disclosure of material nonpublic information. Finally, the Commission is proposing amendments to Forms 4 and 5 to identify transactions made pursuant to certain trading arrangements, and to disclose all gifts of securities on Form 4.

Full Text

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<title>Federal Register, Volume 87 Issue 31 (Tuesday, February 15, 2022)</title>
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[Federal Register Volume 87, Number 31 (Tuesday, February 15, 2022)]
[Proposed Rules]
[Pages 8686-8731]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-01140]

[[Page 8685]]

Vol. 87

Tuesday,

No. 31

February 15, 2022

Part III

Securities and Exchange Commission

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17 CFR Parts 229, 232 240, et al.

Rule 10b5-1 and Insider Trading; Proposed Rule

Federal Register / Vol. 87 , No. 31 / Tuesday, February 15, 2022 /
Proposed Rules

[[Page 8686]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 232, 240, and 249

[Release No. 33-11013; 34-93782; File No. S7-20-21]
RIN 3235-AM86

Rule 10b5-1 and Insider Trading

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing amendments to its rules under the Securities Exchange Act of
1934. The proposed amendments would add new conditions to the
availability of an affirmative defense under an Exchange Act rule that
are designed to address concerns about abuse of the rule to
opportunistically trade securities on the basis of material nonpublic
information in ways that harm investors and undermine the integrity of
the securities markets. The Commission is also proposing new disclosure
requirements regarding the insider trading policies of issuers, and the
adoption and termination (including modification) of certain trading
arrangements by directors, officers, and issuers. In addition, the
Commission is proposing amendments to the disclosure requirements for
executive and director compensation regarding the timing of equity
compensation awards made in close proximity in time to the issuer's
disclosure of material nonpublic information. Finally, the Commission
is proposing amendments to Forms 4 and 5 to identify transactions made
pursuant to certain trading arrangements, and to disclose all gifts of
securities on Form 4.

DATES: Comments should be received on or before April 1, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

<bullet> Use our internet comment form (<a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#4f3d3a232a622c2022222a213b3c0f3c2a2c61282039"><span class="__cf_email__" data-cfemail="4f3d3a232a622c2022222a213b3c0f3c2a2c61282039">[email&#160;protected]</span></a>. Please include
File Number S7-20-21 on the subject line.

Paper Comments

<bullet> Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-20-21. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method of submission. We will post all comments on our website (<a href="https://www.sec.gov/rules/proposed.shtml">https://www.sec.gov/rules/proposed.shtml</a>). Comments also are available for
website viewing and printing in our Public Reference Room, 100 F Street
NE, Washington, DC 20549, on official business days between the hours
of 10:00 a.m. and 3:00 p.m. Operating conditions may limit access to
the Commission's public reference room. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
publicly available.
We or the staff may add studies, memoranda, or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
<a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Sean Harrison, Special Counsel, or
Felicia Kung, Office Chief, Office of Rulemaking, at (202) 551-3430,
Division of Corporation Finance, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to:

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Commission reference CFR citation (17 CFR)
----------------------------------------------------------------------------------------------------------------
Regulation S-K [17 CFR 229.10 through 229.1305]:
Item 402.............................................. Sec. 229.402.
Item 408.............................................. Sec. 229.408.
Regulation S-T [17 CFR 232.11 through 232.903]:
Item 405.............................................. Sec. 232.405.
Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C.
78a et seq.]:
Rule 10b5-1........................................... Sec. 240.10b5-1.
Schedule 14A.......................................... Sec. 240.14a-101.
Schedule 14C.......................................... Sec. 240.14c-101.
Rule 16a-3............................................ Sec. 240.16a-3.
Form 4................................................ Sec. 249.104.
Form 5................................................ Sec. 249.105.
Form 20-F............................................. Sec. 249.220f.
Form 10-Q............................................. Sec. 249.308a.
Form 10-K............................................. Sec. 249.310.
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Table of Contents

I. Introduction
II. Discussion of the Proposed Amendments
A. Amendments to Rule 10b5-1
1. Cooling-Off Period
2. Director and Officer Certifications
3. Restricting Multiple Overlapping Rule 10b5-1 Trading
Arrangements and Single-Trade Arrangements
4. Requiring That Trading Arrangements Be Operated in Good Faith
B. Additional Disclosures Regarding Rule 10b5-1 Trading
Arrangements
1. Quarterly Reporting of Rule 10b5-1(c) and Non-Rule 10b5-1(c)
Trading Arrangements
2. Disclosure of Insider Trading Policies and Procedures
3. Structured Data Requirements
4. Identification of Rule 10b5-1(c) and Non-Rule 10b5-1(c)(1)
Transactions on Forms 4 and 5
C. Disclosure Regarding the Timing of Option Grants and Similar
Equity Instruments Shortly Before or After the Release of Material
Nonpublic Information
D. Reporting of Gifts on Form 4
III. General Request for Comment
IV. Economic Analysis
A. Broad Economic Considerations
B. Amendments to Rule 10b5-1(c)(1)
1. Baseline and Affected Parties
2. Benefits
3. Costs
4. Effects on Efficiency, Competition, and Capital Formation

[[Page 8687]]

5. Reasonable Alternatives
6. Request for Comment
C. Disclosure of Trading Arrangements in New Item 408 of
Regulation S-K and Mandatory Rule 10b5-1 Checkbox in Amended Forms 4
and 5
1. Baseline and Affected Parties
2. Benefits
3. Costs
4. Effects on Efficiency, Competition, and Capital Formation
5. Reasonable Alternatives
6. Request for Comment
D. Additional Disclosure of the Timing of Option Grants and
Related Company Policies and Practices (Amendments to Item 402 of
Regulation S-K)
1. Baseline and Affected Parties
2. Benefits
3. Costs
4. Effects on Efficiency, Competition, and Capital Formation
5. Reasonable Alternatives
6. Request for Comment
E. Additional Disclosure of Insider Gifts of Stock
1. Baseline and Affected Parties
2. Benefits
3. Costs
4. Effects on Efficiency, Competition, and Capital Formation
5. Reasonable Alternatives
6. Request for Comment
V. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Estimates of the Proposed Amendments' Effects on the
Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates
VI. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Rules
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Request for Comments
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority

I. Introduction

Congress enacted the Federal securities laws to promote fair and
transparent securities markets, ``avoid [ ] frauds,'' and ``substitute
a philosophy of full disclosure for the philosophy of caveat emptor and
thus to achieve a high standard of business ethics in the securities
industry.'' \1\ The securities laws' antifraud provisions that
proscribe insider trading play an essential role in maintaining the
fairness and integrity of our markets. We have long recognized that
insider trading and the fraudulent use of material nonpublic
information by corporate insiders \2\ not only harm individual
investors but also undermine the foundations of our markets by eroding
investor confidence.\3\ Congress has recognized the harmful impact of
insider trading on multiple occasions and has authorized enhanced civil
penalties specifically for insider trading.\4\
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\1\ Affiliated Ute Citizens of Utah v. United States, 406 U.S.
128, 151 (1972); accord Lorenzo v. SEC, 139 S. Ct. 1094, 1103
(2019).
\2\ The term ``corporate insider'' as used in this release,
refers to officers and directors of an issuer.
\3\ See In re Cady, Roberts & Co., 40 SEC. 907, 1961 WL 60638,
at *4 n.15 (1961) (``A significant purpose of the Exchange Act was
to eliminate the idea that use of inside information for personal
advantage was a normal emolument of corporate office.''); see also
United States v. O'Hagan, 521 U.S. 642, 658 (1997) (The insider
trading prohibition is consistent with the ``animating purpose'' of
the Federal securities laws: ``to insure honest securities markets
and thereby promote investor confidence.'').
\4\ See Insider Trading Sanctions Act of 1984, Public Law 98-
376, 98 Stat. 1264; Insider Trading and Securities Fraud Enforcement
Act of 1988, Public Law 100-704, 102 Stat. 4677, codified at Section
21A of the Exchange Act, 15 U.S.C. 78u-1. Congress has enacted other
laws that build on the insider trading prohibition. See, e.g.,
Section 20(d) of the Exchange Act [15 U.S.C. 78t(d)]; Section 20A of
the Exchange Act [15 U.S.C. 78t-1]; STOCK Act, Public Law 112-105,
126 Stat. 291.
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Section 10(b) of the Exchange Act is one of the securities laws'
primary antifraud provisions.\5\ Section 10(b) makes it unlawful to use
or employ, in connection with the purchase or sale of any security,
``any manipulative or deceptive device or contrivance in contravention
of such rules and regulations as the Commission may prescribe.'' \6\
The ``manipulative or deceptive device[s] or contrivance[s]''
prohibited by Section 10(b) and 17 CFR 240.10b-5 (Rule 10b-5) (adopted
thereunder) include the purchase or sale of a security of any issuer on
the basis of material nonpublic information about that security or its
issuer, in breach of a duty owed directly, indirectly, or derivatively,
to the issuer of that security or the shareholders of that issuer, or
to any person who is the source of the material nonpublic
information.\7\
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\5\ 15 U.S.C. 78j(b).
\6\ Rule 10b-5, adopted pursuant to Section 10(b), prohibits the
use of ``any device, scheme, or artifice to defraud''; the making of
``any untrue statement of a material fact'' or the ``omi[ssion]'' of
``a material fact necessary in order to make the statements made, in
the light of the circumstances under which they were made, not
misleading''; or ``any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person.''
\7\ See Salman v. United States, 137 S.Ct. 420, 425 n.2 (2016)
(an insider who trades in the securities of his corporation on the
basis of material nonpublic information ``breaches a duty to, and
takes advantage of, the shareholders of his corporation''); O'Hagan,
521 U.S. at 651-53; Chiarella v. United States, 445 U.S. 222, 228-29
(1980); see also 15 U.S.C. 78u-1(a)(1); 17 CFR 240.10b5-2 (non-
exclusive definition of circumstances in which a person has the
requisite duty for purposes of the ``misappropriation'' theory of
insider trading). Liability for insider trading under Section 10(b)
requires ``scienter,'' i.e., ``an intent on the part of the
defendant to deceive, manipulate or defraud.'' Aaron v. SEC, 446
U.S. 680, 686 & n.5, 689-95 (1980); see also Selective Disclosure
and Insider Trading, Release No. 33-7881 (Aug. 15, 2000) [65 FR
51716 at 51727 (Aug. 24, 2000)] (``2000 Adopting Release'').
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The Commission adopted Rule 10b5-1 in August 2000 to provide more
clarity on the meaning of ``manipulative or deceptive device[s] or
contrivance[s]'' prohibited by Exchange Act Section 10(b) and Rule 10b-
5 with respect to trading on the basis of material nonpublic
information.\8\ At the time, Federal appellate courts diverged on the
issue of what, if any, connection must be shown between a trader's
possession of material nonpublic information and his or her trading to
establish liability under Rule 10b-5. Rule 10b5-1 addressed this issue
by providing that a purchase or sale of an issuer's security is on the
basis of material nonpublic information about that security or issuer
for purposes of Section 10(b) if the person making the purchase or sale
was aware of material nonpublic information when the person made the
purchase or sale.\9\ In addition, Rule 10b5-1(c) established an
affirmative defense to Rule 10b-5 liability for insider trading in
circumstances where it is apparent that the trading was not made on the
basis of material nonpublic information because the trade was pursuant
to a binding contract, an instruction to another person to execute the
trade for the instructing person's account, or a written plan
(collectively or individually a ``trading arrangement'') adopted when
the trader was not aware of material nonpublic information.\10\ Rule
10b5-1 also provides a separate affirmative defense

[[Page 8688]]

designed solely for non-natural persons that trade.\11\
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\8\ See 2000 Adopting Release supra note 7.
\9\ A person is aware of material nonpublic information if they
know, consciously avoid knowing, or are reckless in not knowing that
the information is material and nonpublic. See SEC v. Obus, 693 F.3d
276, 286-88, 293 (2d Cir. 2012); United States v. Gansman, 657 F.3d
85, 91 n.7, 94 (2d Cir. 2011). Rule 10b5-1 and its awareness
standard is ``entitled to deference.'' United States v. Royer, 549
F.3d 886, 899 (2d Cir. 2008) (applying Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984)), cert.
denied, 558 U.S. 934, and 558 U.S. 935 (2009); see also United
States v. Rajaratnam, 719 F.3d 139, 157-61 (2d Cir. 2013), cert.
denied, 134 S. Ct. 2820 (2014). The decision in Fried v. Stiefel
Labs., Inc., 814 F.3d 1288, 1295 (11th Cir. 2016), erroneously
suggests that a person must ``use'' the inside information to
purchase or sell securities, but the court did not address Rule
10b5-1 in that private action. The proposed rule would not alter the
``awareness'' standard.
\10\ Rule 10b5-1 does not modify or address any other aspect of
insider trading law. Nor does Rule 10b5-1 provide an affirmative
defense for other securities fraud claims, such as a claim under
Rule 10b-5 for an ``untrue statement of a material fact.'' 17 CFR
240.10b-5(b).
\11\ See Rule 10b5-1(c)(2) [17 CFR 240.10b5-1(c)(2)]. This
affirmative defense is available to entities that demonstrate that
the individual making the investment decision on behalf of the
entity was not aware of material nonpublic information; and the
entity had implemented reasonable policies and procedures to prevent
insider trading.
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Since the adoption of Rule 10b5-1, courts,\12\ commentators \13\
and members of Congress \14\ have expressed concern that the
affirmative defense under Rule 10b5-1(c)(1)(i) has allowed traders to
take advantage of the liability protections provided by the rule to
opportunistically trade securities on the basis of material nonpublic
information. Furthermore, some academic studies of Rule 10b5-1 trading
arrangements have shown that corporate insiders trading pursuant to
Rule 10b5-1 consistently outperform trading of executives and directors
not conducted under a Rule 10b5-1 trading arrangement.\15\ Practices
that have raised concern include corporate insiders using multiple
overlapping plans to selectively cancel individual trades on the basis
of material nonpublic information, or commencing trades soon after the
adoption of a new plan or the modification of an existing plan.\16\ In
addition, concerns have been raised about issuers abusing Rule 10b5-
1(c)(1) plans to conduct share repurchases to boost the price of the
issuer's stock before sales by corporate insiders.\17\ Recently, the
Commission's Investor Advisory Committee (``IAC'') \18\ recommended
that we consider revising Rule 10b5-1 to address apparent loopholes in
the rule that allow corporate insiders to unfairly exploit
informational asymmetries.\19\
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\12\ District courts in private securities law actions have
``acknowledge[d] the possibility that a clever insider might
`maximize' their gain from knowledge of an impending [stock] price
drop over an extended amount of time, and seek to disguise their
conduct with a 10b5-1 plan.'' In re Immucor Inc. Sec. Litig., 2006
WL 3000133, at *18 n.8 (N.D. Ga. Oct. 4, 2006); accord Nguyen v. New
Link Genetics Corp., 297 F. Supp. 3d 472, 494-96 (S.D.N.Y. 2018);
Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 200
(S.D.N.Y. 2010); Malin v. XL Cap. Ltd., 499 F. Supp. 2d 117, 156 (D.
Conn. 2007), aff'd, 312 F. App'x 400 (2d Cir. 2009).
\13\ In December 2020, the Commission proposed to amend Forms 4
and 5 to add a checkbox to permit filers to indicate that the
reported transaction satisfied Rule 10b5-1. See Rule 144 Holding
Period and Form 144 Filings, Release No. 33-10991 (Dec. 22, 2020)
[85 FR 79936]. The Commission received several comment letters in
response expressing concern about potential abuse of Rule 10b5-1.
See, e.g., letter from David Larcker et al. (dated Mar. 10, 2021) at
<a href="https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf">https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf</a>;
letter from Council of Institutional Investors (``CII'') (dated Apr.
22, 2021) at <a href="https://www.sec.gov/comments/s7-14-20/s71420-8709408-236962.pdf">https://www.sec.gov/comments/s7-14-20/s71420-8709408-236962.pdf</a>; letter from CII (dated Mar. 18, 2021) at <a href="https://www.sec.gov/comments/s7-24-20/s72420-8519687-230183.pdf">https://www.sec.gov/comments/s7-24-20/s72420-8519687-230183.pdf</a>. In response
to the publication of its semiannual regulatory agenda, the
Commission also received a letter requesting that a rulemaking
project be initiated to address potential abuses of Rule 10b5-1. See
letter from CII (dated Dec. 13, 2018) at <a href="https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf">https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf</a>.
\14\ See letter from Senator Elizabeth Warren et al. (Feb. 10,
2021) at <a href="https://www.warren.senate.gov/imo/media/doc/02.10.2021%20Letter%20from%20Senators%20Warren,%20Brown,%20and%20Van%20Hollen%20to%20Acting%20Chair%20Lee.pdf">https://www.warren.senate.gov/imo/media/doc/02.10.2021%20Letter%20from%20Senators%20Warren,%20Brown,%20and%20Van%20Hollen%20to%20Acting%20Chair%20Lee.pdf</a>.
\15\ See, e.g., Alan D. Jagolinzer, SEC Rule 10b5-1 and
Insiders' Strategic Trade, 55 Mgmt. Sci. 224 (2009); M. Todd
Henderson et al., Hiding in Plain Sight: Can Disclosure Enhance
Insiders' Trade Returns, 103 Geo. L.J. 1275 (2015); Taylan Mavruk et
al., Do SEC's 10b5-1 Safe Harbor Rules Need to be Rewritten?, 2016
Colum. Bus. L. Rev., 133 (2016); Artur Hugon and Yen-Jung Lee, SEC
Rule 10b5-1 Plans and Strategic Trade around Earnings Announcements
(2016) at <a href="https://ssrn.com/abstract=2880878">https://ssrn.com/abstract=2880878</a> or <a href="http://dx.doi.org/10.2139/ssrn.2880878">http://dx.doi.org/10.2139/ssrn.2880878</a>.
\16\ See, e.g., John P. Anderson, Anticipating a Sea Change for
Insider Trading Law: From Trading Plan Crisis to Rational Reform,
2015 Utah L. Rev. 339 (2015).; David F. Larcker et al., Gaming the
System: Three ``Red Flags'' of Potential 10b5-1 Abuse, Stanford
Closer Look Series (Jan. 19, 2021) (``Gaming the System'') (noting
from their analysis of a sample of sales transactions made pursuant
to Rule 10b5-1 plans between January 2016 and May 2020 that trades
occurring within 30 days of adoption of a Rule 10b5-1 plan are
approximately 50 percent larger than trades made six or more months
later); see also infra note 112 and accompanying text.
\17\ See Jesse M. Fried, Testimony before the Investor
Protection, Entrepreneurship, and Capital Markets Subcommittee, U.S.
House Committee on Financial Services, (Oct. 17, 2019) at <a href="https://ssrn.com/abstract=3474175">https://ssrn.com/abstract=3474175</a> (``Fried Testimony'').
\18\ The IAC was established in April 2012 pursuant to Section
911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
[Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (2010)] to advise
and make recommendations to the Commission on regulatory priorities,
the regulation of securities products, trading strategies, fee
structures, the effectiveness of disclosure, initiatives to protect
investor interests and to promote investor confidence and the
integrity of the securities marketplace.
\19\ See Recommendations of the Investor Advisory Committee
Regarding Rule 10b5-1 Plans (Sept. 9, 2021) (``IAC
Recommendations''), at <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf</a>. The IAC
also held a panel discussion regarding Rule 10b5-1 plans at its June
10, 2021 meeting, at <a href="https://www.sec.gov/video/webcast-archive-player.shtml?document_id=iac061021-2">https://www.sec.gov/video/webcast-archive-player.shtml?document_id=iac061021-2</a>.
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We share the concern about the prevalence of trading practices by
corporate insiders and issuers that suggest the misuse of material
nonpublic information. We also understand that some issuers have
engaged in a practice of granting stock options and other equity awards
with option-like features to executive officers and directors in
coordination with the release of material nonpublic information.\20\ In
addition, there is research indicating that some corporate insiders may
be opportunistically timing gifts of securities while aware of material
nonpublic information relating to such securities.\21\ These practices
can undermine the public's confidence and expectations of honest and
fair capital markets by creating the appearance that some insiders, by
virtue of their positions, do not play by the same rules as everyone
else.
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\20\ See, e.g., William Hughes, Stock Option Spring-loading: An
Examination of Loaded Justifications and New SEC Disclosure Rules,
33 J. Corp. L. 777 (2008); Howland v. Kumar, 2019 Del. Ch. LEXIS
221.
\21\ See, e.g., S. Burcu Avci et al., Manipulative Games of
Gifts by Corporate Executives, 18 U. Pa. J. Bus. L. 1131 (2016);
David Yermack, Deductio ad absurdum: CEOs donating their own stock
to their family foundations, 94 J. Fin. Econ. 107 (2009); S. Burcu
Avci et al., Insider Giving, 71 Duke L.J. (Forthcoming 2021)
electronic copy available at: <a href="https://ssrn.com/abstract=3795537">https://ssrn.com/abstract=3795537</a>.
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We note that similar concerns about misuse of material nonpublic
information have been raised in connection with an issuer's stock
repurchases. In a separate release, we are proposing amendments to
update the disclosure requirements for purchases of equity securities
by an issuer and affiliated purchasers under 17 CFR 229.703 (Item 703
of Regulation S-K).\22\
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\22\ See Share Repurchase Disclosure Modernization, Release No.
34-93783 (Dec. 15, 2021). Item 703 of Regulation S-K requires
disclosure about a registrant's or affiliated purchaser's purchases
of any class of the registrant's equity securities that are
registered under Exchange Act Section 12. Many registrants use Rule
10b5-1 trading arrangements in their repurchase programs.
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In this release, we are proposing 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, our
proposals would:
<bullet> Require a Rule 10b5-1 trading arrangement entered into by
officers or directors to include a 120-day mandatory cooling-off period
before any trading can commence under the trading arrangement after its
adoption (including adoption of a modified trading arrangement); \23\
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\23\ A modification of a Rule 10b5-1(c) trading arrangement,
including cancelling a trade, is equivalent to terminating the prior
trading arrangement and adopting a new Rule 10b5-1 trading
arrangement.
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<bullet> Require a Rule 10b5-1 trading arrangement entered into by
issuers to include a 30-day mandatory cooling-off period before any
trading can commence under the trading arrangement after its adoption
(including adoption of a modified trading arrangement);
<bullet> Require officers and directors to personally certify that
they are not aware of material nonpublic information about the issuer
or the security when

