Rule2022-27675
Insider Trading Arrangements and Related Disclosures
Primary source
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Published
December 29, 2022
Effective
February 27, 2023
Issuing agencies
Securities and Exchange Commission
Abstract
We are adopting amendments to the rule under the Securities Exchange Act of 1934 ("Exchange Act") that provides affirmative defenses to trading on the basis of material nonpublic information in insider trading cases. The amendments add new conditions to this rule that are designed to address concerns about abuse of the rule to trade securities opportunistically on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets. We are also adopting new disclosure requirements regarding the insider trading policies and procedures of issuers, the adoption and termination (including modification) of plans that are intended to meet the rule's conditions for establishing an affirmative defense, and certain other similar trading arrangements by directors and officers. In addition, we are adopting amendments to the disclosure requirements for director and executive compensation regarding equity compensation awards made close in time to the issuer's disclosure of material nonpublic information. Finally, we are adopting amendments to Forms 4 and 5 to require filers to identify transactions made pursuant to a plan intended to meet the rule's conditions for establishing an affirmative defense, and to require disclosure of bona fide gifts of securities on Form 4.
Full Text
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[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Rules and Regulations]
[Pages 80362-80432]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-27675]
[[Page 80361]]
Vol. 87
Thursday,
No. 249
December 29, 2022
Part III
Securities and Exchange Commission
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17 CFR Parts 229, 232, 240, et al.
Insider Trading Arrangements and Related Disclosures; Final Rule
Federal Register / Vol. 87 , No. 249 / Thursday, December 29, 2022 /
Rules and Regulations
[[Page 80362]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 232, 240, and 249
[Release Nos. 33-11138; 34-96492; File No. S7-20-21]
RIN 3235-AM86
Insider Trading Arrangements and Related Disclosures
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: We are adopting amendments to the rule under the Securities
Exchange Act of 1934 (``Exchange Act'') that provides affirmative
defenses to trading on the basis of material nonpublic information in
insider trading cases. The amendments add new conditions to this rule
that are designed to address concerns about abuse of the rule to trade
securities opportunistically on the basis of material nonpublic
information in ways that harm investors and undermine the integrity of
the securities markets. We are also adopting new disclosure
requirements regarding the insider trading policies and procedures of
issuers, the adoption and termination (including modification) of plans
that are intended to meet the rule's conditions for establishing an
affirmative defense, and certain other similar trading arrangements by
directors and officers. In addition, we are adopting amendments to the
disclosure requirements for director and executive compensation
regarding equity compensation awards made close in time to the issuer's
disclosure of material nonpublic information. Finally, we are adopting
amendments to Forms 4 and 5 to require filers to identify transactions
made pursuant to a plan intended to meet the rule's conditions for
establishing an affirmative defense, and to require disclosure of bona
fide gifts of securities on Form 4.
DATES:
Effective date: The final rules are effective on February 27, 2023.
Compliance dates: See Section III for further information on
transitioning to the final rules.
FOR FURTHER INFORMATION CONTACT: Sean Harrison, Special Counsel, Office
of Rulemaking, at (202) 551-3430, Division of Corporation Finance, 100
F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are amending:
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Commission reference CFR citation (17 CFR)
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Regulation S-K [17 CFR 229.10 through
229.1305]
Item 402........................... Sec. 229.402
Item 408........................... Sec. 229.408
Item 601........................... Sec. 229.601
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
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 Final 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. The Amended Good Faith Condition
B. Additional Disclosures Regarding Rule 10b5-1 Trading
Arrangement
1. Quarterly Reporting of Rule 10b5-1 and Non-Rule 10b5-1
Trading Arrangements
2. Disclosure of Insider Trading Policies and Procedures
3. Identification of Rule 10b5-1 and non-Rule 10b5-1
Transactions on Forms 4 and 5
C. Disclosure Regarding Option Grants and Similar Equity
Instruments Made Close in Time to the Release of Material Nonpublic
Information
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
D. Structured Data Requirements
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
E. Reporting of Gifts on Form 4
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
III. Transition Matters
IV. Other Matters
V. 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
5. Reasonable Alternatives
C. Disclosure of Trading Arrangements and Policies and
Procedures 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
D. Additional Disclosure of the Timing of Option Grants and
Related Company Policies and Practices
1. Baseline and Affected Parties
2. Benefits
3. Costs
4. Effects on Efficiency, Competition, and Capital Formation
5. Reasonable Alternatives
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
VI. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Summary of Comment Letters
C. Summary of Collections of Information Requirements
D. Burden and Cost Estimates Related to the Amendments
VII. Final Regulatory Flexibility Act Analysis
A. Need for, and Objectives of, the Amendments
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Agency Action To Minimize Effect on Small Entities
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 prohibitions that
proscribe certain insider trading, including Section 10(b) of the
Exchange Act,\2\ play an essential role in maintaining the fairness and
integrity of our securities markets. The Securities and Exchange
Commission (the ``Commission'') has long recognized that insider
trading \3\ and the fraudulent
[[Page 80363]]
misuse of material nonpublic information by corporate insiders \4\
harms not only individual investors but also undermines the foundations
of our markets by eroding investor confidence.\5\ Congress has
recognized the harmful impact of insider trading on multiple occasions,
such as by providing for enhanced civil penalties specifically for
insider trading.\6\
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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\ 15 U.S.C. 78j(b).
\3\ ``Insider trading'' as used in this release refers to the
purchase or sale of a security of any issuer, on the basis of
material nonpublic information about that security or issuer, in
breach of a duty of trust or confidence that is owed directly,
indirectly, or derivatively, to the issuer of that security or the
shareholders of that issuer, or to any other person who is the
source of the material nonpublic information. See Rule 10b5-1(a).
\4\ We use the terms ``insider'' and ``corporate insider'' in
this release to refer to persons (other than issuers) for whom the
purchase or sale of a security of any issuer, on the basis of
material nonpublic information about that security or issuer, would
represent a breach of a fiduciary duty or a duty of trust or
confidence that is owed directly, indirectly, or derivatively, to
the issuer of a security or the shareholders of that issuer, or to
any other person who is the source of the material nonpublic
information. See Rule 10b5-1(a).
\5\ See In re Cady, Roberts & Co., 40 S.E.C. 907, 1961 WL 60638,
at *4 n. 15 (1961) (``A significant purpose of the Exchange Act was
to eliminate the idea that the 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.'')
\6\ 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 (2012).
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Section 10(b) is one of the securities laws' primary antifraud
provisions. This provision makes it unlawful ``[t]o 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.'' \7\ The
Supreme Court has recognized that the ``manipulative or deceptive
device[s] or contrivance[s]'' prohibited by Section 10(b) and Rule 10b-
5 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, to the shareholders of that issuer, or to any
person who is the source of the material nonpublic information.\8\
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\7\ 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'' [17
CFR 240.10b-5]. In addition to potential insider trading liability,
issuers--and those acting on their behalf--are also subject to other
prohibitions under the Federal securities laws.
\8\ See Salman v. United States, 137 S.Ct. 420, 425 n. 2 (2016)
(explaining that, under the classical theory of insider-trading
liability, 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'' while, under the misappropriation theory, ``a
person commits securities fraud `when he misappropriates
confidential information for securities trading purposes, in breach
of a duty owed to the source of the information,' such as an
employer or client''); O'Hagan, 521 U.S. at 651-53 (``Under the
`traditional' or `classical theory' of insider trading liability,
Sec. 10(b) and Rule 10b-5 are violated when a corporate insider
trades in the securities of his corporation on the basis of
material, nonpublic information,'' and ``the misappropriation theory
outlaws trading on the basis of nonpublic information by a corporate
`outsider' in breach of a duty owed not to a trading party, but to
the source of the information.''); 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 (setting forth a non-exclusive definition of
circumstances in which a person has the requisite duty for purposes
of the ``misappropriation'' theory of insider trading liability).
Liability for insider trading under Section 10(b) and Rule 10b-5
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 (1980); see also Selective Disclosure and
Insider Trading, Release No. 33-7881 (Aug. 15, 2000) [65 FR 51716
(Aug. 24, 2000)] (``2000 Adopting Release'') at 51727.
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The Commission adopted Rule 10b5-1 in 2000 to provide more clarity
regarding the meaning of ``manipulative or deceptive device[s] or
contrivance[s]'' prohibited by Section 10(b) and Rule 10b-5 with
respect to trading on the basis of material nonpublic information.\9\
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 Section 10(b) and Rule 10b-5. The Commission 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) and Rule 10b-5 if the person making the
purchase or sale was aware of the material nonpublic information when
the person made the purchase or sale.\10\ In addition, Rule 10b5-1(c)
established an affirmative defense to liability under Section 10(b) and
Rule 10b-5 for insider trading, which the Commission intended ``to
cover situations in which a person can demonstrate that the material
nonpublic information did not factor into the trading decision.'' \11\
To that end, this defense provided that the trading was not made on the
basis of material nonpublic information if the person can demonstrate,
among other things, that 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 for the trading of
securities (each a ``trading arrangement'' and collectively ``trading
arrangements'') adopted at a time that the person was not aware of
material nonpublic information.\12\ The Commission believed that this
defense would ``provide appropriate flexibility to those who would like
to plan securities transactions in advance, at a time when they are not
aware of material nonpublic information, and then carry out those pre-
planned transactions at a later time, even if they later become aware
of material nonpublic information.'' \13\ Rule 10b5-1(c)(2) provides a
separate affirmative defense designed solely for non-natural persons
(e.g., entities) that trade.\14\
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\9\ See 2000 Adopting Release, supra note 8.
\10\ See Rule 10b5-1(b) (emphasis added). The final amendments
do not alter the ``awareness'' standard, which courts have held 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). Under that standard, 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). The decision in
Fried v. Stiefel Labs., Inc., 814 F.3d 1288, 1295 (11th Cir. 2016),
which concerned a private action that did not involve Rule 10b5-1,
erroneously suggests that a person must ``use'' the inside
information to purchase or sell securities. See also infra at p. 45
n. 145.
\11\ 2000 Adopting Release, supra note 8 at 51728.
\12\ Rule 10b5-1 does not modify or address any other aspect of
insider trading law. It also does not 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).
\13\ 2000 Adopting Release, supra note 8 at 51728.
\14\ See Rule 10b5-1(c)(2) [17 CFR 240.10b5-1(c)(2)]. This
affirmative defense is available to a person other than a natural
person that can demonstrate that the individual making the
investment decision on behalf of the person was not aware of the
material nonpublic information, and the person had implemented
reasonable policies and procedures to prevent insider trading.
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[[Page 80364]]
Since the adoption of the Rule 10b5-1(c)(1) affirmative defense,
courts,\15\ commenters,\16\ and members of Congress \17\ have expressed
concern that traders have sought to benefit from its liability
protections while trading securities opportunistically on the basis of
material nonpublic information. Furthermore, some academic studies have
found that corporate insiders trading pursuant to Rule 10b5-1 plans
\18\ consistently outperform the trading of corporate insiders that is
not conducted under such plans. These studies raise concerns that
corporate insiders may be trading under Rule 10b5-1 in ways that harm
investors and undermine the integrity of the securities markets.\19\
Practices that have raised public concern include corporate insiders
adopting multiple overlapping plans and subsequently selectively
canceling certain trades under such plans while they are aware of
material nonpublic information (allowing such insiders to buy or sell
securities under the plans that provide the most advantageous price) or
commencing trades pursuant to a new plan shortly after the adoption of
such plan (in some cases on the same day as said adoption, which, when
combined with comparatively larger trades made closer in time to
adoption of a plan, suggests that those trades may be on the basis of
material nonpublic information).\20\ In September 2021, the
Commission's Investor Advisory Committee (``IAC'') \21\ recommended
that we ``take the necessary steps to establish meaningful guardrails
around the adoption, modification, and cancellation of Rule 10b5-1
trading plans,'' by addressing certain gaps in the rule that allow
corporate insiders to unfairly exploit informational asymmetries.\22\
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\15\ 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).
\16\ In Dec. 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. (Mar. 10, 2021), <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'') (Apr. 22, 2021),
<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 (Mar. 18, 2021), <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 its Fall 2018
semiannual regulatory agenda, the Commission also received a letter
requesting that the Commission amend Rule 10b5-1 to address
potential abuses of Rule 10b5-1 plans. See letter from CII (Dec. 13,
2018), <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>.
\17\ See, e.g., ``Waters and McHenry Introduce Bipartisan
Legislation to Curb Illegal Insider Trading,'' U.S. House Committee
on Financial Services, (Jan. 18, 2019) <a href="https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401725">https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401725</a>; letter from Senators
Elizabeth Warren, Sherrod Brown and Chris Van Hollen (Feb. 10,
2021), <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>.
\18\ We use the terms ``Rule 10b5-1 plan'' and ``Rule 10b5-1
trading arrangement'' throughout this release to refer to a
contract, instruction or written plan that is intended to satisfy
the affirmative defense conditions of Rule 10b5-1(c)(1).
\19\ See, e.g., Alan D. Jagolinzer, SEC Rule 10b5-1 and
Insiders' Strategic Trade, 55 Mgmt. Sci. 224 (2009); M. Todd
Henderson et al., Offensive Disclosure: How Voluntary Disclosure Can
Increase Returns from Insider Trading, 103 Geo. L.J. 1275 (2015);
Taylan Mavruk & H. Nejat Seyhun, Do SEC's 10b5-1 Safe Harbor Rules
Need to Be Rewritten?, 2016 Colum. Bus. L. Rev. 133 (2016); Artur
Hugon & Yen-Jung Lee, SEC Rule 10b5-1 Plans and Strategic Trade
Around Earnings Announcements, (2016), <a href="https://ssrn.com/abstract=2880878">https://ssrn.com/abstract=2880878</a>.