[[Page 8689]]

they adopt a Rule 10b5-1 trading arrangement;
<bullet> Enhance existing corporate disclosures and require new
quarterly disclosure regarding the adoption and termination of Rule
10b5-1 trading arrangements and other trading arrangements 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''));
<bullet> Provide that the affirmative defense under Rule 10b5-
1(c)(1) does not apply to multiple overlapping Rule 10b5-1 trading
arrangements for open market trades in the same class of securities;
<bullet> Limit the availability of the affirmative defense under
Rule 10b5-1(c)(1) for a single-trade plan to one single-trade plan
during any consecutive 12-month period;
<bullet> Require an issuer to disclose in its Form 10-K or Form 20-
F 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,\24\
and required to be tagged using Inline XBRL;
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\24\ 15 U.S.C. 7241. See infra notes 52 and 53 and accompanying
text.
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<bullet> Require new disclosure regarding grants of equity
compensation awards such as stock options and stock appreciation rights
(``SARs'') close in time to the issuer's disclosure of material
nonpublic information (including earnings releases and other major
announcements) and require that the disclosure be reported using Inline
XBRL; and
<bullet> Require prompt disclosure of dispositions by gifts of
securities by insiders on Form 4 within two business days after such a
gift is made.
We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed amendments. When
commenting, it would be most helpful if you include the reasoning
behind your position or recommendation.

II. Discussion of the Proposed Amendments

A. Amendments to Rule 10b5-1 \25\
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\25\ In addition to the proposed revisions to Rule 10b5-1
discussed in this release, due to current Federal Register
formatting requirements, we are also proposing a technical change
that, as indicated, incorporates the Preliminary Note to Rule 10b5-1
into the body of the rule.
---------------------------------------------------------------------------

As noted above, Rule 10b5-1(c)(1) established an affirmative
defense to Rule 10b-5 liability if the trade was made pursuant to a
binding contract, an instruction to another person to execute the trade
for the instructing person's account, or a written plan. A person
asserting a Rule 10b5-1(c)(1) defense must satisfy several conditions.
First, the person must demonstrate that, before becoming aware of
material nonpublic information, they had entered into a binding
contract to purchase or sell the security, provided instructions to
another person to execute the trade for the instructing person's
account, or adopted a written plan for trading the securities.\26\
Second, the person must demonstrate that the applicable contract,
instructions, or plan:
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\26\ See, e.g., SEC v. Mozilo, 2010 WL 3656068, at *20 (C.D.
Cal. Sept. 16, 2010) (``Although [officer's/director's] stock sales
were made pursuant to Rule 10b5-1 trading plans, the SEC has raised
genuine issues of material fact that [he] was aware of material,
nonpublic information at the time he adopted or amended these
trading plans.'').
---------------------------------------------------------------------------

<bullet> Specified the amount of securities to be purchased or
sold, price, and date;
<bullet> Provided a written formula or algorithm, or computer
program, for determining amounts, prices, and dates; or
<bullet> Did not permit the person to exercise any subsequent
influence over how, when, or whether to effect purchases or sales;
provided, in addition, that any other person who exercised such
influence was not aware of the material nonpublic information when
doing so.
Third, the person must demonstrate that the purchase or sale was
pursuant to the prior contract, instruction, or plan. Rule 10b5-1(c)(1)
states that a purchase or sale is not pursuant to a contract,
instruction, or plan if, among other things, the person who entered
into the arrangement altered or deviated from the contract,
instruction, or plan, or entered into or altered a corresponding or
hedging transaction or position with respect to the securities.\27\
Finally, the rule provides that the affirmative defense of a trading
arrangement is only available if the trading arrangement was entered
into ``in good faith and not as part of a plan or scheme to evade the
prohibitions'' of the rule.\28\
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\27\ Rule 10b5-1(c)(1)(i)(C).
\28\ Rule 10b5-1(c)(1)(ii).
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Since the adoption of Rule 10b5-1, the use of trading arrangements
under Rule 10b5-1(c)(1) has become widespread.\29\ Over the years
concerns have arisen that the design of Rule 10b5-1(c)(1) has enabled
corporate insiders to trade on material nonpublic information. Examples
of potentially abusive practices include the use of multiple
overlapping plans with selective cancellation of certain plans or
trades on the basis of material nonpublic information, as well as
initiation or resumption of trading close in time to plan adoption or
modification. Furthermore, multiple studies examining Rule 10b5-1(c)(1)
trading arrangements have identified potentially abusive activity where
trades occur soon after the adoption of the arrangement (e.g.,
commencing trades within the same fiscal quarter as the adoption of the
arrangement), and trading arrangements that are terminated shortly
after adoption.\30\ The amendments that we are proposing to Rule 10b5-
1(c)(1) are intended to reduce these potentially abusive practices
associated with Rule 10b5-1(c)(1) trading arrangements.
---------------------------------------------------------------------------

\29\ According to one survey, directors and executives at more
than half of S&P 500 companies used Rule 10b5-1 trading arrangements
in 2015. See Morgan Stanley, ``Defining the Fine Line: Mitigating
Risk with 10b5-1 Plans'' (2018) at <a href="https://advisor.morganstanley.com/austin.cornish/documents/field/a/au/austin-cornish/Mitigating%20Risk%20with%2010b5-1%20Plans.pdf">https://advisor.morganstanley.com/austin.cornish/documents/field/a/au/austin-cornish/Mitigating%20Risk%20with%2010b5-1%20Plans.pdf</a>. See
also Bonaim[eacute] et al., Payout Policy Trade-Offs, infra note 159
and accompanying text; Skadden Insights: Share Repurchases 4-6 (Mar.
16, 2020) (discussing the use of Rule 10b5-1 plans for issuer share
repurchases) at <a href="https://www.skadden.com/insights/publications/2020/03/share-repurchases">https://www.skadden.com/insights/publications/2020/03/share-repurchases</a>.
\30\ See, e.g., Alan D. Jagolinzer, SEC Rule 10b5-1 and
Insiders' Strategic Trade, Mgmt. Sci. 224 (2009); Gaming the System
supra note 16 (noting that Rule 10b5-1 plans with a short cooling-
off period, or adopted in a given quarter that begin trading before
that quarter's earnings announcement systematically avoid losses and
foreshadow considerable stock declines over the subsequent six
months); and Taylan Mavruk et al., Do SEC's 10b5-1 Safe Harbor Rules
Need to be Rewritten?, Colum. Bus. L. Rev., 133, 165 (2016)
(observing from their study that the first trade pursuant to a Rule
10b5-1 plan showed abnormal profitability and suggesting that
insiders set up Rule 10b5-1 plans when in possession of material
nonpublic information). See also discussion at infra Section IV.A.
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1. Cooling-Off Period
Currently, Rule 10b5-1(c)(1) does not impose any waiting period
between the date the trading arrangement is adopted and the date of the
first transaction to be executed under the trading arrangement. Under
the current rule, a trader can adopt a Rule 10b5-1(c)(1)

[[Page 8690]]

trading arrangement and execute a trade under the arrangement on the
same day. Investors and other commentators have suggested that
requiring a minimum waiting period of several months between the
adoption of a trading arrangement and the date on which trading can
commence would reduce the risk that an insider could benefit from any
material nonpublic information of which they may have been aware at the
time of adopting the trading arrangement.\31\ We propose to amend Rule
10b5-1(c)(1) to add as a condition to the availability of the
affirmative defense (1) a minimum 120-day cooling-off period after the
date of adoption of any Rule 10b5-1(c)(1) trading arrangement
(including adoption of a modified trading arrangement) by a director or
officer (as defined in 17 CFR 240.16a-1(f) (Rule 16a-1(f))) before any
purchases or sales under the new or modified trading arrangement; and
(2) a minimum 30-day cooling-off period after the date of adoption of
any Rule 10b5-1(c)(1) trading arrangement by an issuer before any
purchases or sales under the new or modified trading arrangement. Under
the proposed amendments, for directors and officers subject to Exchange
Act Section 16 reporting, and for issuers, the Rule 10b5-1(c)(1)
affirmative defense would only be available for a trading arrangement
that includes a cooling-off period that delays transactions under the
trading arrangement for at least 120 or 30 days (whichever is
applicable) after the date of adoption of any new/modified trading
arrangement. The proposed amendments also include a note that clarifies
that a ``modification'' of an existing Rule 10b5-1(c)(1) trading
arrangement, including cancelling one or more trades, would be deemed
equivalent to terminating the plan in its entirety, and the cooling-off
period would therefore apply after a ``modification'' before any new
trades could commence.\32\
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\31\ See Rulemaking petition regarding Rule 10b5-1 Trading
Plans, File No. 4-658 (Jan. 2, 2013) (``CII Rulemaking Petition'')
at <a href="https://www.sec.gov/rules/petitions/2013/petn4-658.pdf">https://www.sec.gov/rules/petitions/2013/petn4-658.pdf</a>; Alan D.
Jagolinzer, David F. Larcker, and Daniel J. Taylor, ``How the SEC
can and should fix insider trading rules'' the Hill (Dec. 17, 2020)
at <a href="https://thehill.com/opinion/finance/530668-how-the-sec-can-and-should-fix-insider-trading-rules">https://thehill.com/opinion/finance/530668-how-the-sec-can-and-should-fix-insider-trading-rules</a>; IAC Recommendations, supra note
19.
\32\ See proposed note to Rule 10b5-1(c); and 2000 Adopting
Release, supra note 8, at 51718, n 111.
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We are proposing these cooling off periods to address concerns that
traders are able to misuse the rule to set up trading arrangements that
use material nonpublic information about an issuer prior to the
disclosure of such information. In particular, evidence suggests that
Rule 10b5-1(c)(1) trading arrangements that commence trades prior to an
earnings announcement are more likely to result in abnormal
returns.\33\ In the case of officers and directors, a 120-day cooling
off period would span an entire quarter, meaning that no trading could
occur under a Rule 10b5-1(c)(1) plan adopted during a particular
quarter until after that quarter's financial results are announced. The
length of the proposed cooling-off period would deter insiders from
seeking to capitalize on unreleased material nonpublic information for
the upcoming quarter. In addition, a 120-day cooling off period and the
30-day cooling off period for issuers between adoption or modification
of a Rule 10b5-1(c)(1) trading arrangement and transactions made under
the arrangement align with recommendations from a wide range of
commentators about the appropriate length of time for such a cooling
off period.\34\ We anticipate that, if adopted, the proposed cooling-
off periods would deter officers, directors, and issuers from adopting
or modifying their Rule 10b5-1 plans on the basis of material nonpublic
information.
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\33\ See the discussion at infra Section IV.B.1.
\34\ See IAC Recommendations, supra note 19 (recommending a
cooling off period of four months); Gaming the System, supra note
16, at 3 (recommending a cooling off period of four to six months);
SEC Targets 10b5-1 Plans, supra note 16 (recommendation from a law
firm for a cooling off period of one fiscal quarter); letter from
Senator Elizabeth Warren et al., supra note 14 (recommending a
cooling off period of four to six months); Robert H. Friedman et al,
Navigating Public Company Equity Buybacks, Insights: Corporate and
Securities Law Advisor, (December 2011) (recommending a 30 day
waiting period for issuers after a Rule 10b5-1(c)(1) plan's adoption
or modification).
---------------------------------------------------------------------------

The proposed cooling-off periods would apply to directors and
officers (as defined in Rule 16a-1(f)) of the issuer,\35\ as well as to
an issuer that structures a share repurchase plan as a Rule 10b5-
1(c)(1)(i) trading arrangement. This requirement would prevent
directors, officers, and issuers who might be aware of material
nonpublic information from adopting or modifying a Rule 10b5-1 trading
arrangement and trading immediately pursuant to the arrangement. The
proposed cooling off period should also discourage registrants,
directors, and officers from selectively terminating or cancelling a
planned trade under a Rule 10b5-1 trading arrangement because they
would be subject to a cooling-off period with respect to the adoption
of any new/modified plan.
---------------------------------------------------------------------------

\35\ Exchange Act Rule 16a-1(f) [17 CFR 240.16a-1(f)] provides
that the ``officer'' is an issuer's president, principal financial
officer, or principal accounting officer (or, if there is no such
accounting officer, the controller), any vice-president of the
issuer in charge of a principal business unit, division or function
(such as sales, administration or finance), any other officer who
performs a policy-making function, or any other person who performs
similar policy-making functions for the issuer. Officers of the
issuer's parent(s) or subsidiaries shall be deemed officers of the
issuer if they perform such policy-making functions for the issuer.
---------------------------------------------------------------------------

Applying a cooling-off period to directors and ``officers'' as that
term is defined in Exchange Act Rule 16a-1(f) \36\ is appropriate
because such individuals are more likely than others to be aware of
material nonpublic information in the general course of events, and
also more likely to be involved in making or overseeing key corporate
decisions that have the potential to affect the issuer's stock price,
including decisions about the timing of the disclosure of such
information.\37\ In addition, applying a cooling-off period to issuers
addresses the concern that issuers may conduct stock buybacks while
aware of material nonpublic information. For example, executives of an
issuer who are aware of materially positive but undisclosed
developments can cause the issuer to buy its stock from current
shareholders who are unaware of those developments. Once the
development is publicly disclosed, the issuer's share price may
increase. Further, once the issuer repurchase program is announced,
executives who initiated the buyback can economically benefit because
it may allow them to sell shares at prices strategically inflated by
the company buyback, in addition to the disclosed developments.\38\ A
cooling off period for issuers would reduce the likelihood of such
scenarios and promote investor confidence.
---------------------------------------------------------------------------

\36\ This would include anyone who performs a policy-making
function for the issuer. Id.
\37\ See O'Hagan, 521, U.S. at 651-52; Chiarella, 445 U.S. at
227; Steginsky v. Xcelera Inc., 741 F.3d 365, 370 n.5 (2d Cir.
2014). See also, Colby v. Klune, 178 F.2d 872 (2d Cir. 1949).
\38\ See Fried Testimony supra note 17.
---------------------------------------------------------------------------

Request for Comment
1. Is the proposed cooling-off period an appropriate condition to
the Rule 10b5-1(c)(1) affirmative defense for contracts, instructions
and written plans? Would a cooling-off period effectively reduce the
potential to abuse the rule, such as from selective termination of
trades?
2. Should the application of a cooling-off period be limited to
directors, officers (as defined in Rule 16a-1(f)) and issuers, as
proposed? Should the proposed cooling-off period instead apply to all
traders who rely on the Rule 10b5-1(c)(1) affirmative defense?

[[Page 8691]]

3. Is the Rule 16a-1(f) definition the appropriate definition of
``officer'' for purposes of the proposed amendment? Are there other
corporate insiders or employees who also should be subject to the
cooling-off period?
4. Is the proposed 120-day cooling-off period appropriate for
directors and officers? Should we require a shorter or longer cooling-
off period? For example, should we require a cooling-off period of
sixty days after the adoption of a new/modified trading arrangement or
a cooling-off period of 180 days?
5. Is the proposed 30-day cooling off period appropriate for
issuers? Would a different period be more appropriate? For example,
would a 60-day, 90-day, or 180-day cooling off period be more
appropriate for issuers relying on the 10b5-1(c)(1) affirmative
defense? If issuers were subject to the proposed requirements, how
would their use of Rule 10b5-1(c)(1) trading arrangements to conduct
share repurchases be affected? Would the proposed cooling-off period
affect existing practices regarding when a repurchase window is
``open'' or ``closed''?
6. Should we define ``modify'' or ``a modification'' for purposes
of Rule 10b5-1(c)? If so, how should we define these terms?
7. Should there be an exception from the cooling-off period for de
minimis changes to a Rule 10b5-1(c) trading arrangement? If so, what
should be the parameters of such an exception?
2. Director and Officer Certifications
We also are proposing to amend Rule 10b5-1(c)(1)(ii) to impose a
certification requirement as a condition to the affirmative defense.
Under the proposed amendment, if a director or officer (as defined in
Rule 16a-1(f)) of the issuer of the securities adopts a Rule 10b5-1
trading arrangement, as a condition to the availability of the
affirmative defense, such director or officer would be required to
promptly furnish to the issuer a written certification, described
below, at the time of the adoption of a new/modified trading
arrangement.\39\
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\39\ The proposed amendment would not require these personal
certifications where a director or officer terminates an existing
Rule 10b5-1 trading arrangement and does not adopt a new/modified
trading arrangement for which the affirmative defense is sought.
However, proposed Item 408 of Regulation S-K would require
registrants to disclose whether any director or officer has
terminated a Rule 10b5-1 trading arrangement (or any similar trading
arrangement). See infra Section II.B.1. An issuer's insider trading
policies and procedures may otherwise govern such plan terminations.
See infra at Section II.B.2. Finally, whether an inference can be
drawn that an individual unlawfully traded on the basis of inside
information may be informed by the manner in which they trade (see,
e.g., SEC v. Warde, 151 F.3d, 42, 47 (2d Cir. 1998), including where
termination of a Rule 10b5-1 trading arrangement is soon followed by
non-Rule 10b5-1 trades in the same security or issuer.
---------------------------------------------------------------------------