\20\ 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 Larcker et al., Gaming the
System: Three ``Red Flags'' of Potential 10b5-1 Abuse, Stan. Closer
Look Series (Jan. 2021) (``Gaming the System'') (noting from their
analysis of a sample of sales transactions made pursuant to Rule
10b5-1 plans between Jan. 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 40 and accompanying text.
\21\ The IAC was established in Apr. 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, and initiatives to
protect investor interests and to promote investor confidence and
the integrity of the securities marketplace.
\22\ 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. See IAC, Meeting Minutes (June 10, 2021), <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061021-minutes.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061021-minutes.pdf</a>.
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On January 13, 2022, the Commission proposed several rule and form
amendments to address potentially abusive practices associated with
Rule 10b5-1 plans, grants of options and other equity instruments with
similar features, and the gifting of securities.\23\ We received over
160 comment letters on the proposals, which we discuss in context
below.\24\ Having considered these comments, we are adopting the
following amendments, which include modifications from the proposal in
response to the comments:
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\23\ See Rule 10b5-1 and Insider Trading, Release No. 33-11013
(Jan. 13, 2022) [87 FR 8686 (Feb. 15, 2022)] (``Proposing
Release'').
\24\ The public comments we received are available at <a href="https://www.sec.gov/comments/s7-20-21/s72021.htm">https://www.sec.gov/comments/s7-20-21/s72021.htm</a>. Unless otherwise
indicated, the comment letters cited herein are those received in
response to the Proposing Release. One comment letter, dated Jan.
10, 2022, urged that the comment period for this proposal, among
others, be extended to at least 60 days. See letter from Senator Pat
Toomey and Representative Patrick McHenry. The Commission voted to
issue the proposal at an open meeting on Dec. 15, 2021. The release
was posted on the Commission website that day, and comment letters
were received beginning that same date. On Jan. 13, 2022, the
Commission voted to approve and issue a revised release that
reflected certain, limited changes to the Paperwork Reduction Act
and Initial Regulatory Flexibility Act Analysis sections. This
proposal was posted on the Commission's website that same day,
superseding the Dec. 15, 2021 release, and was published in the
Federal Register on Feb. 15, 2022. The comment period closed on Apr.
1, 2022. We have considered all comments received since Dec. 15,
2021, and do not believe an extension of the comment period was
necessary. Another comment letter raised concerns about the
rulemaking process at the agency more broadly. See letter from
Senator Thom Tillis. The process followed in adopting these
amendments has complied with the Administrative Procedure Act and
other legal requirements.
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<bullet> Amend the affirmative defense of Rule 10b5-1(c)(1) to: (1)
include a cooling-off period applicable to directors and ``officers''
(as defined by 17 CFR 240.16a-1(f) (``Rule 16a-1(f)'') and a shorter
cooling off period applicable to all other persons other than the
issuer; (2) include a certification condition for directors and
officers; (3) limit the ability of persons other than the issuer to use
multiple overlapping Rule 10b5-1 plans; (4) limit the ability of these
persons to rely on the affirmative defense for a single-trade plan to
one single-trade plan during any consecutive 12-month period; and (5)
add a condition that all persons entering into a Rule 10b5-1 plan must
act in good faith with respect to that plan; \25\
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\25\ We use the term ``the issuer'' in this release to refer to
the issuer of the particular security or securities that are the
subject of trades for which a person seeks the benefit of the
affirmative defense under Rule 10b5-1(c)(1).
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<bullet> Require: (1) quarterly disclosure by registrants regarding
the use of Rule 10b5-1 plans and certain other trading arrangements by
a registrant's directors and officers for the trading of its
securities; and (2) annual disclosure regarding a registrant's insider
trading policies and procedures in new Item 408 of Regulation S-K and
corresponding amendments to Forms 10-Q and 10-K;
<bullet> Add a mandatory Rule 10b5-1(c) checkbox to Forms 4 and 5;
<bullet> Require certain tabular and narrative disclosures
regarding awards
[[Page 80365]]
of options, stock appreciation rights (``SARs''), and/or similar
option-like instruments granted to corporate insiders shortly before
and immediately after the release of material nonpublic information in
new paragraph (x) to Item 402 of Regulation S-K;
<bullet> Require registrants to tag the information specified by
new Items 402(x), 408(a), and 408(b)(1) in Inline XBRL; and
<bullet> Require reporting of dispositions of equity securities by
bona fide gifts on Form 4, rather than on Form 5.
These amendments are intended to improve investor confidence in the
securities markets, and by extension enhance liquidity and capital
formation, while continuing to provide appropriate flexibility to
traders who would like to plan securities transactions in advance, when
they are not aware of material nonpublic information. To achieve these
goals, the amendments are designed to significantly reduce
opportunities for corporate insiders to misuse Rule 10b5-1 to trade on
material nonpublic information. Further, the amendments will increase
transparency regarding the use of Rule 10b5-1 plans, issuers' insider
trading policies and procedures, and their policies and practices with
respect to awards of options, SARs, and/or similar option-like
instruments close in time to the release of material nonpublic
information.
II. Discussion of the Final Amendments
A. Amendments to Rule 10b5-1
Rule 10b5-1(c)(1) provides an affirmative defense to Section 10(b)
and Rule 10b-5 liability if a person satisfies its conditions. First,
the person must demonstrate that, before becoming aware of the material
nonpublic information, they entered into a binding contract to purchase
or sell the security, provided instruction 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 contract, instruction, or plan:
---------------------------------------------------------------------------
\26\ Rule 10b5-1(c)(1)(i)(A).
---------------------------------------------------------------------------
<bullet> Specified the amount of securities to be purchased or sold
and the price at which and the date on which the securities were to be
purchased or sold;
<bullet> Included a written formula or algorithm, or computer
program, for determining the amount of securities to be purchased or
sold and the price at which and the date on which the securities were
to be purchased or sold; 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, pursuant to the
contract, instruction, or plan, did exercise such influence must not
have been aware of the material nonpublic information when doing
so.\27\
---------------------------------------------------------------------------
\27\ Rule 10b5-1(c)(1)(i)(B).
---------------------------------------------------------------------------
Third, the person must demonstrate that the purchase or sale was
pursuant to this contract, instruction, or plan.\28\ A purchase or sale
is not pursuant to a contract, instruction, or plan if, among other
things, the person who entered into the contract, instruction, or plan
altered or deviated from the contract, instruction, or plan (whether by
changing the amount, price, or timing of the purchase or sale), or
entered into or altered a corresponding or hedging transaction or
position with respect to the securities.\29\ Finally, this defense is
only available if the contract, instruction, or plan ``was given or
entered into in good faith and not as part of a plan or scheme to evade
the prohibitions'' of Rule 10b-5.\30\
---------------------------------------------------------------------------
\28\ Rule 10b5-1(c)(1)(i)(C).
\29\ Id.
\30\ Rule 10b5-1(c)(1)(ii).
---------------------------------------------------------------------------
We are concerned that some corporate insiders use Rule 10b5-1 plans
in ways that are not consistent with the objectives of the rule, and
that harm investors and undermine the integrity of the securities
markets. As the use of Rule 10b5-1 plans has become more
widespread,\31\ commentators have raised concerns that the design of
Rule 10b5-1(c)(1) has enabled corporate insiders to trade on the basis
of material nonpublic information while avoiding liability under
Section 10(b) and Rule 10b-5.\32\ Several commenters on the proposals
reiterated those concerns.\33\ These concerns stem from, among other
things, the ability of corporate insiders to adopt multiple Rule 10b5-1
plans at a time when they lack material nonpublic information, and
subsequently terminate some of the plans based on later-obtained
material nonpublic information (notwithstanding the provision of the
current affirmative defense that it is applicable only when the
contract, instruction, or plan was entered into in good faith). For
example, such plans might take financial positions that authorize
trades at price points above and/or below the issuer's current stock
price. When the insider becomes aware of material nonpublic information
indicating likely future changes in the company's stock price, the
insider could cancel the less advantageous plan or plans. Corporate
insiders also could adopt multiple Rule 10b5-1 plans that direct trades
only at price points above the current share price, anticipating that
they will subsequently learn material nonpublic information that would
reveal which of the plans would be most profitable. Then, when they
become aware of material non-public information, they might cancel the
less profitable ones. We are concerned that, in these situations, an
insider's awareness of material nonpublic information may still
``factor into the trading decision,'' even if the insider's plans
appear to satisfy the requirements of Rule 10b5-1(c)(1).\34\
---------------------------------------------------------------------------
\31\ According to one survey, corporate insiders at 51% of S&P
500 companies used Rule 10b5-1 trading arrangements in 2015. See
Morgan Stanley & Shearman & Sterling LLP, ``Defining the Fine Line:
Mitigating Risk with 10b5-1 Plans'' (2018) <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>. Rule
10b5-1 plans are also used by issuers. See Skadden Insights: Share
Repurchases 4-6 (Mar. 16, 2020) <a href="https://www.skadden.com/insights/publications/2020/03/share-repurchases">https://www.skadden.com/insights/publications/2020/03/share-repurchases</a> (discussing the use of Rule
10b5-1 plans for issuer share repurchases).
\32\ See Tom McGinty & Mark Maremont, CEO Stock Sales Raise
Questions about Insider Trading, Wall St. J. (June 29, 2022)
(retrieved from Factiva database); see also Jean Eaglesham & Rob
Barry, Trading Plans Under Fire: Despite 2007 Warning, Experts Say
Loopholes Remain for Corporate Insiders, Wall St. J. (Dec. 13, 2012)
(retrieved from Factiva database).
\33\ See, e.g., letters from American Federation of Labor and
Congress of Industrial Organizations (``AFL-CIO''), Colorado Public
Employees' Retirement Association (``CO PERA''), Council of
Institutional Investors (``CII''), International Corporate
Governance Network (``ICGN''), Better Markets (``Better Markets''),
Public Citizen (``Public Citizen''), and North American Securities
Administrators Association, Inc. (``NASAA'').
\34\ See 2000 Release, supra note 8, at 51728.
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Furthermore, multiple studies examining Rule 10b5-1 plans have
identified potentially abusive activity, including when trades occur
shortly after adoption of a plan. Some of these studies have observed,
among other things, that trades that occur shortly after adoption of a
Rule 10b5-1 plan demonstrate abnormal profitability, which suggests
that some corporate insiders may be aware of material nonpublic
information at the time of adoption of a Rule 10b5-1 plan that
otherwise appears to meet the existing requirements of Rule 10b5-1.\35\
---------------------------------------------------------------------------
\35\ See, e.g., Gaming the System, supra note 19 (observing that
trades under Rule 10b5-1 plans systematically avoid losses and
foreshadow considerable stock declines over the subsequent six
months when: (1) trades executed under the plan occur as much as 60
days after plan adoption; or (2) a Rule 10b5-1 plan is adopted in a
given quarter and begins trading before that quarter's earnings
announcement); Yen-Jun Lee, Insiders' Foreknowledge of Earnings
Results and Rule 10b5-1 Sales Trades, 38 J. Acctg., Auditing & Fin.
1, 9, 17, 19 (2020) (finding that insiders utilizing 10b5-1 plans
tend to sell before negative earnings results, and that insiders
particularly apt to engage in this behavior are also more likely to
begin trading within three months of establishing the plan); Mavruk
& Seyhun, supra note 19, at 165 (observing that first trade pursuant
to a Rule 10b5-1 plan showed abnormal profitability, suggesting that
insiders set up Rule 10b5-1 plans when in possession of material
nonpublic information); McGinty & Maremont, supra note 32; see also
Jagolinzer, supra note 19, at 234-35 (finding that Rule 10b5-1 plans
appear to allow insiders to trade close in time to earnings
releases, and that there is a statistical relationship between plan
adoption and upcoming negative news events). We provide additional
discussion of these sources, including potential caveats about the
data they analyze, infra Section V.B.1.
---------------------------------------------------------------------------
[[Page 80366]]
To address all of these concerns, we are amending Rule 10b5-1(c)(1)
to apply a cooling-off period on persons other than the issuer, impose
a certification requirement on directors and officers, limit the
ability of persons other than the issuer to use multiple-overlapping
Rule 10b5-1 plans, limit the use of single-trade plans by persons other
than the issuer to one such single-trade plan in any 12-month period,
and add a condition that all persons entering into a Rule 10b5-1 plan
must act in good faith with respect to that plan.
1. Cooling-Off Period
a. Proposed Amendments
Rule 10b5-1(c)(1) does not currently impose a waiting period
between the date that a trading plan is adopted and the date of the
first transaction to be executed under the plan. A trader can therefore
adopt a Rule 10b5-1 plan and execute a trade under it as early as the
day of adoption. Investors and other commentators have suggested that
requiring a minimum waiting period (a ``cooling-off period'') between
the adoption of a Rule 10b5-1 plan and the date on which trading can
commence reduces the risk that corporate insiders could benefit from
any material nonpublic information of which they may have been aware
when adopting the plan.\36\ The Commission proposed to amend Rule 10b5-
1(c)(1) to add the following cooling-off periods as conditions of the
affirmative defense: (1) a minimum 120-day cooling-off period after the
date of adoption of any Rule 10b5-1 plan (including adoption of a
modified trading arrangement) by a director or ``officer'' (as defined
in Rule 16a-1(f)) \37\ 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 plan by an issuer
before any purchases or sales under the new or modified trading
arrangement.