The certification would require a director or officer to certify at
the time of the adoption of the trading arrangement:
<bullet> That they are not aware of material nonpublic information
about the issuer or its securities; and
<bullet> That they are adopting the contract, instruction, or plan
in good faith and not as part of a plan or scheme to evade the
prohibitions of Exchange Act Section 10(b) and Exchange Act Rule 10b-5.
For purposes of the proposed amendment, the term ``officer'' would
have the same meaning as the definition for ``officer'' contained in
Exchange Act Rule 16a-1(f). The definition in Exchange Act Rule 16a-
1(f) is appropriate for the reasons discussed above with respect to the
cooling-off period, i.e., these individuals are more likely to be aware
of material nonpublic information regarding the issuer and its
securities, as well as more likely to be involved in making or
overseeing corporate decisions about whether and when to disclose
information.
The proposed certification requirement is intended to reinforce
directors' and officers' cognizance of their obligation not to trade or
adopt a trading plan while aware of material nonpublic information,
that it is their responsibility to determine whether they are aware of
material non-public information when adopting Rule 10b5-1 plans, and
that the affirmative defense under Rule 10b5-1 requires them to act in
good faith and not to adopt such plans as part of a plan or scheme to
evade the insider trading laws.
We recognize that this certification involves important
considerations, especially because directors and officers are often
aware of material nonpublic information. Subject to their
confidentiality obligations, directors and officers can consult with
experts to determine whether they can make this representation
truthfully. Legal counsel can assist directors and officers in
understanding the meaning of the terms ``material'' and ``nonpublic
information.'' \40\ However, the issue of whether a director or officer
has material nonpublic information is an inherently fact-specific
analysis. Thus, a director or officer's completion of this
certification would reflect their personal determination that they do
not have material nonpublic information.
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\40\ As we have said previously, we rely on existing definitions
of the terms ``material'' and ``nonpublic'' established in the case
law. Information is material if ``there is a substantial
likelihood'' that its disclosure ``would have been viewed by the
reasonable investor as having significantly altered the `total mix'
of information made available.'' see Basic v. Levinson, 485 U.S.
224, 231 (1988) (materiality with respect to contingent or
speculative events will depend on a balancing of both the indicated
probability that the event will occur and the anticipated magnitude
of the event in light of the totality of company activity); see also
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976);
Securities Act Rule 405 [17 CFR 230.405]; 17 CFR 240.12b-2 [Exchange
Act Rule 12b-2] Information is nonpublic until the information is
broadly disseminated in a manner sufficient to ensure its
availability to the investing public generally, without favoring any
special person or group. See Dirks v. SEC, 463 U.S. 646, 653-54 &
n.12 (1983); Texas Gulf Sulphur, 401 F.2d 833, 854 (2d Cir. 1968),
cert. denied, 394 U.S. 976 (1969); 17 CFR 243.101(e) [Regulation
FD]. For purposes of insider trading law, insiders must wait a
``reasonable'' time after disclosure before trading. What
constitutes a reasonable time depends on the circumstances of the
dissemination. In re Faberge, Inc., 45 SEC. 249, 255 (1973), citing
Texas Gulf Sulphur, 401 F.2d at 854. Under the misappropriation
doctrine, a recipient of inside information must make a ``full
disclosure'' to the sources of the information that they plan to
trade on or tip the information within a reasonable time before
doing so. O'Hagan, 521 U.S. at 655, 659 n.9; see also SEC v.
Rocklage, 470 F.3d 1, 11-12 (1st Cir. 2006).
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The proposed amendment also includes an instruction that a director
or officer seeking to rely on the affirmative defense should retain a
copy of the certification for a period of ten years.\41\ The proposed
amendments would not require a director, officer, or the issuer to file
the certification with the Commission. The proposed certification would
not be an independent basis of liability for directors or officers
under Exchange Act Section 10(b) and Rule 10b-5. Rather the proposed
certification would underscore the certifiers' awareness of their legal
obligations under the Federal securities law related to the trading in
the issuer's securities.\42\
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\41\ See Proposed instruction to Rule 10b5-1(c)(1)(ii)(C). We
have included a ten-year retention period in consideration of the
statutes of limitations that govern the Commission's ability to seek
certain remedies for insider trading claims. See Exchange Act
Section 21(d)(8) [15 U.S.C. 78u(d)(8)] (ten years for injunctions
and disgorgement of fraud proceeds).
\42\ See, e.g., O'Hagan, 521, U.S. at 651-52; Chiarella, 445
U.S. at 227; Steginsky v. Xcelera Inc., 741 F.3d 365, 370 n.5 (2d
Cir. 2014).
---------------------------------------------------------------------------

Request for Comment
8. Is the proposed certification requirement an appropriate
condition to the availability of the Rule 10b5-1(c)(1)(ii) affirmative
defense for directors and officers? Are there other ways that an
officer or director could demonstrate that they do not possess material
nonpublic information when adopting a trading arrangement?
9. Is the proposed language of the certification appropriate? If
not, what alternative formulation, would be more

[[Page 8692]]

appropriate? Should the certification contain different or additional
conditions?
10. Should the proposed certification requirement also apply to
individuals who are not ``officers'' under Exchange Rule 16a-1(f)?
11. The proposed instruction provides guidance that a director or
officer should retain the certification for ten years consistent with
the ten-year statutes of limitations that govern the Commission's
insider trading actions. Should we instead require the issuer to retain
the certification, either instead of or in addition to the director or
officer? If so, how long should the issuer be required to retain the
certification? Should we allow the individuals and issuers to develop
their own retention policies for the certification?
12. Should we specifically provide in the proposed amendments to
Rule 10b5-1(c)(1)(ii) that the certification does not establish an
independent basis of liability for directors or officers under Exchange
Act Section 10(b) and Rule 10b-5?
3. Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements
and Single-Trade Arrangements
Currently, Rule 10b5-1(c)(1)(i)(C) provides that a person will not
be entitled to the affirmative defense for a trade if they enter into
or alter a ``corresponding or hedging transaction or position'' with
respect to the planned transactions. In the Rule 10b5-1 proposing
release, the Commission explained that this requirement was designed to
prevent persons from devising schemes to exploit inside information by
setting up pre-existing hedged trading programs, and then canceling
execution of the unfavorable side of the hedge, while permitting
execution of the favorable transaction.\43\ The use of multiple trading
arrangements can be used to simulate this kind of impermissible
hedging.
---------------------------------------------------------------------------

\43\ See Selective Disclosure and Insider Trading, Release No.
33-7787 (Dec. 20, 1999) [64 FR 72590 (Dec. 28, 1999)].
---------------------------------------------------------------------------

As discussed above, currently, a person can adopt and employ
multiple overlapping Rule 10b5-1(c)(1) trading arrangements and exploit
inside information by setting up trades timed to occur around dates on
which they expect the issuer will likely release material nonpublic
information. We are also concerned that a person could circumvent the
proposed cooling-off period by setting up multiple overlapping Rule
10b5-1(c)(1) trading arrangements, and deciding later which trades to
execute and which to cancel after they become aware of material
nonpublic information but before it is publicly released. We are
proposing to amend Rule 10b5-1(c)(1) to eliminate the affirmative
defense for any trades by a trader who has established multiple
overlapping trading arrangements for open market purchases or sales of
the same class of securities. Under the proposed amendment, the
affirmative defense would not be available for trades under a trading
arrangement when the trader maintains another trading arrangement, or
subsequently enters into an additional overlapping trading arrangement,
for open market purchases or sales of the same class of securities. The
proposed restriction with respect to multiple overlapping Rule 10b5-
1(c)(1) trading arrangements is designed to eliminate the ability of
traders to use multiple plans to strategically execute trades based on
material nonpublic information and still claim the protection of an
affirmative defense for such trades.
The proposed amendment would not apply to transactions where a
person acquires (or sells) securities directly from the issuer, such as
acquiring shares through participation in employee stock ownership
plans (``ESOPs'') or dividend reinvestment plans (``DRIPs''), which are
not executed by the director or officer on the open market.
Participation in these programs is sometimes effected through Rule
10b5-1(c)(1) trading arrangements, and because the transactions are
directly with the issuer, they are less likely to give rise to insider
trading.\44\ This provision is intended to preserve the benefits of
flexibility for plan participants with respect to such plans.
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\44\ However, ``fiduciaries'' of employee stock ownership plans
should consider the extent to which ``refraining on the basis of
inside information from making a planned trade . . . could conflict
with the complex insider trading . . . requirement imposed by the
federal securities laws or with the objectives of those laws.'' See
Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 429 (2014).
Officers and directors also need to follow Regulation Blackout
Trading Restrictions, 17 CFR 245.100-245.104.
---------------------------------------------------------------------------

In addition to restricting the use of multiple overlapping trading
arrangements, we are also proposing to amend Rule 10b5-1(c)(1)(ii) to
limit the availability of the affirmative defense for a trading
arrangement designed to cover a single trade, so that the affirmative
defense would only be available for one single-trade plan during any
12-month period. Under the proposed amendment, the affirmative defense
would not be available for a single-trade plan if the trader had,
within a 12-month period, purchased or sold securities pursuant to
another single-trade plan. Recent research indicates that single-trade
plans are consistently loss avoiding and often precede stock price
declines.\45\ This research suggests that insiders using single-trade
plans may be executing trades based on material nonpublic information.
At the same time, we recognize the legitimate use of single-trade plans
to address one-time liquidity needs. The proposed limitation on single-
trade plans is intended to balance this legitimate use against
potential for abuse.
---------------------------------------------------------------------------

\45\ See Gaming the System, supra note 16. See also infra
Section IV.B.
---------------------------------------------------------------------------

Request for Comment
13. Are there legitimate uses of multiple, overlapping Rule 10b5-1
trade arrangements? If so, what are they? Is it appropriate to exclude
from the affirmative defense multiple concurrent trading arrangements
for open market purchases or sales of the same class of securities as
proposed? Would the proposal create incentives for corporate insiders
to own different classes of stock? Are there alternative approaches to
addressing the concerns with multiple trading arrangements discussed
above?
14. Is the proposed amendment sufficiently clear as to what types
of overlapping trading arrangements a trader can maintain, while still
preserving the availability of the Rule 10b5-1(c)(1) affirmative
defense? If not, how could additional clarity be provided? In
particular, how would the proposed exclusion affect current practices
with respect to tax qualified retirement savings plans, and tax
withholding transactions with respect to equity compensation
arrangements, such as stock options and restricted stock units?
15. Is it appropriate to limit the availability of the Rule 10b5-
1(c)(1) affirmative defense for single-trade plans as proposed? If not,
are there alternative approaches to addressing concerns about the
potential abuse of single-trade plans? Would the proposed cooling-off
periods sufficiently mitigate the potential to misuse single-trade
plans to execute trades based on material nonpublic information?
Alternatively, would the limited availability of the Rule 10b5-1(c)(1)
affirmative defense for single-trade plans as proposed still allow for
potential abuse? Should we consider prohibiting the use of single-trade
plans entirely?

[[Page 8693]]

4. Requiring That Trading Arrangements Be Operated in Good Faith
As discussed above, the Rule 10b5-1 affirmative defense is only
available if a trading arrangement was entered into in good faith and
not as part of a plan or scheme to evade the prohibitions of the rule.
The ability to trade on the basis of material nonpublic information
through a Rule 10b5-1(c)(1) trading arrangement may incentivize
corporate insiders to improperly influence the timing of corporate
disclosures to benefit their trades under the trading arrangement, for
example, by delaying or accelerating the release of material nonpublic
information.\46\ We are concerned that a trading arrangement may be
canceled or modified in an attempt to evade the prohibitions of the
rule without affecting the availability of the affirmative defense.
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\46\ See infra note 106 and accompanying text.
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We are also concerned that a corporate insider, after entering into
a Rule 10b5-1(c)(1) trading arrangement, may improperly influence the
timing of the announcement of material nonpublic information in a way
that benefits a planned trade under their trading arrangement. To
address these concerns, we are proposing to amend Rule 10b5-1(c)(1)(ii)
to add the condition that a contract, instruction, or plan be
``operated'' in good faith. Amending the condition that a Rule 10b5-1
trading arrangement be entered into in good faith to further require
that the trading arrangement also be operated in good faith would help
deter fraudulent and manipulative conduct and enhance investor
protection throughout the duration of the trading arrangement. The
proposed amendment is intended to make clear that the affirmative
defense would not be available to a trader that cancels or modifies
their plan in an effort to evade the prohibitions of the rule or uses
their influence to affect the timing of a corporate disclosure to occur
before or after a planned trade under a trading arrangement to make
such trade more profitable or to avoid or reduce a loss.
Request for Comment
16. Would the addition of ``and operated'' to the good faith
requirement in Rule 10b5-1(c)(1)(ii), as proposed, have a meaningful
impact? If not, what are alternative approaches that would address the
concern over the manipulation of the timing of corporate disclosures to
benefit a trade under a Rule 10b5-1(c)(1) trading arrangement?
17. Is there evidence to suggest that corporate insiders influence
the timing of corporate disclosures to benefit their trades under a
Rule 10b5-1 trading arrangement? Is there evidence to suggest that any
efforts to time corporate disclosures would not be sufficiently
mitigated by the 120-day cooling-off period?
18. Is the term ``operated'' or the concept of ``operated in good
faith'' sufficiently clear as to the conduct it is meant to describe?
If not, should we provide additional guidance as to its meaning in this
context? Should we define the phrase ``entered into and operated in
good faith''? If so, how should it be defined?
19. Is there another formulation that would better address the
underlying policy concern of an insider improperly influencing the
timing of the release of material nonpublic information to benefit a
trade under a Rule 10b5-1 trading arrangement?
20. Does requiring the trading arrangements to be operated in good
faith create incentives for corporate insiders to take into account
their existing Rule 10b5-1 trading arrangements when making decisions
with respect to the timing of corporate disclosures?

B. Additional Disclosures Regarding Rule 10b5-1 Trading Arrangements

Currently, there are no mandatory disclosure requirements
concerning the use of Rule 10b5-1 trading arrangements or other trading
arrangements by companies or insiders.\47\ The lack of comprehensive
public information about the use of these arrangements by officers,
directors, and issuers--whether pursuant to Rule 10b5-1(c)(1) trading
arrangement or otherwise--deprives investors of the ability to assess
whether those parties may be misusing their access to material
nonpublic information. This lack of transparency may be allowing
improper trading to go undetected and undermining the deterrent impact
of our insider trading laws. In addition, the lack of public
information about the use of these arrangements by companies and
corporate insiders limits investors' ability to assess potential
incentive conflicts and information asymmetries when making investment
and voting decisions. Requiring more robust disclosure of particular
trading arrangements should reduce potential abuse of the rule, and
inform investors and the Commission regarding potential violations of
Rule 10b-5.
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\47\ Form 144 (17 CFR 239.144) under the Securities Act contains
a representation that is used by a filer of the form to indicate
whether such person has adopted a written trading plan or given
trading instructions to satisfy Rule 10b5-1. Form 144 is a notice
form that must be filed with the Commission by an affiliate of an
issuer who intends to resell restricted or ``control'' securities of
that issuer in reliance upon 17 CFR 230.144 (Securities Act Rule
144). In 2002, the Commission proposed amendments to Form 8-K that,
among other things, would have required registrants to report on the
form any adoption, modification or termination of a Rule 10b5-1
trading arrangement by any director and certain officers of the
registrant. See Form 8-K Disclosure of Certain Management
Transactions, Release No. 33-8090 (Apr. 12, 2002) [67 FR 19914 (Apr.
23, 2002)].
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Currently, issuers are not required to disclose their insider
trading policies or procedures. We believe that information about
insider trading policies and procedures is important and would help
investors to understand and assess how the registrant protects material
nonpublic information from misuse. While codes of ethics may address
insider trading issues, they often lack the detail necessary for
investors to assess actual practices surrounding potential insider
trading. Accordingly, we are proposing new Item 408 under Regulation S-
K and corresponding amendments to Forms 10-Q and 10-K to require: (1)
Quarterly disclosure of the use of Rule 10b5-1 and other trading
arrangements by a registrant, and its directors and officers for the
trading of the issuer's securities; and (2) annual disclosure of a
registrant's insider trading policies and procedures. We are also
proposing new Item 16J to Form 20-F to require annual disclosure of a
foreign private issuer's insider trading policies and procedures. In
addition, we are proposing amendments to Forms 4 and 5 to require
insiders to identify whether a reported transaction was executed
pursuant to a Rule 10b5-1(c) trading arrangement.
The proposed disclosures that would be required in Forms 10-Q, 10-
K, and Form 20-F would be subject to the certifications required by
Section 302 of the Sarbanes-Oxley Act of 2002.\48\ Section 302 requires
an issuers' principal executive officer and principal financial officer
to certify, among other things, that based on their knowledge, the Form
10-K, Form 10-Q, or Form 20-F that they have signed does not contain
untrue statements of material facts or omit to state material facts
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the periods covered by the reports.\49\
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\48\ Public Law 107-204, 116 Stat. 745 (2002).
\49\ In effectuating this statutory responsibility, the
principal executive and financial officers of an issuer may be aided
by a written representation (such as a sub-certification) from the
issuer's principal legal or compliance officer (or person performing
similar functions) that, based on a reasonable review, they have
determined the issuer's insider trading practices and procedures
comport with what the issuer is disclosing about them in its
periodic reports. However, it would not be reasonable for a
principal executive or financial officer to rely on such a
representation if they are aware of information that is inconsistent
with, or raises doubts about the reliability of, the representation.

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[[Page 8694]]

1. Quarterly Reporting of Rule 10b5-1(c) and Non-Rule 10b5-1(c) Trading
Arrangements
Currently, issuers are not required to disclose trading
arrangements by directors, officers, or the issuer itself when
conducting a share buyback. Nor are issuers required to disclose
terminations of, including modifications to, trading arrangements
previously adopted by directors, officers, or the issuer itself. The
disclosure of such information would allow investors to assess the
extent to which directors, officers, and the issuer are adopting or
terminating such trading arrangements during periods when they may be
aware of material nonpublic information. Proposed Item 408(a) of
Regulation S-K would require registrants to disclose:
<bullet> Whether, during the registrant's last fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report),
the registrant has adopted or terminated any contract, instruction or
written plan to purchase or sell securities of the registrant, whether
or not intended to satisfy the affirmative defense conditions of Rule
10b5-1(c), and provide a description of the material terms of the
contract, instruction or written plan, including:
[cir] The date of adoption or termination; \50\
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\50\ As discussed above, we have proposed clarifying that any
modification or amendment of an existing Rule 10b5-1 trading
arrangement is the equivalent of terminating the existing
arrangement and adopting a new arrangement. See supra note 23.
Accordingly, the proposal would require a description of the
modification.
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[cir] The duration of the contract, instruction or written plan;
and
[cir] The aggregate amount of securities to be sold or purchased
pursuant to the contract, instruction or written plan.
<bullet> Whether, during the registrant's last fiscal quarter, any
director or officer has adopted or terminated any contract, instruction
or written plan for the purchase or sale of equity securities of the
registrant, whether or not intended to satisfy the affirmative defense
conditions of Rule 10b5-1(c), and provide a description of the material
terms of the contract, instruction or written plan, including:
[cir] The name and title of the director or officer;
[cir] The date on which the director or officer adopted or
terminated the contract instruction or written plan;
[cir] The duration of the contract instruction or written plan; and
[cir] The aggregate number of securities to be sold or purchased
pursuant to the contract, instruction or written plan.
We are proposing to require these disclosures in Form 10-Q and Form
10-K. Under the proposal, a registrant would be required to provide
this disclosure if during the quarterly period covered by the report,
the registrant, or any director or officer who is required to file
reports under Section 16 of the Exchange Act, adopted or terminated a
Rule 10b5-1(c) trading arrangement. Such disclosures would allow
investors to assess whether, and if so, how, issuers monitor trading by
their directors and officers for compliance with insider trading laws
and whether their compliance programs are effective at preventing the
misuse of material nonpublic information.
We recognize that as a result of the proposed amendments some
issuers, directors or officers may seek to execute sales or purchases
through trading arrangements that do not satisfy the conditions of Rule
10b5-1(c)(1). For this reason, we are also proposing to require similar
disclosures with respect to the adoption or termination of other pre-
planned trading contracts, instructions, or plans (``non-Rule 10b5-1
trading arrangements'') through which the issuer, officer or directors
seek to transact in issuer securities.
Requiring quarterly disclosure of the adoption or termination of a
trading arrangement by a director, officer or the issuer provides
important information that would better allow investors, the
Commission, and other market participants to observe how these trading
arrangements are being used. For example, disclosure of the termination
(including a modification) of a trading arrangement by an officer, even
in the absence of subsequent trading by the officer, could provide
investors or the Commission with important information about the
potential misuse of inside information if the termination coincides
with the release of material nonpublic information by the issuer.
Making information about these arrangements public may also serve as a
deterrent against potential abuses of Rule 10b5-1(c)(1) trading
arrangements or other trading arrangements by making those who use
these arrangements more likely to focus on following the requirements
applicable to such arrangements and compliance with Rule 10b-5. In
addition, requiring disclosure of these events on a quarterly basis
would present this disclosure to investors in a consolidated manner in
a single document.
Request for Comment
21. Would the disclosures in proposed Item 408(a) provide useful
information to investors and the markets? Does the proposed disclosure
requirement specify all of the information that should be disclosed as
to registrants' trading arrangements? Does the proposed disclosure
requirement specify all of the information that should be disclosed as
to trading arrangements of officers and directors? Are there other
disclosures that we should require that would provide more transparency
into the use of Rule 10b5-1 and non-Rule 10b5-1 trading arrangements?
Is there any information that we have proposed to require be disclosed
that we should not require? We are proposing disclosure about trading
arrangements both for registrants and for officers and directors.
Should we instead require disclosure about only one of those categories
of traders? Should we consider requiring disclosure of trading
arrangements of insiders who are not officers or directors? If so, at
what level of specificity?
22. Would a description of the material terms of a trading
arrangement encourage front-running of trades under the trading
arrangement? Should the required disclosures be limited to particular
terms of a trading arrangement?
23. Do registrants currently have access to information about a
director's or officer's adoption or termination of a non-Rule 10b5-1
trading arrangement that would allow them collect and prepare this
information for disclosure in a Form 10-Q in a timely fashion? If not,
what would they need to do to collect and prepare this information for
disclosure?
24. Is it appropriate to require disclosures regarding both Rule
10b5-1 trading arrangements and non-Rule 10b5-1 trading arrangements?
Is the scope of the term ``non-Rule 10b5-1'' sufficiently clear? Should
we define the term?
25. Is the proposal to require disclosure in Forms 10-Q and 10-K
appropriate? Should we instead require disclosure in a different form?
Should we consider a different frequency of disclosure?
26. The proposed Item 408(a) disclosure requirement would not apply
to foreign private issuers that file annual reports using Form 20-F
because such issuers are not required to file quarterly

[[Page 8695]]

reports on Form 10-Q. Should the proposed amendments apply to foreign
private issuers or would the information be less useful if reported
annually on Form 20-F?
2. Disclosure of Insider Trading Policies and Procedures
Well-designed policies and procedures that address the potential
misuse of material nonpublic information can play an important role in
deterring and preventing trading on the basis of material nonpublic
information. Specific disclosures concerning registrants' insider
trading policies and procedures would benefit investors by enabling
them to assess registrants' corporate governance practices and to
evaluate the extent to which those policies and procedures protect
shareholders from the misuse of material nonpublic information. We are
thus proposing to add new Item 408(b) to Regulation S-K, which would
require registrants to:
<bullet> Disclose whether the registrant has adopted insider
trading policies and procedures governing the purchase, sale, and other
dispositions of the registrant's securities by directors, officers, and
employees or the registrant itself that are reasonably designed to
promote compliance with insider trading laws, rules, and regulations,
and any listing standards applicable to the registrant. If the
registrant has not adopted such insider trading policies and
procedures, explain why it has not done so; and
<bullet> If the registrant has adopted insider trading policies and
procedures, disclose such policies and procedures.
These disclosures would be required in a registrant's annual
reports on Form 10-K and proxy and information statements on Schedules
14A and 14C.\51\ Foreign private issuers would also be required to
provide analogous disclosure in their annual reports pursuant to a new
Item 16J in that form.
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\51\ Item 1 of Schedule 14C requires that a registrant furnish
the information called for by all of the items of Schedule 14A
(other than Items 1(c), 2, 4 and 5) which would be applicable to any
matter to be acted upon at the meeting if proxies were to be
solicited in connection with the meeting.
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Currently, 17 CFR 232.406 (Item 406 of Regulation S-K) requires a
registrant to disclose whether it has adopted a code of ethics that
applies to its principal executive officer, chief financial officer,
and other appropriate executives and, if it has not adopted such a
code, to state why it has not done so.\52\ Many registrants are
required to maintain codes of ethics or conduct under exchange listing
standards.\53\ These codes may contain specific policies and
restrictions that address insider trading.\54\ Apart from these codes
of ethics or conduct, some registrants have other policies and
procedures specifically addressing insider trading. The proposed
amendments are designed to provide investors with meaningful
information regarding a registrant's insider trading policies and
procedures to enable them to better assess the manner in which the
registrant promotes compliance with insider trading laws and protects
material nonpublic information from misuse.
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\52\ See also Section 406 of the Sarbanes-Oxley Act of 2002
(``SOX''), 15 U.S.C. 7264.
\53\ See e.g., NYSE Listed Company Manual Section 303A.10, which
states in relevant part that every NYSE ``listed company should
proactively promote compliance with laws, rules and regulations,
including insider trading laws. Insider trading is both unethical
and illegal, and should be dealt with decisively.'' See also NASDAQ
Listing Rule 5610 that requires every Nasdaq listed company to adopt
a code of conduct that must comply with the definition of a ``code
of ethics'' set out in SOX Section 406 (c) and that must apply to
all directors, officers, and employees.
\54\ Insider trading policies and procedures may be part of the
standards that are reasonably necessary to promote: Honest and
ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships; full, fair, accurate, timely, and understandable
disclosure in the periodic reports required to be filed by the
issuer; and compliance with applicable governmental rules and
regulations. See 15 U.S.C. 7264(c); see also supra Section I.
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We recognize that insider trading policies and procedures may vary
from company to company and that decisions as to specific provisions of
the policies and procedures are best left to the company. Therefore,
the proposed amendments do not specify all details that a registrant
should address in its insider trading policies, nor do they prescribe
any specific language that such policies must include (although this
release does include some guidance as to the appropriate subject matter
below). We also recognize that registrant's existing code of ethics may
contain insider trading policies. In this case, the registrant, could
cross-reference to the particular components of its code of ethics that
constitute insider trading policies and procedures in response to
proposed Item 408(b)(2).
When making disclosure about their insider trading policies and
procedures under proposed Item 408(b)(2), registrants should endeavor
to provide detailed and meaningful information from which investors can
assess the sufficiency of their insider trading policies and
procedures. For example investors may find useful, to the extent it is
included in the issuer's relevant policies and procedures, information
on the issuer's process for analyzing whether directors, officers,
employees, or the issuer itself when conducting an open-market share
repurchase have material nonpublic information; the issuer's process
for documenting such analyses and approving requests to purchase or
sell its securities; or how the issuer enforces compliance with any
such policies and procedures it may have. Furthermore, the disclosure
under proposed Item 408 could address not only policies and procedures
that apply to the purchase and sale of the registrant's securities, but
also other dispositions of the issuer's securities where material
nonpublic information could be misused such as, for example, through
gifts of such securities.\55\
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\55\ The Exchange Act does not require that a ``sale'' of
securities be for value, and instead provides that the ``terms
`sale' or `sell' each include any contract to sell or otherwise
dispose of.'' Exchange Act Section 3(a)(14) [15 U.S.C. 78c(a)(14)]
compare with Securities Act Section 2(a)(3) [15 U.S.C. 77b(a)(3)]
(``the terms `sale' or `sell' shall include every contract of sale
or disposition of a security or interest in a security, for
value.''). For example, a donor of securities violates Exchange Act
Section 10(b) if the donor gifts a security of an issuer in
fraudulent breach of a duty of trust and confidence when the donor
was aware of material nonpublic information about the security or
issuer, and knew or was reckless in not knowing that the donee would
sell the securities prior to the disclosure of such information. The
affirmative defense under Rule 10b5-1(c)(1) is available for planned
securities gifts.
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Request for Comment
27. Would the proposed disclosure requirements regarding a
registrant's insider trading policies and procedures or lack thereof
provide useful information to investors? Is there other information
that would be useful to include in Item 408(b)?
28. Is the proposed scope of the term ``insider trading policies
and procedures'' sufficiently clear? Should we more specifically define
the term? Are there other elements or objectives of an insider trading
policy or procedure that should be included in the proposed Item?
29. Should the Item 408(b) disclosure be required in Schedules 14A
and 14C, as proposed?
30. Should foreign private issuers be required to provide
disclosure of their insider trading policies and procedures? Are any
modifications to the proposed disclosure requirement appropriate to
recognize the different legal regimes in which foreign private issuers
may operate?
3. Structured Data Requirements
We are proposing to require registrants to tag the information
specified by Item 408 in Inline XBRL in accordance with Rule 405 of
Regulation S-T (17 CFR 232.405) and the EDGAR

[[Page 8696]]

Filer Manual.\56\ The proposed requirements would include block text
tagging of narrative disclosures, as well as detail tagging of
quantitative amounts disclosed within the narrative disclosures. Inline
XBRL is both machine-readable and human-readable, which improves the
quality and usability of XBRL data for investors.\57\
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\56\ This tagging requirement would be implemented by including
a cross-references to Rule 405 of Regulation S-T in proposed Item
408(a)(3) and Item 408(b)(3), and by revising Rule 405(b) of
Regulation S-T [17 CFR 232.405(b)] to include the Item 408
disclosure. In conjunction with the EDGAR Filer Manual, Regulation
S-T governs the electronic submission of documents filed with the
Commission. Rule 405 of Regulation S-T specifically governs the
scope and manner of disclosure tagging requirements for operating
companies and investment companies, including the requirement in
Rule 405(a)(3) to use Inline XBRL as the specific structured data
language to use for tagging the disclosures.
\57\ See Inline XBRL Filing of Tagged Data, Securities Act
Release No. 10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)].
Inline XBRL allows filers to embed XBRL data directly into an HTML
document, eliminating the need to tag a copy of the information in a
separate XBRL exhibit. Inline XBRL is both human-readable and
machine-readable for purposes of validation, aggregation, and
analysis. Id. at 40851.
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Requiring Inline XBRL tagging of the disclosures provided pursuant
to Item 408 would benefit investors by making the disclosures more
readily available and easily accessible to investors, market
participants, and others for aggregation, comparison, filtering, and
other analysis, as compared to requiring a non-machine readable data
language such as ASCII or HTML. This would enable automated extraction
and analysis of the granular data required by the proposed rules,
allowing investors and other market participants to more efficiently
perform large-scale analysis and comparison of this information across
issuers and time periods. For narrative disclosures, an Inline XBRL
requirement would allow investors to extract and search for disclosures
about a registrant's insider trading policies and procedures (rather
than having to manually run searches for these disclosures through
entire documents), automatically compare/redline these disclosures
against prior periods, and perform targeted AI/ML assessments of
specific narrative disclosures rather than the entire unstructured
document. At the same time, we do not expect the incremental compliance
burden associated with tagging the additional information to be unduly
burdensome, because issuers subject to the proposed tagging
requirements are for the most part subject to similar Inline XBRL
requirements in other Commission filings.
Request for Comment
31. Should we require issuers to tag the disclosures required by
Item 408 of Regulation S-K in Inline XBRL, as proposed? Are there any
changes we should make to ensure accurate and consistent tagging? If
so, what changes should we make?
32. Should we modify the scope of the disclosures required to be
tagged? Should the narrative disclosure about a registrant's insider
policies and procedures be tagged using Inline XBRL, as proposed?
33. Should we require issuers to use a different structured data
language to tag these disclosures? If so, what structured data language
should we require?
34. Are there any issuers, such as smaller reporting companies,
emerging growth companies or foreign private issuers that we should
exempt from the tagging requirement? If so, how would investors in such
issuers receive the information that they need to make informed
decisions regarding these issuers?
4. Identification of Rule 10b5-1(c) and Non-Rule 10b5-1(c)(1)
Transactions on Forms 4 and 5
Section 16(a) of the Exchange Act provides that every person who
beneficially owns, directly or indirectly, more than 10 percent of any
class of equity security (other than an exempted security) registered
pursuant to Exchange Act Section 12, or who is an officer or director
of the issuer of such security, shall file with the Commission an
initial report disclosing the amount of all equity securities of such
issuer of which the insider is the beneficial owner, and a subsequent
transaction report to disclose any changes in beneficial ownership.
Section 16 of the Exchange Act was designed to provide the public with
information on securities transactions and holdings of corporate
officers, directors, and principal shareholders, and to deter those
individuals from seeking to profit from short-term trading in the
securities of their corporations while in possession of material,
nonpublic information.\58\
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\58\ See Ownership Reports and Trading By Officers, Directors
and Principal Security Holders, Release No. 34-28869 (Feb. 8, 1991)
[56 FR 7242 (Feb. 21, 1991)].
---------------------------------------------------------------------------

Persons subject to Section 16 reporting must disclose changes in
their beneficial ownership on Form 4 or 5. Exchange Act Rule 16a-3(g)
\59\ provides that a reporting person must report specified changes in
beneficial ownership on Form 4 before the end of the second business
day following the date of execution of the transaction. In December
2020, the Commission proposed, among other things, amendments to Form 4
and Form 5 \60\ to add a checkbox to these forms that would permit
filers, at their option, to indicate whether a transaction reported on
the form was made pursuant to a contract, instruction, or written
trading plan for the purchase or sale of equity securities of the
issuer that satisfies the conditions of Rule 10b5-1(c).\61\ In the
December 2020 Proposing Release, the Commission noted that many Form 4
and Form 5 filers voluntarily provide additional disclosure in these
forms stating that a reported transaction satisfied the affirmative
defenses conditions of Rule 10b5-1(c). The Commission indicated that
the checkbox option would provide filers with a more efficient method
to disclose this information.
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\59\ 17 CFR 240.16a-3(g).
\60\ Form 5 is a year-end report to be used by any person who
was an officer, director or a 10% beneficial owner during any
portion of the issuer's fiscal year to disclose transactions and
holdings that are exempt from Section 16(b) or that were required to
be reported during the fiscal year, but were not.
\61\ See Rule 144 Holding Period and Form 144 Filings, Release
No. 33-10911 (Dec. 22, 2020) [86 FR 5063 (Jan. 19, 2021)]
(``December 2020 Proposing Release'').
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In response to the December 2020 Proposing Release, the Commission
received feedback from several commenters who asserted, based on
analyses of sales of securities executed under Rule 10b5-1 trading
arrangements, that many of these transactions were likely made on the
basis of material nonpublic information.\62\ These commenters
recommended that the proposed Rule 10b5-1 checkbox disclosure be
mandatory on Forms 4 and 5 because such disclosure would help investors
and the public better discern whether Rule 10b5-1 trading arrangements
are being used to engage in opportunistic trading on the basis of
inside information.\63\
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\62\ See letters from Council of Institutional Investors (dated
Mar. 18, 2021), Alan Jagolinzer (dated Mar. 10, 2021), and David
Larcker et al. (dated Mar. 10, 2021), available at <a href="https://www.sec.gov/comments/s7-24-20/s72420.htm">https://www.sec.gov/comments/s7-24-20/s72420.htm</a>.
\63\ Id.
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In consideration of this feedback, we are proposing to add a Rule
10b5-1(c) checkbox as a mandatory disclosure requirement on Forms 4 and
5. The checkbox would require a Form 4 or 5 filer to indicate whether a
sale or purchase reported on that form was made pursuant to a Rule
10b5-1(c) trading arrangement. Filers would also be required to provide
the date of

[[Page 8697]]

adoption of the Rule 10b5-1 trading arrangement, and would have the
option to provide additional relevant information about the reported
transaction. Requiring this disclosure on Forms 4 and 5 would provide
greater transparency around the use of Rule 10b5-1 plans and would be
consistent with the primary purpose of Exchange Act Section 16.\64\ It
also would provide information that could be used by registrants to
comply with their Item 408 disclosure obligations.
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\64\ See S. Rep. No. 1455, 73d Cong., 2d Sess. 55 (1934).
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In addition, we are proposing to add a second, optional checkbox to
both of Forms 4 and 5. This optional checkbox would allow a filer to
indicate whether a transaction reported on the form was made pursuant
to a pre-planned contract, instruction, or written plan that is not
intended to satisfy the conditions of Rule 10b5-1(c).
Request for Comment
35. Should we add a mandatory checkbox on Forms 4 and 5 to indicate
whether a sale or purchase was made pursuant to a Rule 10b5-1(c) plan?
Should we require disclosure of the date of adoption of the Rule 10b5-1
plan? Would the Rule 10b5-1(c) checkbox and disclosure of the date of
adoption of the plan help provide useful information about whether a
Rule 10b5-1 plan was being used to engage in opportunistic trading
based on material nonpublic information? Are there alternative methods
of providing this information that we should consider?
36. Should we add an optional checkbox on Forms 4 and 5 to indicate
that a sale or purchase reported on these forms was made pursuant to a
contract, instruction or written plan that did not satisfy the
conditions of Rule 10b5-1(c), as proposed? Would such an affirmative
indication provide useful information to investors and market
participants? Are filers already sufficiently able to provide this
information elsewhere if they choose to do so? If so, should we make
the use of the checkbox mandatory?