---------------------------------------------------------------------------
\36\ 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 et al, How the SEC Can and Should Fix Insider Trading
Rules, The Hill (Dec. 17, 2020), <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 22.
\37\ Exchange Act Rule 16a-1(f) provides that the term
``officer'' ``shall mean 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.''
---------------------------------------------------------------------------
The Commission proposed the cooling-off periods to address concerns
that some insiders may be adopting Rule 10b5-1 plans while aware of
material nonpublic information, such as an issuer's upcoming quarterly
earnings results, and then shortly thereafter trading before the
information becomes public. We understand that corporate insiders are
often aware of material nonpublic information. Although Rule 10b5-
1(c)(1) precludes reliance on the affirmative defense when a person is
aware of such information at the time of adoption of a Rule 10b5-1
plan, in practice, it is difficult for an outside party to determine
whether the insider satisfied this condition.\38\ With cognizance of
this difficulty, some corporate insiders may use Rule 10b5-1 plans to
execute trades on the basis of material nonpublic information and seek
to assert the affirmative defense to avoid potential liability. The
academic studies discussed above suggest that this may be the case as
researchers have observed that trades made under Rule 10b5-1 plans that
occur before the next earnings announcement are abnormally
profitable.\39\ Some corporate insiders also undertake other actions,
such as cancellation of sales scheduled under Rule 10b5-1 plans ahead
of favorable issuer disclosures, which appears consistent with an
effort to exploit material nonpublic information.\40\
---------------------------------------------------------------------------
\38\ See Henderson et al., supra note 19, at 1289.
\39\ See Gaming the System, supra note 19 (``[P]lans 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'').
\40\ See Jagolinzer, supra note 19, at 235 (observing that there
is evidence ``that participants terminate sales plans before
positive shifts in firm returns''); Mavruk & Seyhun, supra note 19,
at 120, 125 (noting patterns of trading consistent with cancellation
of some planned trades are abnormally profitable). Based on our
review of the data sources used in the sources cited, we understand
them to use the term ``earnings announcement'' to refer to the
earliest of quarterly or annual reporting or other earnings
announcements for which the issuer furnishes a corresponding Form 8-
K.
---------------------------------------------------------------------------
To address concerns that certain corporate insiders misuse Rule
10b5-1 by adopting and trading under trading arrangements despite their
awareness of material nonpublic information, and in light of the
evidence that suggests that trading arrangements that commence close in
time to the plan's adoption and prior to an earnings announcement are
more likely to result in abnormal returns, the Commission proposed
requiring insiders to wait a period of time before trading under a new
(or modified) plan could commence. Although many companies already
impose such a cooling-off period for their own insiders,\41\ not all do
so, and, furthermore, among those that have a cooling-off period, there
is little uniformity with respect to the duration of such periods. The
Commission proposed a 120-day cooling-off period for officers and
directors because such a period would extend beyond the fiscal quarter
\42\ in which the trading arrangement is established, meaning that
trading generally would not occur under a Rule 10b5-1 plan adopted
during a particular quarter until after the registrant announced its
financial results for that quarter. Although the cooling-off period
proposed by the Commission for officers and directors may have been
longer than the cooling-off period used by many issuers or recommended
by certain financial advisors, the Commission believed that the
proposed duration would deter insiders from exploiting material
nonpublic information for the relevant quarter. In addition, the
Commission noted that a 120-day cooling-off period would align with the
recommendations of a wide range of commentators.\43\
---------------------------------------------------------------------------
\41\ This practice suggests that many companies have concluded
that in general a cooling-off period, rather than individualized
efforts to identify instances where an executive is aware of
material nonpublic information, strikes an appropriate balance of
precision, cost of implementation, and investor confidence.
\42\ Quarters are about 90 days long and public reporting
companies are required to disclose their quarterly results no later
than 40 or 45 days after the end of their fiscal quarter, depending
on their filing status. See 17 CFR 249.308(a). Nevertheless,
companies on average disclose their quarterly results within 30 days
of the end of the fiscal quarter. See Morgan Stanley & Shearman &
Sterling LLP, supra note 29.
\43\ See IAC Recommendations, supra note 22 (recommending a
cooling off period of four months); Gaming the System, supra note
12, at 3 (recommending a minimum cooling-off period and noting that
``[a] cooling-off period of four to six months . . . is supported by
the data in our sample''); letter from Senators Elizabeth Warren,
Sherrod Brown and Chris Van Hollen supra note 17 (recommending a
cooling off period of four to six months).
---------------------------------------------------------------------------
Under the proposed amendments, the cooling-off periods would have
applied to directors and ``officers'' (as defined in Rule 16a-1(f)) of
the issuer, as well as to an issuer that structures a share repurchase
plan as a Rule 10b5-1 plan,
[[Page 80367]]
although in the latter case the Commission proposed a shorter, 30-day
cooling-off period. This requirement would prevent directors, officers,
and issuers who might be aware of material nonpublic information from
adopting or modifying a trading arrangement and trading immediately
pursuant to the arrangement. The proposed cooling-off period also was
intended to discourage issuers, directors, and officers from
selectively terminating or cancelling a planned trade under a Rule
10b5-1 plan because any subsequent trades upon the adoption of a new or
modified plan would also be subject to a new cooling-off period.
The Commission noted that applying a cooling-off period to
directors and ``officers'' as defined in Rule 16a-1(f) was 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.\44\ The Commission also requested comment, however, on
whether the Rule 16a-1(f) definition was the appropriate definition of
``officer'' for purposes of the proposed amendment and further inquired
whether the cooling-off period should apply to all traders who rely on
the Rule 10b5-1(c)(1) affirmative defense.\45\
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\44\ 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).
\45\ Proposing Release, supra note 22, at 17.
---------------------------------------------------------------------------
In addition, the Commission stated that applying a cooling-off
period to issuers may help address the concern that issuers may conduct
stock buybacks while aware of material nonpublic information. For
example, corporate insiders who are aware of positive material
nonpublic information can cause the issuer to buy its stock at a lower
price from current shareholders who are unaware of this information
because, once the information is publicly disclosed, the issuer's share
price may increase. The Commission proposed a 30-day cooling-off period
for issuers to help reduce the likelihood of this potential abuse and
promote investor confidence. The Commission also proposed a note to
Rule 10b5-1(c)(1) stating that any modification or amendment to a prior
contract, instruction, or written plan would be deemed to be the
termination of such prior contract, instruction, or written plan, and
the adoption of a new contract, instruction, or written plan.\46\
---------------------------------------------------------------------------
\46\ The proposed note would have codified prior Commission
guidance on Rule 10b5-1(c)(1)(i)(C). See infra note 122 and
accompanying text.