C. Disclosure Regarding the Timing of Option Grants and Similar Equity
Instruments Shortly Before or After the Release of Material Nonpublic
Information

Since the enactment of the Securities Act and the Exchange Act, the
Commission has sought to enhance its rules regarding the disclosure of
executive and director compensation and to improve the presentation of
this information to investors.\65\ One area of focus for the Commission
has been disclosure related to equity-based compensation. Many
companies use stock options as a form of compensation for their
employees and executives.\66\ In a simple stock option award, a company
may grant an employee the right to purchase a specified number of
shares of the company's stock at a specified price, called the exercise
price, which is typically set as the fair market value of the company's
stock on the grant date. Stock options with exercise prices at or above
the fair market value of the underlying stock are designed to motivate
the recipient to work towards increasing company value, because the
option holder would only benefit if the company's stock price exceeds
the exercise price at the time of exercise.\67\
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\65\ See, e.g., Executive Compensation and Related Person
Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 at
53160, n. 45 (Sept. 8, 2006)] (hereinafter ``2006 Executive
Compensation Release''); Proxy Disclosure Enhancements, Release No.
33-9089 (Dec, 16, 2009) [74 FR 68334 (Dec. 24, 2009)].
\66\ The term ``option'' includes stock options, SARs and
similar instruments with option-like features. See 17 CFR
229.402(a)(6).
\67\ When the exercise price for an option is less than the fair
market value of the underlying security, the option is ``in the
money.'' If the exercise price and fair market value are the same,
the option is ``at the money.'' If the exercise price is greater
than the fair market value, the option is ``out of the money.''
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In 2006, the Commission revised its executive compensation
disclosure rules to, among other things, provide investors a more
complete picture of compensation to principal executive officers,
principal financial officers, and the other highest paid executive
officers and directors.\68\ In the 2006 Executive Compensation Release,
the Commission stated that under the principles-based compensation
disclosure requirements of Item 402 of Regulation S-K, registrants may
be required to disclose in their Compensation Discussion and Analysis
(``CD&A'') information about the timing of option grants in close
proximity to the release of nonpublic information by the company.\69\
Such disclosure should include, for example, whether a company is aware
of material nonpublic information that is likely to result in an
increase of its stock price, such as a product development announcement
or positive earnings, and grants stock options immediately before the
release of this information. Timing option grants to occur immediately
before the release of positive material nonpublic information
(``spring-loading'') can benefit executives with an option award that
will likely be in-the-money as soon as the material nonpublic
information is made public.\70\ Alternatively, if a company is aware of
material nonpublic information that is likely to decrease its stock
price, it may decide to delay a planned option award until after the
release of such information (``bullet-dodging'').\71\
---------------------------------------------------------------------------

\68\ 2006 Executive Compensation Release, supra note 65, at
53164.
\69\ See 17 CFR 229.402(b)(2)(iv) and 2006 Executive
Compensation Release, supra note 65, at 53163-4.
\70\ See Lucian A. Bebchuk and Jesse M. Fried, Paying for Long-
Term Performance, 158 U. Pa. L. Rev. 1915, 1937-39 & n. 63 (2010)
(noting that the practice of spring-loading may also disguise an in-
the-money option award as having been granted at-the-money).
\71\ See Allan Horwich, The Legality of Opportunistically Timing
Public Company Disclosures in the Context of SEC Rule 10b5-1, 71
Bus. Law. 1113, 1143 (2016) (noting that ``bullet-dodging'' occurs
when a board delays the grant of an option until adverse material
nonpublic information known to the board is disclosed, which reduces
the market price and the option exercise price that is set at the
time of the grant).
---------------------------------------------------------------------------

In the release, the Commission noted that the existence of a
program, plan or practice to select option grant dates for executive
officers in coordination with the release of material nonpublic
information would be material to investors and should be fully
disclosed.\72\
---------------------------------------------------------------------------

\72\ 2006 Executive Compensation Release, supra note 65, at
53163.
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We are concerned, however, that our existing disclosure
requirements do not provide investors with adequate information
regarding an issuer's policies and practices on stock option awards
timed to precede or follow the release of material nonpublic
information. Under our current executive compensation disclosure rules,
compensation-related equity interests (including options, restricted
stock, and similar grants) are required to be presented in a tabular
format and accompanied by appropriate narrative disclosure necessary
for an understanding of the information presented in a table. Option
grants that are spring-loaded or bullet-dodging are not required to be
separately identified in these tables. Consequently, investors may not
have a clear picture of the effect of an option award that is made
close in time to the release of material nonpublic information on the
executives' or directors' compensation and on the company's financial
statements. Understanding that issuers may have reasons for granting
these types of options, but that increased transparency may be
warranted, we are proposing amendments that would require registrants
to disclose in a new table any option awards to named executive
officers \73\ or directors that are made

[[Page 8698]]

within a certain time proximity of the release of material nonpublic
information such as an earnings announcement.
---------------------------------------------------------------------------

\73\ Named executive officers include all individuals serving as
the registrant's Principal Executive Officer (``PEO'') or Principal
Financial Officer (``PFO'') during the last completed fiscal year,
the registrant's three most highly compensated officers other than
the PEO and PFO who were serving as executive officers at the end of
the last completed fiscal year, and up to two additional individuals
for whom disclosure would have been provided but for the fact that
the individual was not serving as an executive officer at fiscal
year-end. See Item 402(a)(3) of Regulation S-K.
---------------------------------------------------------------------------

Under the proposal, to identify if any such timed options are
granted, a new paragraph (x) would be added to Item 402 of Regulation
S-K \74\ that would require tabular disclosure of each option award
(including the number of securities underlying the award, the date of
grant, the grant date fair value, and the option's exercise price)
granted within 14 calendar days before or after the filing of a
periodic report, an issuer share repurchase, or the filing or
furnishing of a current report on Form 8-K that contains material
nonpublic information; the market price of the underlying securities
the trading day before disclosure of the material nonpublic
information; and the market price of the underlying securities the
trading day after disclosure of the material nonpublic information.\75\
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\74\ In Release No. 33-9861, the Commission proposed to add
paragraph (w) to Item 402. The proposed Item 402(x) designation is
consistent with the new designations proposed in that release, but
could change depending on Commission action to adopt those
proposals. See Listing Standards for Recovery of Erroneously Awarded
Compensation, Release No. 33-9861 (July 1, 2015) [80 FR 41144 (July
14, 2015)]. See also Reopening of Comment Period for Listing
Standards for Recovery of Erroneously Awarded Compensation, Release
No. 33-10998 (Oct. 14, 2021) [86 FR 58232 (October 21, 2021)].
\75\ Under the proposed rule, disclosure would also be required
of the grant date fair value of each equity award computed in
accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 718.
---------------------------------------------------------------------------

Many companies required to file Exchange Act periodic reports also
voluntarily communicate material nonpublic information regarding their
results of operations or financial condition for a completed fiscal
quarter or annual period through an earnings release.\76\ After
completion of a fiscal quarter, a company's board of directors will
usually meet a week or two before announcing the earnings release.\77\
During this period, the board would likely be aware of material
nonpublic information that could affect the stock price of the company.
The proposed fourteen day window is designed to cover the period that a
company would be aware of material nonpublic information at the time
that its board of directors' grants an option award. In addition, new
Item 402(x) would require narrative disclosure about an issuer's option
grant policies and practices regarding the timing of option grants and
the release of material nonpublic information, including how the board
determines when to grant options and whether, and if so, how, the board
or compensation committee takes material nonpublic information into
account when determining the timing and terms of an award. For
companies that are subject to CD&A, the proposed narrative disclosure
could be included in CD&A.
---------------------------------------------------------------------------

\76\ Commission staff estimates that approximately 63% of the
Form 10-Qs filed with the Commission in calendar year 2017 were
accompanied by a prior or concurrent earnings release by the issuer.
\77\ While some companies provide earnings releases in advance
of the corresponding Form 10-Q filings, many companies also issue
earnings releases concurrently with their Form 10-Q filings.
---------------------------------------------------------------------------

The proposed amendments are intended to provide shareholders a full
and complete picture of any spring-loaded or bullet-dodging option
grants during the fiscal year. It is important for shareholders to
understand company practices with respect to these types of options
grants as they consider their say-on-pay votes, and when approving
executive compensation and electing directors. Accordingly, we are
proposing to require this disclosure in annual reports on Form 10-
K,\78\ as well as in proxy statements and information statements
related to the election of directors, shareholder approval of new
compensation plans, and solicitations of advisory votes to approve
executive compensation.\79\
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\78\ The executive compensation disclosure requirements in Part
III of Form 10-K may be incorporated by reference from a proxy or
information statement involving the election of directors, if filed
within 120 days of the end of the fiscal year. See Note 3 to General
Instruction G(3) to Form 10-K.
\79\ 17 CFR 240.14a-21 [Exchange Act Rule 14a-21] requires,
among other things, companies soliciting proxies for an annual or
other meeting of shareholders at which directors will be elected to
include a separate resolution subject to a shareholder advisory vote
to approve the compensation of named executive officers.
---------------------------------------------------------------------------

We are also proposing to require registrants to tag the information
required by Item 402(x) in Inline XBRL in accordance with Rule 405 of
Regulation S-T (17 CFR 232.405) and the EDGAR Filer Manual.\80\ We
expect that the disclosure of this data in a structured data language
would improve the usability of the data for investors, other market
participants and the Commission, and facilitate the analysis of this
information.
---------------------------------------------------------------------------

\80\ This tagging requirement would be implemented by including
a cross-references to Rule 405 of Regulation S-T in proposed Item
402(x), and by revising Rule 405(b) of Regulation S-T [17 CFR
232.405(b)] to include the Item 402(x) disclosure. In conjunction
with the EDGAR Filer Manual, Regulation S-T governs the electronic
submission of documents filed with the Commission. Rule 405 of
Regulation S-T specifically governs the scope and manner of
disclosure tagging requirements for operating companies and
investment companies, including the requirement in Rule 405(a)(3) to
use Inline XBRL as the specific structured data language to use for
tagging the disclosures.
---------------------------------------------------------------------------

We do not propose to exempt smaller reporting companies \81\ or
emerging growth companies (``EGCs'') \82\ from the proposed Item 402(x)
disclosures. Information about grants of options awards while a board
of directors is aware of material nonpublic information is material to
all investors, and no less relevant to shareholders of a smaller
reporting company or an EGC. Accordingly, smaller reporting companies
and EGCs would be subject to the new disclosure requirement. However,
consistent with the scaled approach to their executive compensation
disclosure,\83\ smaller reporting companies and EGCs would be permitted
to limit their disclosures about specific option awards to the PEO, the
two most highly compensated executive officers other than the PEO at
fiscal year-end, and up to two additional individuals who would have
been the most highly compensated but for not serving as executive
officers at fiscal year-end.\84\
---------------------------------------------------------------------------

\81\ ``Smaller reporting company'' is defined in Securities Act
Rule 405 and 17 CFR 240.12b-2 [Exchange Act Rule 12b-2] as an issuer
that is not an investment company, an asset-backed issuer (as
defined in 17 CFR 229.1101), or a majority-owned subsidiary of a
parent that is not a smaller reporting company and that: (1) Had a
public float of less than $250 million; or (2) had annual revenues
of less than $100 million and either: (a) No public float; or (b) a
public float of less than $700 million.
\82\ An EGC is defined as a company that has total annual gross
revenues of less than $1.07 billion during its most recently
completed fiscal year and, as of December 8, 2011, had not sold
common equity securities under a registration statement. A company
continues to be an EGC for the first five fiscal years after it
completes an IPO, unless one of the following occurs: Its total
annual gross revenues are $1.07 billion or more; it has issued more
than $1 billion in non-convertible debt in the past three years; or
it becomes a ``large accelerated filer,'' as defined in Exchange Act
Rule 12b-2. See Securities Act Rule 405 and Exchange Act Rule 12b-2.
\83\ See Item 402(l) of Regulation S-K.
\84\ See Item 402(m)(2) of Regulation S-K.
---------------------------------------------------------------------------

Request for Comment
37. To what extent does the board of directors or compensation
committee currently consider the impact of granting option awards made
close in time to disclosure of material nonpublic information? What
type of effect would the proposed disclosures have on the timing and
granting of option awards if this requirement for Item 402(x) were
adopted?
38. Would the proposed table in Item 402(x) provide meaningful
information

[[Page 8699]]

to shareholders regarding option awards made close in time to the
disclosure of material nonpublic information? What, if any, other
information should be required? Should the proposed table include a
column to specify the date on which the material nonpublic information
was released? Should any of the proposed disclosure elements be
eliminated?
39. The proposed disclosure requirements under new Item 402(x)
would apply to option awards made within a 14-day period before or
after the filing of a Form 10-Q or the filing (or furnishing) of a Form
8-K containing material nonpublic information with the Commission. Is
the proposed 14-day time period appropriate? Should the period be
longer or shorter than 14 days, and if so, what time period would be
appropriate? What percent of option grants would be included in this
disclosure based on these reporting windows?
40. Is a one-day period after the disclosure of material nonpublic
information a sufficient period for the material nonpublic information
to be reflected in the market price of the issuer's securities? Is a
one-day period prior to the disclosure too late to reflect the change
in the share price to the extent that the material nonpublic
information may have been previously disclosed to the market (e.g.,
leaked)? Should the window for measuring the change in market price
based on the release of material nonpublic information be longer or
shorter?
41. Should smaller reporting companies and emerging growth
companies be required to provide all of the proposed disclosure?
42. Are there material tax implications that could result from the
timing of stock option grants with the release of material nonpublic
information that should be disclosed?

D. Reporting of Gifts on Form 4

Currently, Section 16 reporting persons are required to report any
``bona fide'' \85\ gift of equity securities registered under Exchange
Act Section 12 on Form 5. Exchange Act Rule 16a-3(f) provides that
every person who at any time during an issuer's fiscal year was subject
to Section 16 of the Exchange Act must file a Form 5 within 45 days
after the issuer's fiscal year end to disclose certain beneficial
ownership transactions and holdings not reported previously on Forms 3,
4, or 5.\86\ As transactions that are exempted from Section 16(b) by 17
CFR 240.16b-5,\87\ including both the acquisition and disposition of
bona fide gifts are eligible for delayed reporting on Form 5 pursuant
to Rule 16a-3(f)(1). This filing schedule, under the current rules, can
permit insiders to report ``bona fide'' gifts more than one year after
the date of the gift.\88\
---------------------------------------------------------------------------

\85\ A bona fide gift is a gift that is not required or inspired
by any legal duty or that is in any sense a payment to settle a debt
or other obligation, and not made with the thought of reward for
past services or hope for future consideration. See Ownership
Reports and Trading by Officers, Directors and Principal
Stockholders, Release No. 34-26333 (Dec. 2, 1988) [53 FR 49997 (Dec.
13, 1988)].
\86\ 17 CFR 240.16a-3(f).
\87\ Rule 16b-5.
\88\ Reports on Form 5 are due within 45 days after the issuer's
fiscal year end, which potentially allows a delay of up to 410 days
between a reportable transaction and the filing of the Form 5.
---------------------------------------------------------------------------

We have become aware that the length of the filing period for Form
5 may allow insiders to engage in problematic practices involving gifts
of securities, such as insiders making stock gifts while in possession
of material nonpublic information,\89\ or backdating a stock gift in
order to maximize a donor's tax benefit.\90\ To address these concerns,
we are proposing to amend Exchange Act Rule 16a-3 to require the
reporting of dispositions of bona fide gifts of equity securities on
Form 4. Under the proposed amendment, an officer, director, or a
beneficial owner of more than 10 percent of the issuer's registered
equity securities making a gift of equity securities would be required
to report the gift on Form 4 before the end of the second business day
following the date of execution of the transaction. This would be
significantly earlier than what is required under current reporting
rules. This earlier reporting deadline would help investors, other
market participants, and the Commission better evaluate the actions of
these insiders and the context in which equity securities gifts are
being made.
---------------------------------------------------------------------------

\89\ See Daisy Maxey, ``Improper `Insider Charitable Giving' Is
Widespread, Study Says'', WALL ST. J., July 5, 2021, at <a href="https://www.wsj.com/articles/insider-charitable-giving-11625418315?mod=searchresults_pos1&page=1">https://www.wsj.com/articles/insider-charitable-giving-11625418315?mod=searchresults_pos1&page=1</a>. See also supra note 55
above.
\90\ See S. Burcu Avci et al., Insider Giving, supra note 21
above (finding that insiders' charitable gifts of securities are
unusually well timed suggesting that such results are likely due to
the possession of material nonpublic information and from the
backdating of the stock gift).
---------------------------------------------------------------------------

Request for Comment
43. Should we require dispositions by gifts of equity securities to
be disclosed Form 4 instead of Form 5, as proposed?
44. Should we require disclosure of other information about gifts
on Form 4 that are not already required by Form 4? If so, what
information should we require?

III. General Request for Comment

We request and encourage any interested person to submit comments
on any aspect of the proposed amendments, other matters that might have
an impact on the proposed amendments, and any suggestions for
additional changes. With respect to any comments, we note that they are
of greatest assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments
and by alternatives to our proposals where appropriate.

IV. Economic Analysis

We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 2(b) of the Securities Act,\91\ Section 3(f)
of the Exchange Act,\92\ and Section 2(c) of the Investment Company Act
\93\ require us, when engaging in rulemaking, to consider or determine
whether an action is necessary or appropriate in (or, with respect to
the Investment Company Act, consistent with) the public interest, and
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation. In
addition, Section 23(a)(2) of the Exchange Act requires the Commission
to consider the effects on competition of any rules the Commission
adopts under the Exchange Act and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\94\
---------------------------------------------------------------------------

\91\ 15 U.S.C. 77b(b).
\92\ 15 U.S.C. 78c(f).
\93\ 15 U.S.C. 80a-2(c).
\94\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

We have considered the economic effects of the proposed amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be quantified.
Consequently, while we have, wherever possible, attempted to quantify
the economic effects expected from this proposal, much of the
discussion remains qualitative in nature. Where we are unable to
quantify the economic effects of the proposed amendments, we provide a
qualitative assessment of the potential effects and encourage
commenters to provide data and information that would help quantify the
benefits, costs, and the potential impacts of the proposed amendments
on efficiency, competition, and capital formation.
We request comment from all interested parties. With regard to any
comments, we note that such comments

[[Page 8700]]

are of greatest assistance to our rulemaking initiative if accompanied
by supporting data and analysis of the issues addressed in those
comments.

A. Broad Economic Considerations

The proposed amendments are expected to provide greater
transparency to investors (i.e., decrease information asymmetries
between insiders and outside investors) about issuer and insider
trading arrangements and restrictions, as well as insider compensation
and incentives, enabling more informed decisions about investment in
the company. The proposed amendments are also expected to limit the
opportunity for insider trading based on material nonpublic information
(``MNPI'') (referred to as ``insider trading'' throughout Section IV
for brevity) under Rule 10b5-1 by amending the substantive conditions
of the affirmative defense, resulting in benefits to investors and
improvement in insiders' incentives.
Insider trading enables certain investors who have access to inside
information or who control the timing or substance of corporate
disclosures to profit at the expense of other investors. Due to their
access to material nonpublic information, insiders can obtain profits
through the strategic timing of trades in the issuer's securities.
These profits are gained at the expense of ordinary investors, and
essentially transfer wealth from other investors to the insider. In
addition, insider trading can distort the incentives of corporate
insiders, which results in a loss of shareholder value, and erode
investor confidence in the markets. To the extent insider trading by a
company's insiders imposes reputational costs for companies, by
reducing insider trading, the proposed amendments also could offer
reputational benefits to companies.
1. Insider trading harms investors, distorts insiders' incentives,
and imposes economic costs on investors and capital markets.
The proposed amendments are expected to decrease the incidence of
unlawful insider trading based on MNPI.\95\ Insider trading represents
a breach of fiduciary or other similar relation of trust and
confidence.\96\ Congress, the Courts, and the Commission have concluded
that such insider trading is illegal.\97\ Before analyzing each aspect
of the proposed rule, in the interest of completeness, the Commission
first reviews the economic literature on the insider trading
prohibition.\98\
---------------------------------------------------------------------------

\95\ The discussion of broad economic considerations generally
focuses on insider trading in stock, except where specified
otherwise. To the extent that insiders benefit from the timing of
option awards and gifts of stock around MNPI, some of the economic
effects associated with insider trading also may be manifested in
those contexts. For a detailed discussion of the economic
considerations applicable to option award timing and insider gift
timing, see infra Sections IV.D and IV.E.
\96\ See infra note 187.
\97\ See supra Section I.
\98\ See generally Alexandre Padilla and Brian Gardiner, Insider
Trading: Is There an Economist in the Room? 24 J. Private Enterprise
113, 123 (2009) (noting ``economists have progressively reached the
same conclusion: that insider trading is harmful to investors,
corporations, and stock exchanges, and, therefore, ought to be
prohibited'').
---------------------------------------------------------------------------

Insiders have information advantages that place them in a unique
position to obtain profits for themselves through strategic timing of
trades. When an insider profits by trading on MNPI, those profits are
obtained at other investors' expense.\99\ Thus, reducing the incidence
of insider trading would benefit investors.\100\
---------------------------------------------------------------------------

\99\ See also Michael Manove, The Harm from Insider Trading and
Informed Speculation, 104(4) Quarterly Journal of Economics, 823-845
(1989); William K.S. Wang, Trading on Material Non-Public
Information on Impersonal Stock Markets: Who is Harmed and Who Can
Sue Whom Under SEC Rule 10b-5?, Southern California Law Review
(1981).
\100\ These arguments and those below apply to Rule 10b5-1 plans
pertaining to trading in equity of other issuers as well as own
company stock. Misappropriation of information may have many
economic effects, including but not limited to, revealing
information to the market in a manner suboptimal to the issuer, (and
thus discouraging investment in information and increasing costs of
keeping information private). Further, as with trading in own
company stock, increased trading by insiders reduces incentives for
liquidity provision through adverse selection, imposing economic
costs on investors broadly. Finally, misappropriation has associated
agency costs as it represents an undisclosed form of compensation,
and may lead further divergence of interests between the manager and
the shareholders. See Frank H. Easterbrook, Insider Trading, Secret
Agents, Evidentiary Privileges, and the Production of Information,
The Supreme Court Review, 315-16, 323, 331-34; In re Melvin, SEC
Release No. 3682, 2015 WL 5172974, at *4 & n.31 (Sept. 4, 2015).
---------------------------------------------------------------------------

Insider trading also imposes a cost on the investors in the company
by distorting managerial incentives, which results in a loss of
shareholder value. Thus, whether insiders are strategically timing
stock sales and purchases based on MNPI is informative about insider
incentives and the value of the company. The ability of officers and
directors (who are either involved in making corporate decisions or
play a crucial role in the oversight of such decisions) to profit from
MNPI exacerbates conflicts of interest between officers/directors and
other shareholders, resulting in inefficient, value-decreasing
corporate decisions. By protecting the insider from the full effects of
poor corporate performance on the value of the insider's equity
position, through the ability to sell ahead of negative news, insider
trading weakens incentive alignment and exacerbates agency conflicts
(and in turn increases the cost of monitoring insiders). The incentive
distortions are discussed in greater detail below.
One incentive distortion is that an insider may prefer projects
that require less effort or that yield higher private benefits, even if
such projects have a negative net present value (NPV) and thus decrease
shareholder value.\101\ To mitigate agency conflicts and better align
insider incentives with those of shareholders, insiders are often
compensated with equity. The ability to sell shares in advance of
negative news (to the extent the compensation has vested) protects the
insider's equity position from the full effect of share price declines.
This weakens incentive alignment and exacerbates the agency conflicts
described above, increasing the likelihood that the insider would
pursue negative-NPV projects. Downside protection also incentivizes the
insider to choose riskier negative-NPV projects, due to the possibility
of profiting on the upside.\102\ Relatedly, if short-term investment
projects yield more profitable MNPI (while MNPI about long-term
projects arrives less frequently or is less definitive), an

[[Page 8701]]

insider may exhibit short-termism in investment decisions, at the
expense of shareholder value.\103\
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\101\ See, e.g., Antonio E. Bernardo, Contractual Restrictions
on Insider Trading: A Welfare Analysis, 18(1) Economic Theory 7-35
(2001) (showing in a model that ``[f]or many reasonable parameter
values, however . . . that managers may be too willing to take risky
projects. In fact, managers will often choose the risky investment
project when it has a lower expected return than the riskless
investment project.''). In some circumstances, insider trading may
remedy a manager's excess conservatism due to under diversification.
See also Lucian A. Bebchuk and Chaim Fershtman, Insider Trading and
the Managerial Choice among Risky Projects, 29(1) Journal of
Financial and Quantitative Analysis, 1-14 (1994). However, Bebchuk
and Fershtman (1994) similarly acknowledge that ``[t]he desire to
increase trading profits might lead the managers to prefer a very
risky project even if it offers a lower expected return than a safer
alternative.''
\102\ See, e.g., Frank H. Easterbrook, Insider Trading, Secret
Agents, Evidentiary Privileges, and the Production of Information,
The Supreme Court Review, 309-366, 332 (1981) (stating that ``[t]he
opportunity to gain from insider trading also may induce managers to
increase the volatility of the firm's stock prices. . . They may
select riskier projects than the shareholders would prefer, because
if the risk pays off they can capture a portion of the gains in
insider trading and, if the project flops, the shareholders bear the
loss.''). But see Alexander P. Robbins, The Rule 10b5-1 Loophole: An
Empirical Study, 34 Review of Quantitative, Finance and Accounting,
199-224 (2010) (finding, in a sample of 10b5-1 plans of 81 NASDAQ-
listed companies from 2004 to 2006 that ``insiders do not appear to
increase the volatility of their own firms' shares in order to
profit by trading on the basis of material nonpublic information
under the protection of the 10b5-1 affirmative defense'').
\103\ See M. Todd Henderson, Insider Trading and Executive
Compensation: What We Can Learn from the Experience with Rule 10b5-
1, Research Handbook on Executive Pay, 299 (2012) (stating that
short-termism is a cost of insider trading and that ``[e]xecutives
looking to maximize the value of their shares may engage in conduct
that increases the stock price in the short run at the expense of
the long term so that they can profit from trading in firm stock'').
Such managerial short-termism/myopia reduces shareholder value. See
generally, John R. Graham, Campbell R. Harvey, and Shiva Rajgopal,
The Economic Implications of Corporate Financial Reporting, 40(1-3)
Journal of Accounting and Economics, 3-73 (2005); Alex Edmans,
Blockholder Trading, Market Efficiency, and Managerial Myopia, 64(6)
Journal of Finance, 2481-2513 (2009).
---------------------------------------------------------------------------

Being able to profit from MNPI also can distort insider incentives
with respect to other corporate decisions that can affect the share
price (for example, repurchases in cases where such a payout is not
efficient, motivated by the attempt to boost the share price in advance
of an insider's sale of shares).\104\ As another example, officers and
directors engaged in insider trading may be disincentivized from
sharing information efficiently within the firm if they can profit from
withholding it and personally trading on it, which leads to inefficient
corporate decisions and thus decreased shareholder value.\105\
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\104\ See, e.g., Konan Chan, David L. Ikenberry, Inmoo Lee, and
Yanzhi Wang, Share Repurchases as a Potential Tool to Mislead
Investors, 16 Journal of Corporate Finance 137 (2010) (finding in
1980-2000 data that a limited number of managers may have used
repurchases in a misleading way as ``cheap talk''); Alice A.
Bonaim[eacute] and Michael D. Ryngaert, Insider Trading and Share
Repurchases: Do Insiders and Firms Trade in the Same Direction?, 22
Journal of Corporate Finance, 35-53 (2013) (finding that repurchases
that coincide with net insider selling may be related to price
support and/or reasons related to option exercises); Peter Cziraki,
Evgeny Lyandres, and Roni Michaely, What do Insiders Know? Evidence
from Insider Trading Around Share Repurchases and SEOs, 66 Journal
of Corporate Finance 101544 (2021) (finding that, ``[h]igher insider
net buying is associated with better post-event operating
performance, a reduction in undervaluation, and, for repurchases,
lower post-event cost of capital. Insider trading also predicts
announcement returns and long-term abnormal returns following
events.'' Their results suggests that ``insider trades before
corporate events [repurchases and SEOs] contain information about
changes both in fundamentals and in investor sentiment''); Lenore
Palladino, Do Corporate Insiders Use Stock Buybacks for Personal
Gain?, 34(2) International Review of Applied Economics, 152-174
(2020) (finding increased insider selling in quarters where buybacks
are occurring); Waqar Ahmed, Insider Trading Around Open Market
Share Repurchase Announcements, University of Warwick Working Paper
(2017) (finding that ``insiders take advantage of higher post-
[repurchase] announcement price and sell more heavily'', and that
such selling is predictive of lower long-term returns). See also
Rulemaking Petition 4-746, Jun. 25, 2019, available at <a href="https://www.sec.gov/rules/petitions/2019/petn4-746.pdf">https://www.sec.gov/rules/petitions/2019/petn4-746.pdf</a>, at 5 and note 17
(expressing concern and citing evidence of repurchases used to
increase share prices at the time when insiders sell shares); Alex
Edmans, Vivian Fang, and Allen Huang, The Long-Term Consequences of
Short-Term Incentives, Journal of Accounting Research, forthcoming
(2021) (finding that ``[v]esting equity is positively associated
with the probability of a firm repurchasing shares'' but that ``it
is also associated with more negative long-term returns over the 2-3
years following repurchases'' and that ``CEOs sell their own stock
shortly after using company money to buy the firm's stock, also
inconsistent with repurchases being motivated by undervaluation'').
But see, e.g., Harrison Liu and Edward Swanson, Is Price Support a
Motive for Increasing Share Repurchases?, 38 Journal of Corporate
Finance, 77 (2016) (finding that ``[c]orporate insiders do not sell
from personal stock holdings during the price support quarter.'');
Pascal Busch and Stefan Obernberger, Actual Share Repurchases, Price
Efficiency, and The Information Content Of Stock Prices, 30 Review
of Financial Studies, 324 (2017) (concluding, with respect to actual
share repurchases, that price support provided by repurchases
improves price efficiency, even when manipulation concerns might be
highest, such as those that occur prior to insider sales).
\105\ See, e.g., Robert J. Haft, The Effect of Insider Trading
Rules on the Internal Efficiency of the Large Corporation, 80(5)
Michigan Law Review, 1051-1071, 1055 (1982).
---------------------------------------------------------------------------

Another economic cost of insider trading is that it may incentivize
insiders to adjust the timing or content of corporate disclosure (e.g.,
delay the release of MNPI).\106\ Manipulation of corporate disclosure
causes price distortions and impairs the ability of investors to make
informed investment decisions. Less informed investment decisions
result in less efficient allocation of capital in investor portfolios,
compared to a setting with no disclosure distortions. To the extent
that investors anticipate such disclosure gaming, they may
commensurately increase their information gathering effort, resulting
in higher information gathering costs for investors. Investors,
however, have a limited ability to identify specific corporate
disclosures being manipulated or to obtain timely and accurate
information elsewhere.
---------------------------------------------------------------------------

\106\ See, e.g., Ranga Narayanan, Insider Trading and the
Voluntary Disclosure of Information by Firms, 24(3) Journal of
Banking and Finance, 395-425 (2000) (stating that ``[s]tringent
enforcement of insider trading regulations induces more disclosure
by firms''); Qiang Cheng and Kin Lo, Insider Trading and Voluntary
Disclosures, 44(5) Journal of Accounting Research, 815-848 (2006)
(finding that when ``managers plan to purchase shares, they increase
the number of bad news forecasts to reduce the purchase price . . .
insiders do exploit voluntary disclosure opportunities for personal
gain, but only selectively, when litigation risk is sufficiently
low''); Frank H. Easterbrook, Insider Trading, Secret Agents,
Evidentiary Privileges, and the Production of Information, Supreme
Court Review 1981, 309-366, 333 (1981) (stating that ``[t]he
prospect of insiders' gains may lead the firm to delay the release
of information''). Some studies also note that an opposite effect is
possible--managers concerned about litigation may provide higher-
quality disclosure before selling shares. See Jonathan L. Rogers,
Disclosure Quality and Management Trading Incentives, 46(5) Journal
of Accounting Research, 1265-1296 (2008) (Finding that
``[c]onsistent with a desire to reduce the probability of litigation
. . . managers provide higher quality disclosures before selling
shares than they provide in the absence of trading'' but also
finding that ``[c]onsistent with a desire to maintain their
information advantage, . . . some, albeit weaker, evidence that
managers provide lower quality disclosures prior to purchasing
shares than they provide in the absence of trading.''). In the
context of Rule 10b5-1 plans, see, e.g., Stanley Veliotis, Rule
10b5-1 Trading Plans and Insiders' Incentive to Misrepresent, 47(2)
American Business Law Journal, 313-360, at 330 & nn. 77-78 (2010)
(stating that ``Rule 10b5-1 plans give insiders an incentive to
accelerate the release of good news ahead of planned stock sales and
to delay the release of bad news until after the sales are completed
. . . As a practical matter, manipulation of the announcement's
timing would be extremely difficult to prove because insiders are
not required to disclose their 10b5-1 plans and firms seldom
disclose a schedule for corporate announcements in advance . . .'');
Karl T. Muth, With Avarice Aforethought: Insider Trading and 10b5-1
Plans, 10(1) U.C. Davis Business Law Journal, 65-82, at 71 & nn. 32-
33 (2009) (stating that ``executives can participate in the timing
of news . . . about the company. Withholding or `timing' news allows
the executive to (imperfectly) time market response to news . .
.''); John Shon and Stanley Veliotis, Meeting or Beating Earnings
Expectations, 59(9) Management Science, 1988-2002 (2013) (finding
that ``firms with insider sales executed under Rule 10b5-1 plans
exhibit a higher likelihood of meeting or beating analysts' earnings
expectations (MBE) . . . [that] this relation between MBE and plan
sales is more pronounced for the plan sales of chief executive
officers (CEOs) and chief financial officers (CFOs) and is
nonexistent for other key insiders,'' and concluding that ``[o]ne
interpretation of [their] results is that CEOs and CFOs who sell
under these plans may be more likely to engage in strategic behavior
to meet or beat expectations in an effort to maximize their proceeds
from plan sales'').
---------------------------------------------------------------------------

Investor recognition of the potential incentive distortions and the
risk of lower-quality corporate disclosures resulting from insider
trading, as well as the risk of buying shares from a better informed
inside seller, is likely to decrease investor confidence in the issuer
and make investors less willing to buy or hold the issuer's shares
(trading against informed insiders generates what is known as ``adverse
selection'').\107\ This in turn could have negative effects on capital
formation and the ability to fund investments, due to challenges in
raising the required amount of capital.
---------------------------------------------------------------------------

\107\ See, e.g., Lawrence M. Ausubel, Insider Trading in a
Rational Expectations Economy, 80(5) American Economic Review 1022-
1041 (1990) (showing in a rational expectations model that ``[i]f
`outsiders' expect `insiders' to take advantage of them in trading,
outsiders will reduce their investment. The insiders' loss from this
diminished investor confidence may more than offset their trading
gains. Consequently, a prohibition on insider trading may effect a
Pareto improvement.''). Further, informed trading by insiders can
reduce the incentive for outside investors to acquire information.
See Michael J. Fishman and Kathleen M. Hagerty, Insider Trading and
the Efficiency of Stock Prices, 23(1) RAND Journal of Economics,
106-122 (1992).
---------------------------------------------------------------------------

Turning to the effects on the market as a whole, the risk of
trading against informed insiders trading on MNPI negatively affects
market integrity and erodes investor confidence in the

[[Page 8702]]

secondary trading market, deterring traders that do not have the
advantage of MNPI. Insider trading is also likely to adversely affect
price efficiency \108\ and liquidity.\109\
---------------------------------------------------------------------------

\108\ A number of studies demonstrate adverse effects of insider
trading on market efficiency. See, e.g., Michael J. Fishman and
Kathleen M. Hagerty, Insider Trading and the Efficiency of Stock
Prices, 23(1) RAND Journal of Economics, 106-122 (1992) (showing
that ``under certain circumstances, insider trading leads to less
efficient stock prices. This is because insider trading has two
adverse effects on the competitiveness of the market: It deters
other traders from acquiring information and trading, and it skews
the distribution of information held by traders toward one
trader.''); Zhihong Chen and Yuan Huang, Yuanto Kusnadi, and K.C.
John Wei, The Real Effect of the Initial Enforcement of Insider
Trading Laws, 45 Journal of Corporate Finance, 687-709 (2017)
(finding evidence that the initial enforcement of insider trading
laws ``improves capital allocation efficiency by increasing price
informativeness and reducing market frictions''); Robert M. Bushman,
Joseph D. Piotroski, and Abbie J. Smith, Insider Trading
Restrictions and Analysts' Incentives to Follow Firms, 60(1) Journal
of Finance, 35-66 (2005) (arguing that ``insider trading crowds out
private information acquisition by outsiders'' and showing that
``analyst following increases after initial enforcement of insider
trading laws'' in a cross-country sample); Nuno Fernandes and Miguel
A. Ferreira, Insider Trading Laws and Stock Price Informativeness,
22(5) Review of Financial Studies 1845-1887 (2009) (finding that
price informativeness increases with the enforcement of insider
trading laws, but only in countries with a strong ``efficiency of
the judicial system, investor protection, and financial
reporting''). See also Alexander P. Robbins, The Rule 10b5-1
Loophole: An Empirical Study, 34 Review of Quantitative Finance and
Accounting, 199-224 (2010) (finding, in a sample of 10b5-1 plans of
81 NASDAQ-listed companies from 2004 to 2006 that ``10b5-1 plans
have a significant negative effect on the liquidity of a firm's
shares, and therefore the firm's cost of capital''). Some studies
argue that insider trading improves price efficiency. See, e.g.,
Hayne E. Leland, Insider Trading: Should It Be Prohibited?, 100(4)
Journal of Political Economy, 859-887 (1992) (showing in a model
that ``stock prices better reflect information'' when insider
trading is permitted.); Utpal Bhattacharya, Hazem Daouk, Brian
Jorgenson, and Carl-Heinrich Kehr, When an Event is Not an Event:
The Curious Case of An Emerging Market, 55(1) Journal of Financial
Economics, 69-101 (2000) (suggesting ``that unrestricted insider
trading causes prices to fully incorporate the information before
its public release''); see generally Henry G. Manne, Insider Trading
and the Stock Market (1966). A reduction in insider trading can have
nuanced effects on market efficiency. For example, the conclusions
about the effect on insider trading on market efficiency may depend
on whether the framework is static or dynamic. See David Easley,
Soeren Hvidkjaer, and Maureen O'Hara, Is Information Risk a
Determinant of Asset Returns? 57(5) Journal of Finance, 2185-2221
(2002).
\109\ Various studies show that insider trading negatively
impacts liquidity. For example, see Raymond P.H. Fishe and Michel A.
Robe, The Impact of Illegal Insider Trading in Dealer and Specialist
Markets: Evidence From a Natural Experiment, 71(3) Journal of
Financial Economics, 461-488 (2004); Louis Cheng, Michael Firth,
T.Y. Leung, and Oliver Rui, The Effects of Insider Trading on
Liquidity, 14(5) Pacific-Basin Finance Journal 467-483 (2006); Hayne
E. Leland, Insider Trading: Should It Be Prohibited? 100(4) Journal
of Political Economy, 859-887 (1992) (showing in a model that
``markets are less liquid'' and ``outside investors and liquidity
traders will be hurt'' when insider trading is permitted); Laura N.
Beny, Do Insider Trading Laws Matter? Some Preliminary Comparative
Evidence, 7(1) American Law and Economics Review, 144-183 (2005)
(finding that ``countries with more prohibitive insider trading laws
have more diffuse equity ownership, more accurate stock prices, and
more liquid stock markets''); Lawrence R. Glosten, Insider Trading,
Liquidity, and the Role of the Monopolist Specialist, 62(2), Journal
of Business 211-235 (1989) (showing in a model that insider trading
reduces liquidity). However, another study does not find a negative
effect of insider trading on liquidity. See e.g., Charles Cao, Laura
C. Field, and Gordon Hanka, Does Insider Trading Impair Market
Liquidity? Evidence from IPO Lockup Expirations, 39(1) Journal of
Financial and Quantitative Analysis, 25-46 (2004).
---------------------------------------------------------------------------

2. Certain Rule 10b5-1 plan \110\ trading practices may raise
concerns about potential insider trading.
---------------------------------------------------------------------------

\110\ For purposes of this economic analysis, the terms ``Rule
10b5-1 trading arrangements'' and ``Rule 10b5-1 plans'' are used to
refer to the trading arrangements reliant upon the affirmative
defense of Rule 10b5-1(c)(1), in line with the use of these terms in
the academic research on this topic.
---------------------------------------------------------------------------

Over the years concerns have been raised that persons have engaged
in securities trading based on MNPI while availing themselves of the
Rule 10b5-1(c)(1) affirmative defense.\111\ Examples of practices that
have raised concerns include the strategic cancellation of previously
adopted plans or individual trades on the basis of MNPI,\112\ as well
as initiation or resumption of trading close in time to plan adoption
or modification.\113\
---------------------------------------------------------------------------