---------------------------------------------------------------------------
b. Comments on the Proposed Amendments
Commenters expressed a range of views on the proposed cooling-off
periods. Many commenters expressed general support for a cooling-off
period for directors and officers.\47\ Several of these commenters
supported the proposed cooling-off period of 120 days.\48\ For example,
one commenter agreed that the proposed 120-day cooling-off period would
deter officers and directors from adopting or modifying a Rule 10b5-1
plan while aware of material nonpublic information and prevent insiders
from gaming Rule 10b5-1 plans by opportunistically canceling trades or
modifying plans.\49\ In addition, in expressing the view that this
duration was appropriate, another commenter stated the concern that,
given that directors and officers are more likely than other traders to
be aware of material nonpublic information and involved in making or
overseeing key corporate decisions that could affect the stock price,
they could be involved with decisions regarding the timing of a range
of issuer disclosures, including disclosures related to a merger or
acquisition, departure of a named executive officer, or the financial
statements.\50\ Finally, another commenter, who did not support the
proposed duration of the cooling-off period, nonetheless asserted that
a cooling-off period would increase investor confidence that insiders
were not using Rule 10b5-1 plans to benefit from nonpublic material
information.\51\
---------------------------------------------------------------------------
\47\ See, e.g., letters from American Federation of Labor and
Congress of Industrial Organizations (``AFL-CIO''), Better Markets,
Colorado Public Employees' Retirement Association (``CO PERA''),
Council of Institutional Investors (``CII''), Cravath, Swaine &
Moore LLP (``Cravath''), Davis Polk & Wardwell LLP (``Davis Polk''),
DLA Piper (``DLA''), Fenwick & West (``Fenwick''), International
Corporate Governance Network (``ICGN''), Craig M. Lewis et al.
(``Lewis''), Manulife Financial Corp. (``Manulife''), Committee on
Securities Law of the Business Law Section of the Maryland State Bar
(``MD Bar''), North American Securities Administrators Association,
Inc. (``NASAA''), New York City Comptroller (``NYCC''), NYSE Group,
Inc. (``NYSE''), PNC Financial Services Group, Inc. (``PNC''),
Public Citizen, Anthony O'Reilly (``O'Reilly''), Securities Industry
and Financial Markets Association (``SIFMA'') (letter dated Apr. 1,
2022, from Kevin Carroll, ``SIFMA 3''), and Sullivan & Cromwell LLP
(``Sullivan'').
\48\ See, e.g., letters from AFL-CIO, CII, CO PERA, ICGN, Public
Citizen, O'Reilly, and NASAA.
\49\ See letter from CII.
\50\ See letter from ICGN.
\51\ See letter from Manulife.
---------------------------------------------------------------------------
At the same time, many commenters, including several commenters
that expressed support for a cooling-off period for directors and
officers, contended that the duration of the proposed cooling-off
period was unnecessarily long.\52\ For example, some of these
commenters asserted that a 120-day cooling-off period would discourage
insiders from adopting Rule 10b5-1 plans \53\ and therefore result in
larger, more concentrated volumes of insider-directed trades taking
place during trading windows rather than being spread out under a Rule
10b5-1 plan, which could increase market volatility.\54\
---------------------------------------------------------------------------
\52\ See, e.g., letters from Federal Regulation of Securities
Committee of the Business Law Section of the American Bar
Association (``ABA''); ACCO Brands Corp. (``ACCO''); Chevron Corp.
(``Chevron''); Cravath; Davis Polk; DLA; Dow Inc. (``Dow''); Empire
State Realty Trust (``Empire Trust''); FedEx Corporation
(``FedEx''); Fenwick; HR Policy Association Center on Executive
Compensation (``HRPA''); Jones Day; Kirkland & Ellis (``Kirkland'');
Manulife, National Association of Manufacturers (``NAM''); National
Venture Capital Association (``NVCA''); New York City Bar
Association (``NYC Bar''); NYSE; Paul, Weiss, Rifkind, Wharton &
Garrison LLP (``Paul Weiss''); PNC; Quest Diagnostics Inc.
(``Quest''); William Quinn (``Quinn''); US Chamber of Commerce
(letter dated Apr. 1, 2022) (``Chamber of Chamber 2''); American
Property Casualty Insurance Association, American Securities
Association, Center On Executive Compensation, U.S. Chamber of
Commerce, Nareit, National Association of Manufacturers, and NIRI:
The Association for Investor Relations (``Coalition Letter'');
Shearman & Sterling LLP (``Shearman''); SIFMA 3; Simpson Thacher &
Bartlett LLP (``Simpson''); Sullivan; and Wilson, Sonsini, Goodrich
& Rosati (``Wilson Sonsini'').
\53\ See letter from NYC Bar. This comment letter was initially
submitted in Apr. 2022 and posted on the Commission website on Oct.
2022. The delayed posting of this comment letter to the website is
unrelated to the technological error that resulted in the Oct. 2022
reopening of the comment files of certain other Commission releases.
See Resubmission of Comments and Reopening of Comment Periods for
Several Rulemaking Releases Due to a Technological Error in
Receiving Certain Comments, Release Nos. 33-11117, 34-96005, IA-
6162, IC-34724; File Nos. S7-32-10, S7-18-21, S7-21-21, S7-22-21,
S7-03-22, S7-08-22, S7-09-22, S7-10-22, S7-13-22, S7-16-22, S7-17-
22, S7-18-22 (Oct. 7, 2022). In Apr. 2022, the submitter of this
comment letter withdrew the comment letters submitted on this rule
and the proposing release for another rule and submitted replacement
comment letters. Staff posted the replacement comment letter on the
other rule, but inadvertently failed to post the replacement comment
letter for the Proposing Release until the submitter of the comment
letter again contacted Commission staff in Oct. 2022.
\54\ See, e.g., letters from Chamber of Commerce 2, Davis Polk,
DLA, Fenwick, NYSE, SIFMA 3, Simpson, and Sullivan.
---------------------------------------------------------------------------
Some of these commenters recommended alternative durations for the
cooling-off period for directors and officers.\55\ Shorter alternatives
ranged from a cooling-off period of 30 days
[[Page 80368]]
from the date of adoption of a Rule 10b5-1 plan,\56\ which some
commenters asserted is a common practice many issuers have
implemented,\57\ to a maximum cooling-off period of 90 days after the
adoption of a Rule 10b5-1 plan.\58\ Other commenters recommended
shortening the cooling-off period, in part, by taking into account when
the issuer publishes its earnings announcement or results. These
commenters suggested that the cooling-off period last until: (1) the
earlier of 60 days or one business day after the earnings release for
the fiscal quarter of adoption; \59\ (2) the earlier of 60 days or 48
hours after the next release of annual or quarterly results; \60\ (3)
90 days or fewer or, if the officer or director enters into the Rule
10b5-1 plan within five trading days of an earnings release, 30 days;
\61\ (4) the earlier of 90 days or the publication of results for the
quarter during which the plan was adopted; \62\ (5) one trading day
after the next earnings announcement covering at least one fiscal
quarter and filed or furnished with an Exchange Act report; \63\ and
(6) the earlier of 30 days or the release of quarterly earnings with an
exception for plans entered into within five business days after an
earnings release.\64\ Another commenter, however, urged the Commission
to consider lengthening the cooling-off period to 180 days.\65\
---------------------------------------------------------------------------
\55\ See, e.g., letters from ACCO, Chamber of Commerce 2, Dow,
DLA, Fenwick, NAM, NYSE, Paul Weiss, Quinn, Simpson, and Sullivan.