\111\ See, e.g., See Recommendations of the Investor Advisory
Committee Regarding Rule 10b5-1 Plans (Sept. 9, 2021), at <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf</a>; Letter from David Larcker, March 10,
2021, available at <a href="https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf">https://www.sec.gov/comments/s7-24-20/s72420-8488827-229970.pdf</a>; Letter from Council of Institutional Investors
(CII), April 22, 2021, available at <a href="https://www.sec.gov/comments/s7-14-20/s71420-8709408-236962.pdf">https://www.sec.gov/comments/s7-14-20/s71420-8709408-236962.pdf</a>; Letter from CII, March 18, 2021,
available at <a href="https://www.sec.gov/comments/s7-24-20/s72420-8519687-230183.pdf">https://www.sec.gov/comments/s7-24-20/s72420-8519687-230183.pdf</a>; Letter from CII, September 25, 2020, available at
<a href="https://www.sec.gov/comments/s7-06-20/s70620-7843308-223819.pdf">https://www.sec.gov/comments/s7-06-20/s70620-7843308-223819.pdf</a>;
Letter from CII, December 13, 2018, available at <a href="https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf">https://www.sec.gov/comments/s7-20-18/s72018-4766666-176839.pdf</a>; Letter from
CII, July 11, 2018, available at <a href="https://www.cii.org/files/July%2011%202018%20SEC%20Reg%20Flex%20Letter%20Final.pdf">https://www.cii.org/files/July%2011%202018%20SEC%20Reg%20Flex%20Letter%20Final.pdf</a>; Letter
from CII, February 12, 2018, available at <a href="https://www.sec.gov/comments/s7-07-17/s70717-3025708-161898.pdf">https://www.sec.gov/comments/s7-07-17/s70717-3025708-161898.pdf</a>; Letter from CII to The
Honorable Jay Clayton, January 18, 2018, available at <a href="http://www.cii.org/files/issues_and_advocacy/correspondence/2018/January%2018%202018%20Rule%2010b5-1%20">http://www.cii.org/files/issues_and_advocacy/correspondence/2018/January%2018%202018%20Rule%2010b5-1%20</a>(finalI).pdf; Letter from CII,
July 8, 2016, available at <a href="https://www.sec.gov/comments/s7-06-16/s70616-49.pdf">https://www.sec.gov/comments/s7-06-16/s70616-49.pdf</a>; Letter from CII to The Honorable Mary Jo White, May
9, 2013, available at <a href="http://www.cii.org/files/issues_and_advocacy/correspondence/2013/05_09_13_cii_letter_to_sec_rule_10b5-1_trading_plans.pdf">http://www.cii.org/files/issues_and_advocacy/correspondence/2013/05_09_13_cii_letter_to_sec_rule_10b5-1_trading_plans.pdf</a>; CII Rulemaking Petition.
\112\ See, e.g., Jill E. Fisch, Testimony before the Investor
Protection, Entrepreneurship, and Capital Markets Subcommittee, U.S.
House Committee on Financial Services, Insider Trading and Stock
Option Grants: An Examination of Corporate Integrity in the Covid-19
Pandemic, September 17, 2020, available at <a href="https://docs.house.gov/meetings/BA/BA16/20200917/111013/HHRG-116-BA16-Wstate-FischJ-20200917.pdf">https://docs.house.gov/meetings/BA/BA16/20200917/111013/HHRG-116-BA16-Wstate-FischJ-20200917.pdf</a>, at p. 5; Alan D. Jagolinzer, SEC rule 10b5-1 and
Insiders' Strategic Trade, 55(2) Management Science, 224-239 (2009)
(finding ``for a sample of 54 firms for which there is public
disclosure of early sales plan terminations'' that ``early sales
plan terminations are associated with pending positive performance
shifts, reducing the likelihood that insiders' sales execute at low
prices''); Stanley Veliotis, Rule 10b5-1 Trading Plans and Insiders'
Incentive to Misrepresent, 47(2) American Business Law Journal, 313-
360, at 328-30 (2010) (discussing concerns related to selective
cancellations); Taylan Mavruk and Nejat H. Seyhun, Do SEC's 10B5-1
Safe Harbor Rules Need to Be Rewritten, Columbia Business Law
Review, 133-183, at 165, 168-71 (2016) (discussing selective
cancellation concerns, providing indirect evidence, and concluding
that its findings are ``consistent with the hypothesis that insiders
intervene in their planned transactions to increase
profitability''). See also Stephen L. Lenkey, Cancellable Insider
Trading Plans: An Analysis of SEC Rule 10b5-1, 32(12) Review of
Financial Studies, 4947-4996 (2019) (concluding, in a theoretical
framework, that ``[b]ecause the conditions under which the insider
elects to adopt a plan often coincide with the conditions under
which the termination option reduces welfare, an alternative
regulatory framework wherein the insider could adopt a non-
cancellable plan (and, thereby, credibly commit to execute his
planned trade) would improve the investors' welfare under a wide set
of circumstances.'')
\113\ For a discussion of the evidence of returns following
insider trades occurring close to plan adoption, see infra notes
123-131 and accompanying and preceding text. But see infra notes
132-138 and accompanying and following text. Existing disclosure
does not provide data on plan cancellations or plan modifications
(including cancellations of planned trades).
---------------------------------------------------------------------------

As discussed in detail in Section II above, the Commission is
proposing several amendments to address these practices, including
additional disclosure requirements for insider and issuer trading plans
under Item 408 of Regulation S-K; additional disclosure of Rule 10b5-1
plan use in beneficial ownership forms; and modifications to the
conditions of the affirmative defense under Rule 10b5-1(c)(1)
(introducing cooling-off periods following the adoption of a new or
modified plan; certification requirements; and restrictions on single-
trade plans and multiple overlapping plans for open market trades in
the same class of securities and single-trade plans). Disclosure
requirements significantly affect the underlying behavior of insiders
and issuers by drawing scrutiny of investors and other market
participants to insider trading practices.\114\
---------------------------------------------------------------------------

\114\ Studies have found evidence that changes in mandatory
disclosure affect behavior. See, e.g., Elizabeth C. Chuk, Economic
Consequences of Mandated Accounting Disclosures: Evidence from
Pension Accounting Standards, 88(2) Accounting Review, 395-427
(2013); Alice Adams Bonaim[eacute], Mandatory Disclosure and Firm
Behavior: Evidence from Share Repurchases, 90(4) Accounting Review,
1333-1362 (2015).
---------------------------------------------------------------------------

Combined, the proposed amendments are expected to reduce the
potential for insider trading through Rule 10b5-1

[[Page 8703]]

plans and other trading arrangements by insiders and companies. As
discussed above, deterring insider trading would result in benefits for
investor protection, capital formation, and orderly and efficient
markets. By deterring insider trading, the amendments would
disincentivize insider behavior that is likely to harm the securities
markets and undermine investor confidence.
3. Current levels of disclosure about insider and issuer trading
plans limit the ability of investors to identify the risk of insider
trading and consider the associated incentive conflicts and information
asymmetries in their investment decisions.
Existing gaps in the disclosure framework limit the information
currently available to investors and other market participants
regarding the use of insider and issuer trading plans, and the extent
to which trading based on MNPI potentially distorts insider incentives
with respect to corporate decisions (and thus shareholder value).
Besides limiting the ability of investors to correctly value the
company's shares, and thus make informed investment decisions, such
disclosure gaps limit the ability of the Commission staff to perform
market surveillance with regard to Exchange Act Section 10(b) and Rule
10b-5, with the associated adverse consequences for investor
protection.
The proposed disclosure amendments would provide greater
transparency to investors and decrease information asymmetries between
insiders and outside investors about insiders' and companies' trading
arrangements and associated policies and procedures, enabling more
informed decisions about whether to invest in the company's shares and
at what valuation. This might result in more efficient capital
allocation and more informationally efficient pricing. The proposed
additional disclosure requirements might also indirectly yield
potential capital formation benefits if they increase investor
confidence in the company's governance.
4. The economic effects of the proposed amendments are in some
cases uncertain.
The discussed economic effects of the proposed amendments may be
uncertain or difficult to generalize.
An important factor contributing to the uncertainty about the
magnitude of the benefits of the proposed amendments to Rule 10b5-1 is
the potential for substitution between Rule 10b5-1 plans and other
trading arrangements. The use of the Rule 10b5-1(c)(1) affirmative
defense is voluntary. Insiders and companies may elect to pursue other
trading arrangements if they perceive the costs of relying on that
affirmative defense are too high. For example, companies may instead
rely on the Rule 10b5-1(c)(2) affirmative defense. The application of
the proposed disclosure requirements of new Item 408 of Regulation S-K
to all officer, director, and company trading plans (including plans
not under Rule 10b5-1) is expected to partly mitigate this concern.
The considerations presented above are generally applicable to the
proposed amendments as a whole. In the sections that follow we provide
a more detailed discussion of economic effects of the particular
proposed amendments, including the expected costs and benefits relative
to the market baseline, as well as reasonable alternatives.

B. Amendments to Rule 10b5-1(c)(1)

The Commission is proposing additional conditions that must be
satisfied for a trading arrangement to be eligible for the Rule 10b5-
1(c)(1) affirmative defense. These amendments are intended to protect
investors by decreasing opportunities for officers, directors, and
companies to profit from MNPI through such trading arrangements.
The proposed amendments would narrow the conditions under which the
Rule 10b5-1(c)(1) affirmative defense would be available. First, the
proposed amendments would establish mandatory cooling-off periods
before any trading could commence under a Rule 10b5-1 trading
arrangement by an officer, director, or issuer after the adoption of a
new or modified trading arrangement. Second, the proposed amendments
would eliminate the availability of the affirmative defense for
multiple overlapping trading arrangements for open market transactions
in the same class of securities, as well as limit single-trade plans to
a maximum of one in a 12-month period. Third, the proposed amendments
would impose a certification requirement as a condition of the Rule
10b5-1(c)(1) affirmative defense for trading arrangements of officers
and directors. In addition, the proposed amendments would broaden the
good faith provision, which is a condition of the 10b5-1(c)(1)
affirmative defense.
1. Baseline and Affected Parties
We consider the economic effects of the proposed amendments in the
context of the regulatory and market baseline. A lack of comprehensive
disclosure of Rule 10b5-1 trading arrangements makes it more difficult
to provide complete data on existing Rule 10b5-1 practices and affected
plan participants. Our estimates are limited by the voluntary nature of
the Rule 10b5-1 disclosure in beneficial ownership filings, where
insider trades are reported, as well as the limited scope of Rule 10b5-
1 trades for which Form 144 reporting is required.\115\ Based on
beneficial ownership filings (Forms 3, 4, and 5) during the 2020
calendar year, approximately 4,900 natural persons at approximately
1,400 companies reported trades under Rule 10b5-1 trading arrangements.
This figure includes approximately 4,800 officers and directors at
1,400 companies; narrowing it to officers yields an estimate of
approximately 3,900 officers at 1,200 companies.\116\ Due to the data
limitations mentioned above, the actual number of affected parties is
likely to be larger.
---------------------------------------------------------------------------

\115\ Form 144 must be filed with the Commission by an affiliate
as a notice of the proposed sale of (restricted) securities when the
amount to be sold under Rule 144 during any three-month period
exceeds 5,000 shares or units or has an aggregate sales price in
excess of $50,000. See <a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/form-144">https://www.investor.gov/introduction-investing/investing-basics/glossary/form-144</a>. Thus, Rule 10b5-1 plan
trades below that threshold are not required to be reported on Form
144 and thus may not be in our data. Further, because the vast
majority of Form 144 filings are made in paper form during the
considered period, we rely on information from such paper filings
extracted and processed by the vendor for the Thomson Reuters/
Refinitiv insiders dataset.
\116\ The estimate is based on the data from filings on Forms 3,
4, and 5 for trades during calendar year 2020 that reported Rule
10b5-1 plan use (obtained from Thomson Reuters/Refinitiv insiders
dataset). The estimate only captures natural persons with Rule 10b5-
1 plans that have Section 16 reporting obligations, and thus likely
represents a lower bound on the number of affected plan
participants. Officers and directors are identified based on the
role code (beneficial owners and affiliates are not included in the
count). Combining data from Form 144 filings with planned sale dates
in calendar year 2020 that reported Rule 10b5-1 plan use (also
obtained from Thomson Reuters/Refinitiv insiders dataset) and the
data from filings on Forms 3, 4, and 5 cited above, we estimate that
approximately 5,800 natural persons at approximately 1,500 companies
(which includes 5,000 officers and directors at 1,400 companies; or
when limited to officers only, approximately 4,100 officers at 1,300
companies) reported trades under Rule 10b5-1. Due to gaps in the
reporting regime, we cannot be certain whether the higher prevalence
of plans reported for officers is due to their higher prevalence in
general or due to greater disclosure of such plans.
---------------------------------------------------------------------------

Below we discuss the available evidence on Rule 10b5-1 plans of
officers, directors, and other natural persons. A recent academic study
analyzed Form 144 data on insider trades under Rule 10b5-1 plans during
January 2016-May 2020.\117\ The study

[[Page 8704]]

documents ``[t]he mean (median) cooling-off period is 117.9 (76) days.
Approximately 14 percent of plans commence trading within the first 30
days, and 39 percent within the first 60 days. These represent very
short cooling-off periods. 82 percent of plans commence trading within
6 months.'' \118\ As a caveat, the available data do not indicate
whether the trading time frames are due to an issuer's policies (i.e.,
whether there is a ``cooling-off period'' is not known--only the time
between plan adoption and the first trade, which could be viewed as the
``effective cooling-off period'', is calculated).
---------------------------------------------------------------------------

\117\ See David F. Larcker, Bradford Lynch, Philip Quinn, Brian
Tayan, and Daniel J. Taylor, Gaming the System: Three Red Flags'' of
Potential 10b5-1 Abuse, Stanford Closer Look Series, January 19,
2021 (``Larcker et al. (2021)'') (2021). The study presents novel
data ``on all sales of restricted stock filed on Form 144 between
January 2016 and May 2020 and the adoption date of any corresponding
10b5-1 plans. . . In total, we have data on 20,595 plans, which
covers the trading activity by 10,123 executives at 2,140 unique
firms. These plans are responsible for a total of 55,287 sales
transactions totaling $105.3 billion during our sample period.
Average (median) trade size is $1.9 million ($0.4 million) . . .''
The analysis based on Form 144 data has the advantage of not being
subject to voluntary reporting bias. However, as a caveat, planned
resales reported on Form 144 represent a subset of all trades and
may not be representative of all Rule 10b5-1 trades by insiders
(e.g., of purchases, or of sales of unrestricted stock). By
comparison, Mavruk and Seyhun (2016) examine a larger sample of plan
trades identified by a voluntary Rule 10b5-1 checkbox on beneficial
ownership forms. They examine transactions for ``an average of
14,211 insiders in 3875 firms for each year between 2003 and 2013.''
See Taylan Mavruk and Nejat H. Seyhun, Do SEC's 10B5-1 Safe Harbor
Rules Need to Be Rewritten, Columbia Business Law Review, 133-183
(2016). Relatedly, Hugon and Lee (2016) utilize a sample of
``voluntary disclosures of 10b5-1 plan participation in SEC Form 4
filed between October 2000 and December 2010.'' See Artur Hugon and
Yen-Jung Lee, SEC Rule 10b5-1 Plans and Strategic Trade around
Earnings Announcements, Arizona State University and National Taiwan
University (Working Paper) (2016). See also See Rik Sen, Are Insider
Sales Under 10b5-1 Plans Strategically Timed?, New York University
(Working Paper) (2008); Eliezer M. Fich, Robert Parrino, and Anh L.
Tran, When and How Are Rule 10b5-1 Plans Used for Insider Stock
Sales?, Drexel University, University of Texas at Austin, and City
University of London (Working Paper) (2021) (also utilizing Form 4
data). Data on Rule 10b5-1 trades by issuers is not available.
\118\ See Larcker et al. (2021).
---------------------------------------------------------------------------

Using Form 144 data provided by The Washington Service for a more
recent period (January 2, 2018-October 19, 2021), we find that the
median (mean) cooling off period is 72 (105) days, with 13.5 percent of
first trades pursuant to a plan occurring within thirty days of the
plan date and 40.7 percent occurring within 60 days of the plan
date.\119\ Shorter cooling off periods are also associated with higher
trade sizes as trades occurring within 90 days of plan adoption have a
median size of $670,000 compared with a median size of $378,000 for
those trades occurring more than six months after plan adoption.
Further, single-trade plans constitute approximately 40% of plans
during the time period examined.
---------------------------------------------------------------------------

\119\ 13.5 percent of trades occur within 0-30 days. 27.2
percent of trades occur within 31-60 days, and 22.6 percent within
61-90 days. In total, 63.3 percent of trades occur within 90 days of
the plan date and 83.7 percent of plans commence trading within six
months.
---------------------------------------------------------------------------

A 2016 industry survey also examined Rule 10b5-1 plan practices at
public companies.\120\ In the survey (i) 77 percent of the respondents
had a mandatory cooling-off period of 60 days or less and a cooling-off
period of 30 days was the most common cooling-off period among
respondents (41 percent); (ii) 98 percent of the respondents reviewed
and approved insiders' Rule 10b5-1 plans to some degree; (iii) 55
percent of the respondents allowed termination of plans and 40 percent
of the respondents allowed modification of plans; and (iv) 18 percent
of respondents allowed insiders to maintain multiple overlapping plans,
while 82 percent disallowed multiple overlapping plans.\121\
---------------------------------------------------------------------------

\120\ See Defining the Fine Line: Mitigating Risk with 10b5-1
Plans, Morgan Stanley/Shearman & Sterling LLP, available at <a href="https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf">https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf</a>. The survey included public
company members of the Society of Corporate Secretaries & Governance
Professionals. The respondents and their practices related to Rule
10b5-1 plans are not necessarily representative of all companies
subject to the proposed amendments and their Rule 10b5-1 plan
policies and practices. Separately, the survey stated that that 51
percent of S&P 500 companies had Rule 10b5-1 plans in 2015.
\121\ Id.
---------------------------------------------------------------------------

Various studies have sought to examine the potential use of MNPI
for trading under Rule 10b5-1 by looking at the returns around trades
under such plans (with the caveats about data availability). Larcker et
al. (2021) document abnormal profits following some Rule 10b5-1(c)(1)
trades, which is indicative of potential informed trading by insiders
under such plans. For example, the study shows abnormal industry-
adjusted returns over a six-month period following the first sale to be
-2.5 percent for plans with a cooling-off period of less than 30 days
and -1.5 percent for plans with a cooling-off period of between 30 and
60 days, but no evidence of such a post-insider sale price drop when
the cooling-off period was longer than 60 days. The study also finds
that the abnormal return is between -2 percent and -3 percent for plans
that execute a sale in the window between when the plan is adopted and
that quarter's earnings announcement, but no price drop is found
following sales after the earnings announcement. Similarly, they find
that insider sales under all single-trade plans are associated with a
share price decrease after the sale.\122\ Negative abnormal returns
after insider sales under Rule 10b5-1(c)(1) plans indicate potential
informed trading by insiders ahead of negative news. A lack of such
negative returns after insider sales under plans with longer cooling
off periods is suggestive of inside information becoming stale during
the cooling off period, though it could also indicate low statistical
power. Similarly, a lack of negative returns when insider sales occur
after the quarter's earnings announcement may suggest less potential
for informed selling once the earnings information has been made
public; while this result could also indicate low power, it is
intuitive that information is more evenly shared following the earnings
announcement.\123\
---------------------------------------------------------------------------

\122\ The data does not show the dates of all scheduled trades,
only the dates of executed trades. Thus, some ``single-trade'' plans
may be multi-trade plans in progress, or multi-trade plans with all
but one trade cancelled.
\123\ As a caveat, the tests of statistical significance of the
differences are not shown, so we cannot assess whether the economic
differences discussed above have statistical significance.
---------------------------------------------------------------------------

Several other studies document abnormal returns following trading
by insiders who use Rule 10b5-1 plans. For example, a 2009 study of the
use of Rule 10b5-1 plans finds that ``[p]articipating insiders' sales
systematically follow positive and precede negative firm performance,
generating abnormal forward-looking returns larger than those earned by
nonparticipating colleagues,'' that ``a substantive proportion of
randomly drawn plan initiations are associated with pending adverse
news disclosures,'' and that ``early sales plan terminations are
associated with pending positive performance shifts.'' \124\ A 2016
study examined insider sales at financial institutions prior to the
2008 financial crisis and found that ``net insider sales in the 2001Q2-
2007Q2 pre-financial crisis quarters predict not-yet-reported non-
performing securitized loans and securitization income for those
quarters, and that net insider sales during 2006Q4 predict write-downs
of securitization-related assets during the 2007Q3-2008Q4 crisis
period'' and, crucially for this analysis, that ``insiders avoid larger
stock price losses through 10b5-1 plan sales than through non-plan
sales.'' \125\ A different 2016 study presents ``evidence consistent
with insiders using 10b5-1 plans to sell stock in