\56\ See, e.g., letters from ACCO, Chamber of Commerce 2, DLA,
Fenwick, NYC Bar, NYSE, Paul Weiss, Quinn, and Sullivan.
\57\ See, e.g., letters from Chamber of Commerce 2, NYSE, Paul
Weiss, and Simpson.
\58\ See, e.g., letters from Chevron, Dow, and Cleary, Gottlieb,
Steen & Hamilton LLP (``Cleary'').
\59\ See letter from ABA.
\60\ See letter from Manulife.
\61\ See letter from Dow.
\62\ See letter from Cleary.
\63\ See letter from Davis Polk.
\64\ See letter from NAM.
\65\ See letter from Senators Elizabeth Warren, Chris Van
Hollen, Tammy Baldwin, and Bernard Sanders (``Sen. Warren et al.'').
---------------------------------------------------------------------------
Among commenters who recommended that we link the end of the
cooling-off period to the release of earnings or other financial
results, most did not specify whether the end of the cooling-off period
should be tied to the publication of such results in the form of a
quarterly report on Form 10-Q or annual report on Form 10-K, or instead
to the announcement of such results in a Form 8-K, that is filed or
furnished with the Commission.\66\ Some commenters suggested that the
end of the cooling-off period should be tied to the ``next'' (relative
to the adoption or modification of the Rule 10b5-1 plan) such release;
\67\ we understand that if an earnings announcement accompanied by a
Form 8-K is made, it typically precedes the filing of a Form 10-Q or
Form 10-K. One commenter suggested that the end of the cooling-off
period should be tied to the earlier of the release of financial
results or the start of the issuer's open trading window under the
insider's trading policy.\68\
---------------------------------------------------------------------------
\66\ See, e.g., letters from ABA, Cleary, and PNC.
\67\ See, e.g., letters from Davis Polk, DLA, and Simpson.
\68\ See letter from DLA; see also letter from Quest (suggesting
that there is no incremental material nonpublic information
disclosed in a Form 10-Q when an issuer has already released an
earnings announcement).
---------------------------------------------------------------------------
Finally, some commenters asked the Commission to provide exceptions
from the cooling-off period. For example, one commenter asked that the
cooling-off period not apply in cases of financial hardship for the
officer or director, such as an unanticipated financial liability that
is unrelated to the trading of securities.\69\ Another commenter asked
the Commission to exclude venture capital funds from the cooling-off
period condition, or to provide a shorter cooling-off period for
venture capital funds.\70\
---------------------------------------------------------------------------
\69\ See letter from Wilson Sonsini.
\70\ See letter from NVCA.
---------------------------------------------------------------------------
Many commenters opposed a cooling-off period for issuers,\71\
largely due to issuers' use of Rule 10b5-1 plans in connection with
share repurchase plans under Exchange Act Rule 10b-18.\72\ One of these
commenters stated that Rule 10b5-1 plans allow issuers to more
effectively coordinate and execute their share repurchases during open
and closed trading windows.\73\ Given this practice, several commenters
contended that the proposed cooling-off period would limit the
usefulness of Rule 10b5-1 plans and impede the ability of issuers to
effectively carry out share repurchases and other transactions used by
issuers to manage their capital.\74\ Some of these commenters stated
the concern that a cooling-off period for issuers could increase market
volatility as issuer repurchase activity would be limited to much
shorter trading windows.\75\
---------------------------------------------------------------------------
\71\ See, e.g., letters from the Bank Policy Institute and the
American Bankers Association (``BPI''), Home Depot, Inc. (``Home
Depot''), Dow, Chevron, Empire Trust, FedEx, International
Bancshares Corporation (``IBC''), Manulife, NYSE, HudsonWest LLC
(``HudsonWest''), Guzman & Company (``Guzman''), Quest, Coalition
Letter, Chamber of Commerce 2, HRPA, Lewis, NAM, NVCA, NYC Bar,
Society for Corporate Governance (``SCG''), SIFMA (letter dated Apr.
1, 2022, from Joseph P. Corcoran) (``SIFMA 2''), ABA, Cravath, Davis
Polk, Dorsey & Whitney LLP (``Dorsey''), Fenwick, Jones Day,
Kirkland, Paul Weiss, Simpson, Shearman, Sullivan, Wilson Sonsini,
and Vistra Corp. (``Vistra'').
\72\ 17 CFR 240.10b-18. Rule 10b-18 provides issuers with a safe
harbor from liability for manipulation under Sections 9(a)(2) and
10(b) of the Exchange Act [15 U.S.C. 78i(a)(2) and 78j(b)] when they
repurchase their common stock in the market in accordance with the
Rule's manner, timing, price, and volume conditions.
\73\ See letter from Simpson.
\74\ See, e.g., letters from BPI, Home Depot, Dow, Chevron,
FedEx, Quest, Chamber of Commerce 2, Coalition Letter, NAM, SCG,
SIFMA 2, ABA, Cravath, Davis Polk, Jones Day, Paul Weiss, Simpson,
Shearman, and Wilson Sonsini.
\75\ See, e.g., letters from NYSE and Sullivan.
---------------------------------------------------------------------------
In addition, several of these commenters asserted that a cooling-
off period for issuers was unnecessary because existing safeguards
under the Federal securities laws and market practices protect
investors from issuer abuse of Rule 10b5-1 plans.\76\ Some commenters
contended the Commission did not set forth any evidence of issuers
abusing Rule 10b5-1 trading arrangements to justify this cooling-off
period.\77\
---------------------------------------------------------------------------
\76\ See, e.g., letters from Cravath, Davis Polk, Dow, FedEx,
Fenwick, Lewis, NAM, Paul Weiss, Quest, SCG, SIFMA 2, and Wilson
Sonsini.
\77\ See, e.g., letters from BPI, Davis Polk, Cravath, and
Wilson Sonsini.
---------------------------------------------------------------------------
In contrast, other commenters supported a cooling-off period for
issuers.\78\ One of these commenters contended that the proposed 30-day
period was too short to address the concerns underlying the proposal
and advocated for a 120-day cooling-off period for issuers, similar to
the proposed cooling-off period for directors and officers.\79\
---------------------------------------------------------------------------
\78\ See, e.g., letters from CO PERA, CII, ICGN, NYCC, Better
Markets, Public Citizen, Stern Tannenbaum Bell LLP (``Stern''),
ACCO, PNC, NASAA, and Sen. Warren et al.