[[Page 8705]]

advance of disappointing earnings results.'' \126\ The study further
finds that some of the more aggressive insider trading on earnings
information shifted into Rule 10b5-1 plans after adoption of the
rule.\127\ The study also finds that ``these insiders make the
following types of trades: non-routine, infrequent, one-time, close to
the plan initiation date, and during traditional blackout periods.''
\128\ Another 2016 study presents evidence of ``insiders selling shares
prior to imminent bad earnings news through their Rule 10b5-1 trading
plans.'' \129\ A 2020 study finds that ``public companies
disproportionately disclose positive news on days when corporate
executives sell shares under predetermined Rule 10b5-1 plans,'' with
such disclosure of good news on Rule 10b5-1 selling days being most
prevalent ``in the health care sector and among mid-cap firms.'' \130\
The study further shows that ``stock prices reverse after high levels
of Rule 10b5-1 selling on positive news days, and that the price
reversal increases with the share volume of Rule 10b5-1 selling.''
\131\
---------------------------------------------------------------------------

\124\ See Alan D. Jagolinzer, SEC Rule 10b5-1 and Insiders'
Strategic Trade, 55(2) Management Science, 224-239 (2009).
\125\ See Stephen G. Ryan, Jennifer Wu Tucker, and Ying Zhou
Securitization and Insider Trading, 91(2) Accounting Review, 649-675
(2016).
\126\ See Artur Hugon and Yen-Jung Lee, SEC Rule 10b5-1 Plans
and Strategic Trade around Earnings Announcements, Arizona State
University and National Taiwan University (Working Paper) (2016).
\127\ Id.
\128\ Id.
\129\ See Jonathan A. Milian, Insider Sales Based on Short-term
Earnings Information, 47 Rev. Quant. Finan. Acc. (2016) 47, 109-128
(examining data on insider sales under Rule 10b5-1 based on
beneficial ownership filings from August 2004 through May 2010). As
a caveat, the study specifies that the plan identification may be
imprecise: it ``use[s] the timing of insiders' Rule 10b5-1 trades
relative to each other in order to infer a sales plan,'' ``[g]iven
the lack of disclosure requirements in SEC Rule 10b5-1 and the
nature of the data.''
\130\ See Joshua Mitts, Insider Trading and Strategic
Disclosure, Columbia University (Working Paper) (2020).
\131\ Id.
---------------------------------------------------------------------------

However, a 2008 study finds ``no significant difference in stock
price performance following plan sales and non-plan sales.'' \132\ The
study shows that ``price contingent orders (e.g., limit orders), a
common feature in trading plans, give rise to empirical patterns that
have been taken as evidence of strategic timing of sales.'' \133\ A
different 2016 study finds negative abnormal returns after insider
sales under Rule 10b5-1(c)(1), as well as positive abnormal returns
after insider purchases under Rule 10b5-1(c)(1) (over a one-month
holding period).\134\ However, the study does not find significant
differences between the abnormal returns following insider trades under
Rule 10b5-1(c)(1) and other insider trades.\135\ Finally, a 2021 study
finds that ``non-plan sales are, on average, preceded by a larger price
run-up (3.0 percent versus 1.4 percent) and followed by a larger price
decline (-1.6 percent versus -1.0 percent) than plan sales . . .
consistent with greater opportunistic behavior by CEOs who trade
outside of Rule 10b5-1 plans.'' \136\ Further, focusing on ``the 25
percent of sales with the largest ratio of transaction value to the
CEO's most recent total annual compensation . . . the average
cumulative abnormal return (``CAR'') during the 40 trading days before
the sale is 3.68 percent for non-plan sales and 1.77 percent for plan
sales . . . the average CAR for the 40 trading days after the sale is -
2.24 percent for non-plan sales and -2.41 percent for plan sales.''
\137\ The study concludes that ``the overall level of opportunistic
behavior is smaller for sales within Rule 10b5-1 plans than for sales
outside of such plans'' but that ``CEOs who have a lot of money at
stake are able to trade opportunistically even if the transaction is
executed under a Rule 10b5-1 plan.'' \138\ The findings of these
studies differ in part because of differences in the sample used for
analysis (sample period and whether the data is based on beneficial
ownership forms or Form 144 filings) and methodology (including, among
other assumptions, whether insider trading under Rule 10b5-1(c)(1) is
examined in isolation or in comparison with other insider sales and
purchases). As noted above, the lack of data on Rule10b5-1 plans can
make it difficult to extrapolate from the available evidence to all
trading under Rule 10b5-1(c)(1). However, overall, the evidence on the
use of Rule 10b5-1 plans in the discussed studies raises concerns about
informed trading by insiders.
---------------------------------------------------------------------------

\132\ See Rik Sen, Are Insider Sales Under 10b5-1 Plans
Strategically Timed?, New York University (Working Paper) (2008).
The study uses Form 4 data from January 2003--June 2006. As an
important caveat, reporting of 10b5-1 trades on Form 4 is voluntary.
Thus, trades classified as ``non-10b5-1'' trades in the study may
include 10b5-1 plan trades.
\133\ Id.
\134\ See Taylan Mavruk and Nejat H. Seyhun, Do SEC's 10B5-1
Safe Harbor Rules Need to Be Rewritten, Columbia Business Law
Review, 133-183 (2016).
\135\ Id. As noted above, due to voluntary reporting of the Rule
10b5-1 flag on beneficial ownership forms, trades classified as
``non-10b5-1'' trades in the study may include Rule 10b5-1 plan
trades.
\136\ See Eliezer M. Fich, Robert Parrino, and Anh L. Tran, When
and How Are Rule 10b5-1 Plans Used for Insider Stock Sales?, Drexel
University, University of Texas at Austin, and City University of
London (Working Paper) (2021). This study examines ``11,250 stock
sales by 1,514 CEOs at 1,312 different public firms during the 2013
to 2018 period. Of these stock sales, 6,953 are identified in SEC
Form 4 filings as executed through Rule 10b5-1 plans.'' As noted
above, due to voluntary reporting of the Rule 10b5-1 flag on
beneficial ownership forms, trades classified as ``non-10b5-1''
trades in the study may include Rule 10b5-1 plan trades.
\137\ Id. Cumulative abnormal returns are returns in excess of
returns that would be expected given the security's systematic risk
over the period of time in question.
\138\ Id.
---------------------------------------------------------------------------

Data on companies' use of Rule 10b5-1 plans are very limited. Some
companies voluntarily disclose on Form 8-K their use of Rule 10b5-1
plans to carry out stock repurchases. One study examining different
repurchase methods documented ``at least 200 announcements of
repurchases using Rule 10b5-1 per year from 2011 to 2014. . . [In 2014]
29% [of repurchase announcements] included a 10b5-1 plan.'' \139\ While
the use of Rule 10b5-1 plans by issuers can fluctuate year to year, the
study suggests that approximately 200 companies could be affected by
the proposed amendments. Based on a textual search of calendar year
2020 filings, we similarly estimate that approximately 220 companies
disclosed share repurchase programs executed under a Rule 10b5-1
plan.\140\ Due to a lack of a trade reporting requirement similar to
that for officers and directors, we are not aware of data or studies on
companies' actual trading under Rule 10b5-1 plans.
---------------------------------------------------------------------------

\139\ See Alice Bonaim[eacute], Jarrad Harford, and David Moore,
Payout Policy Trade-Offs and the Rise of 10b5-1 Preset Repurchase
Plans, 66(6) Management Science, 2762-2786 (2020). The study does
not provide evidence of companies' use of such plans for insider
trading through issuer repurchases. The study focuses on such plans
being less flexible and representing a stronger pre-commitment than
open market repurchases. The study finds that, ``[c]onsistent with
[such] plans signaling commitment, Rule 10b5-1 repurchase
announcements are associated with greater and faster completion
rates, with more positive market reactions, and with more dividend
substitution than open market repurchases.''
\140\ The estimate is based on a textual search of calendar year
2020 filings of Forms 10-K, 10-Q, 8-K, as well as amendments and
exhibits thereto in Intelligize, using keywords ``10b5-1
repurchases'' or a combination of keywords ``repurchase plan'' and
``10b5-1''. Due to a lack of standardized presentation and the
unstructured (i.e., non-machine-readable) nature of the disclosure,
this estimate is approximate and may be over- or under-inclusive.
---------------------------------------------------------------------------

Companies also may use Rule 10b5-1 plans for sales of securities.
Due to a lack of reporting, we cannot estimate the prevalence of such
plans.
2. Benefits
The main benefit of the proposed amendments to Rule 10b5-1(c)(1) is
a reduction in the potential for insider trading based on MNPI by
officers, directors, and companies (discussed in greater detail in
Section IV.A above). Below we discuss how each of the proposed
amendments to Rule 10b5-1(c)(1) is expected to reduce such insider
trading. Crucially, we expect the

[[Page 8706]]

proposed provisions to work in tandem to substantially reduce or
eliminate insider trading through Rule 10b5-1 plans. In particular, the
safeguards provided by the proposed certification requirement are
expected to reinforce the effects of the proposed cooling-off periods
and the restrictions on multiple overlapping and single-trade plans.
The cooling-off period is expected to work in tandem with the exclusion
of multiple overlapping plans from Rule 10b5-1(c)(1) in addressing
opportunistic plan cancellations based on MNPI. Thus, while we
separately discuss below the benefits of each individual provision for
reducing insider trading, in combination the proposed amendments should
also generate synergies.
As discussed in Section IV.A above, because the Rule 10b5-1(c)(1)
affirmative defense is elective, if officers, directors, or companies
find the provisions as amended to be overly burdensome, they may elect
not rely on it.\141\ To the extent the migration of trading outside of
Rule 10b5-1 plans results, in some instances, in an increase, or no
change, in the incidence of insider trading, the benefits of the
proposed amendments may be attenuated or offset. The magnitude of the
described effect would depend on the extent to which other mechanisms
(such as legal liability, enforcement actions, listing standards,
reputational concerns, as well as corporate governance mechanisms)
counteract insider trading incentives and any changes that companies
implement to their insider trading policies. Companies may make changes
in response to the proposed disclosure requirements of Item 408 of
Regulation S-K, discussed in detail in Section IV.C below.
---------------------------------------------------------------------------

\141\ But see infra note 157.
---------------------------------------------------------------------------

In the subsections below we discuss the individual benefits of
these proposed conditions. In Section IV.B.2.v below, we discuss the
proposed amendments as they apply to companies' plans.
i. Cooling-Off Period for Officers and Directors \142\
---------------------------------------------------------------------------

\142\ The cooling-off periods proposed for Rule 10b5-1 trading
arrangements of issuers are discussed in Sections IV.B.2.v and
IV.B.3.v below.
---------------------------------------------------------------------------

The Commission is proposing as a condition to the availability of
the affirmative defenses under Rule 10b5-1(c)(1) to officers and
directors a 120-day cooling-off period before any purchases or sales
under the trading arrangement may commence after the date of adoption
of a new or modified trading arrangement. The cooling-off period would
prevent officers and directors aware of MNPI from being able to trade
under the Rule 10b5-1 plan immediately after adopting or modifying such
a plan. This would substantially weaken insider incentives to enter or
modify Rule 10b5-1 plans based on any MNPI with a horizon that is
shorter than the proposed cooling-off period. The 120-day length of the
proposed cooling-off period would largely prevent officers and
directors from capitalizing on unreleased MNPI for the upcoming
quarter.\143\ It also is consistent with, or exceeds, several
recommendations regarding such cooling-off periods.\144\ To the extent
that MNPI may be time-sensitive, we expect such a cooling-off period to
effectively discourage officers and directors from adopting new or
modified plans on the basis of MNPI.
---------------------------------------------------------------------------

\143\ See, e.g., Larcker et al. (2021); see also supra note 126
and accompanying text.
\144\ See, e.g., Council of Institutional Investors, Request for
rulemaking concerning amending Rule 10b5-1 or further interpretive
guidance regarding the circumstances under which Rule 10b5-1 trading
plans may be adopted, modified, or cancelled, December 28, 2012, at
p. 3, available at <a href="https://www.sec.gov/rules/petitions/2013/petn4-658.pdf">https://www.sec.gov/rules/petitions/2013/petn4-658.pdf</a> (recommending a minimum three-month waiting period); Yafit
Cohn and Karen Hsu Kelley, Simpson Thacher, Discusses Combating
Securities Fraud Allegations With10b5-1 Trading Plans, August 10,
2017, available at <a href="https://clsbluesky.law.columbia.edu/2017/08/10/simpson-thatcher-discusses-combatting-securities-fraud-allegations-with10b5-1-trading-plans/">https://clsbluesky.law.columbia.edu/2017/08/10/simpson-thatcher-discusses-combatting-securities-fraud-allegations-with10b5-1-trading-plans/</a> (recommending that ``insiders wait 30 to
90 days before selling stock under the trading plan for the first
time''); David B.H. Martin, Keir D. Gumbs, David L. Kornblau,
Matthew C. Franker, and Stephanie W. Bignon, Rule 10b5-1 Trading
Plans: Avoiding the Heat, Bloomberg BNA Securities Regulation & Law
Report, 45 SRLR 438, 2013 (referring to the three-month cooling-off
period recommended by the Council of Institutional Investors and
stating that ``[w]aiting periods of this duration, or those which
restrict trading until after issuance of the next regular earnings
release, may assist insiders in demonstrating good faith and that
trades under a Rule 10b5-1 plan were not designed to take advantage
of material nonpublic information.''). In a February 10, 2021
letter, Senators Warren, Brown and Van Hollen recommended the
Commission consider a four to six-month cooling-off period between
adoption, or modification of a plan and commencement or
recommencement of trading under the plan.
---------------------------------------------------------------------------

Some evidence of the extent to which cooling-off periods could
prevent insider trading is presented in Larcker et al. (2021). In that
study, approximately 14 percent of insider Rule 10b5-1 plans have the
first trade within 30 days of plan adoption, 39 percent within the
first 60 days, and 82 percent within 6 months.\145\ Shorter periods
between plan adoption and first trade are associated with worse returns
after the sale, which implies that more insider trading occurs in cases
of trading commencing closer to plan adoption.\146\
---------------------------------------------------------------------------

\145\ See Larcker et al. (2021), at p. 2.
\146\ Id, at p. 2.
---------------------------------------------------------------------------

The proposed 120-day cooling-off period for officer and director
Rule 10b5-1 trading arrangements would also help deter trades under a
newly adopted or modified plan before the release of that quarter's
earnings announcement. Trades under Rule 10b5-1(c)(1) prior to an
earnings announcement appear to be more likely to involve insider
trading behavior. For example, Larcker et al. (2021) find that ``38
percent of plans adopted in a given quarter also execute trades before
that quarter's earnings announcement (i.e., in the 1 to 90 days prior
to earnings [sic]. . . Sales occurring between the adoption date and
earnings announcement are about 25 percent larger than sales occurring
more than six months after the earnings announcement . . . plans that
execute a trade in the window between when the plan is adopted and that
quarter's earnings announcement anticipate large losses and foreshadow
considerable stock price declines.'' \147\
---------------------------------------------------------------------------

\147\ Id., at pp. 2-3.
---------------------------------------------------------------------------

The proposed cooling-off periods would apply to directors and Rule
16a-1(f) officers but not to other natural persons. Directors and Rule
16a-1(f) officers (1) are generally more likely to be involved in
making or overseeing corporate decisions about whether and when to
disclose information; and (2) are generally more likely to be aware of
MNPI.\148\ Given the significant loss of flexibility associated with a
cooling-off period, the proposed approach of exempting natural person
insiders that are not officers or directors from the proposed cooling-
off period would tailor the application of the additional conditions of
the affirmative defense in a way that better balances the additional
costs to insiders with the investor protection benefits.
---------------------------------------------------------------------------

\148\ See, e.g., Mavruk and Seyhun (2016), at p. 179.
---------------------------------------------------------------------------

ii. Restricting Multiple Overlapping and Single-Trade Rule 10b5-1
Trading Arrangements
The Commission is proposing as a condition to the affirmative
defense to disallow the use of multiple overlapping Rule 10b5-1 plans
for open market trades in the same class of securities. This means that
an insider or company would not be able to use the affirmative defense
of Rule 10b5-1(c)(1) to maintain two or more Rule 10b5-1 plans for open
market trades in the same security class. In combination with the
proposed cooling-off period, this provision is expected to reduce the
likelihood that insiders or companies would enter into multiple,
overlapping plans and selectively cancel some of the plans at a later
time based on MNPI, while

[[Page 8707]]

availing themselves of Rule 10b5-1(c)(1)'s affirmative defense.\149\
The effects of this provision may be modest to the extent that
companies already prohibit multiple Rule 10b5-1 plans,\150\ or to the
extent that companies may allow a trading plan not reliant on Rule
10b5-1(c)(1) to exist in conjunction with a trading plan reliant on
Rule 10b5-1(c)(1).\151\
---------------------------------------------------------------------------

\149\ As a result, the benefit of strategically canceling an
existing plan based on MNPI would be significantly reduced for many
insiders or issuers, compared to a scenario in which an insider or
issuer has multiple plans without cooling off periods, which is
permitted today. Under the proposal, an insider or issuer that
cancels a plan would be subject to disclosure obligations, as well
as a cooling-off period with respect to any new plan, which makes a
strategically planned cancellation significantly less attractive for
an insider or issuer that plans to continue trading. As proposed,
this cooling-off period could not be effectively shortened or
eliminated by having multiple plans with similar or staggered
adoption dates, because of the proposed restriction on multiple
overlapping plans for open-market trades in the same class of
securities.
\150\ A 2016 industry survey found that 82 percent of
respondents do not allow multiple, overlapping Rule 10b5-1 plans.
See Defining the Fine Line: Mitigating Risk with 10b5-1 Plans,
Morgan Stanley/Shearman & Sterling LLP, available at <a href="https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf">https://advisor.morganstanley.com/capitol-wealth-management-group/documents/field/c/ca/capitol-wealth-management-group/Defining_the_Fine_LineLocked_Version.pdf</a>, supra note 120. The data
is based on the responses of the surveyed public company members of
the Society of Corporate Secretaries and Governance Professionals
and may not be representative of other companies.
\151\ But see infra note 157 and accompanying text. Also,
trading under a plan not reliant on Rule 10b5-1 could entail
additional legal costs and limitations.
---------------------------------------------------------------------------

The proposed unavailability of the affirmative defense for multiple
overlapping trading arrangements would not apply to transactions in
which directors, officers, or employees acquired or sold for themselves
securities as participants in ESOPs or DRIPs. This provision is
expected to preserve the benefits of flexibility for participants in
such plans. The proposed exclusion of multiple overlapping plans would
not apply to trades in different classes of securities. For example, a
plan for Class A common stock and an overlapping plan for Class B
common stock or for preferred stock would still be eligible for the
affirmative defense under the proposed amendments, provided that the
other conditions are met. Because different classes of shares can have
significantly different cash flow and voting rights, this provision is
expected to preserve the benefits of flexibility for those plan
participants that seek to implement independent purchase or disposition
strategies for different share classes through separate, overlapping
plans.
The Commission is also proposing to limit the number of single-
trade trading arrangements under the Rule 10b5-1(c)(1) affirmative
defense to a maximum of one such trading arrangement in the prior 12-
month period. This is expected to reduce the likelihood that plan
participants would be able to repeatedly profit from ``one-off,'' ad
hoc trades based on previously undisclosed MNPI while availing
themselves of the protections of the Rule 10b5-1(c)(1) affirmative
defense.\152\ The incremental benefit of the proposed limitation may be
somewhat attenuated if insiders relying on single-trade plans are
largely driven by one-time liquidity needs, or if they are effectively
deterred from using MNPI by the cooling-off period or certification and
good faith provisions also being proposed. The benefit would also be
attenuated to the extent that some multi-trade plans may combine a
single trade based on MNPI with additional liquidity trades.
Nevertheless, there could be some benefit to limiting the frequency of
single-trade arrangements to the extent that some MNPI has a longer
horizon than the cooling-off period.
---------------------------------------------------------------------------

\152\ For instance, some suggestive evidence is presented in
Larcker et al. (2021) (finding that, for single-trade plans, share
prices decreased following insider sales under Rule 10b5-1). As a
caveat, the data does not show the dates of all scheduled trades,
only the

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