\79\ See letter from NASAA.
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Several commenters urged the Commission to clarify that immaterial
or administrative modifications to an existing Rule 10b5-1 trading
arrangement would not constitute a modification that triggers a new
cooling-off period.\80\ For example, some commenters asserted that
modifications should not trigger the cooling-off period unless they
address the pricing, amount of securities to be purchased or sold, and/
or the timing of purchases or sales.\81\ In addition, another commenter
urged the Commission not to trigger a new cooling-off period upon a
modification of a Rule 10b5-1 plan.\82\
---------------------------------------------------------------------------
\80\ See, e.g., letters from Chamber of Commerce 2, NAM, SIFMA
2, ABA, Cleary, Cravath, Davis Polk, DLA, Fenwick, and Sullivan.
\81\ See, e.g., letters from Cravath, Cleary, Davis Polk, and
DLA.
\82\ See letter from NAM.
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We also received comment on whether some or all of the proposed
amendments should apply only to directors and officers, as defined in
Rule
[[Page 80369]]
16a-1(f), or whether they should also apply to other insiders or
traders more broadly. Several commenters indicated that the proposed
cooling-off period and limitations on overlapping and single-trade
plans should apply to all traders or all natural persons.\83\ One of
these commenters generally observed that the limitations should apply
broadly because other officers and employees can potentially have
access to and trade on material nonpublic information.\84\ Another
commenter suggested that any individual involved in a company's trading
program or ``corporate decisions'' should be subject to the cooling-off
requirement.\85\ Two commenters also suggested that we extend the new
Item 408(a) reporting obligation to cover any employee who adopts a
10b5-1 plan.\86\
---------------------------------------------------------------------------
\83\ See letters from Better Markets, NASAA; see also letter
from Sen. Warren et al. (suggesting the limitation apply to ``all
employees'').
\84\ See letter from NASAA.
\85\ See letter from ICGN.
\86\ See letters from BrilLiquid LLC (``BrilLiquid'') and NASAA.
---------------------------------------------------------------------------
Other commenters opposed any expansion of the amendments beyond
directors and Rule 16a-1(f) officers.\87\ Some of these commenters
agreed with our observation that these officers were those most likely
to have access to material nonpublic information.\88\ Two commenters
argued that trading by employees other than Rule 16a-1(f) officers is
unlikely to adversely affect financial markets because of the limited
authority of these employees over corporate decisions.\89\ One of these
commenters further observed that because other employees do not
generally file Form 4, their trading activities are unlikely to affect
public confidence in a company's securities.\90\ Two other commenters
suggested that non-executive employees are particularly likely to need
to liquidate and diversify their company stock holdings, and so would
be disproportionately harmed by limitations such as the cooling-off
period.\91\ One commenter also stated that making the affirmative
defense more difficult to establish would reduce the likelihood that
companies would require their non-executive employees to use Rule 10b5-
1 plans, reducing the benefits of the rule.\92\
---------------------------------------------------------------------------
\87\ See letters from Chamber of Commerce 2, CII, Cravath, Davis
Polk, NAM, SCG, and SIFMA.
\88\ See letters from CII, Cravath, and SIFMA.
\89\ See letters from Cravath and Davis Polk.
\90\ See letter from Davis Polk.
\91\ See letters from Chamber of Commerce 2 and NAM.
\92\ See letter from Davis Polk.
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c. Final Amendment
After consideration of the comments, we are adopting a modified
cooling-off period that will apply to all persons other than the
issuer, with directors and ``officers'' (as defined in Rule 16a-1(f))
\93\ of the issuer subject to a longer cooling-off period than applies
to other persons (other than the issuer) who rely on the Rule 10b5-
1(c)(1) affirmative defense.
---------------------------------------------------------------------------
\93\ We are declining the request from one commenter to adopt a
definition of ``officer or director'' that would expressly exclude
certain venture capital funds whose partners may serve as a director
on the board of an issuer. As we have noted, Rule 10b5-1 does not
alter the law of insider trading and any potential liability under
the circumstances described by the commenter would be determined
according to established principles. We also are not convinced that
the business circumstances of such a director are unique and thus
warrant a distinctive set of affirmative defense requirements. We
further note that Rule 10b5-1(c)(2) can provide an alternative
affirmative defense for persons other than natural persons.
---------------------------------------------------------------------------
Under the final rule, a director or ``officer'' (as defined in Rule
16a-1(f)) who adopts (including a modification of) a Rule 10b5-1 plan
would not be able to rely on the Rule 10b5-1 affirmative defense unless
the plan provides that trading under the plan will not begin until the
later of (1) 90 days after the adoption of the Rule 10b5-1 plan or (2)
two business days following the disclosure of the issuer's financial
results in a Form 10-Q or Form 10-K for the fiscal quarter in which the
plan was adopted or, for foreign private issuers, in a Form 20-F or
Form 6-K that discloses the issuer's financial results (but in any
event, the required cooling-off period is subject to a maximum of 120
days after adoption of the plan).\94\
---------------------------------------------------------------------------
\94\ The good faith requirement in Rule 10b5-1(c)(1)(ii) will
continue to apply as a condition of the affirmative defense.
---------------------------------------------------------------------------
This cooling-off period is intended to deter opportunistic trading
that may be occurring under the current rule and, by extension, as
noted by commenters, it may increase investor confidence that directors
and officers are not using Rule 10b5-1 plans for such purposes.\95\ The
purpose of a cooling-off period is to provide a separation in time
between the adoption of the plan and the commencement of trading under
the plan so as to minimize the ability of an insider to benefit from
any material nonpublic information. In addition, academic studies
documenting abnormal trading results indicate that opportunistic
trading may be occurring notwithstanding current Rule 10b5-1(c)(1) and
that certain corporate insiders are earning profits unavailable to
others.\96\ For example, directors, officers, and other corporate
insiders commonly have access to preliminary quarterly financial data
before it is released to the public. As academic commentary has
observed, ``[q]uarterly earnings announcements . . . offer the most
important and frequent dates of material information disclosure by
firms.'' \97\ A cooling-off period could serve to avoid a situation in
which, for example, an insider adopts a Rule 10b5-1 plan while aware of
likely directional trends in quarterly results and trades under the
plan before the disclosure of such information.
---------------------------------------------------------------------------
\95\ See, e.g., letters from AFL-CIO, CII, and Manulife.
\96\ See supra note 35 and accompanying text.
\97\ See U. Ali & D. Hirshleifer, Opportunism as a Firm and
Managerial Trait: Predicting Insider Trading Profits and Misconduct,
126 J. Fin. Econ. 490, 491 (2017).
---------------------------------------------------------------------------
In addition, as the Proposing Release indicated, we are concerned
that this type of opportunistic trading could occur in contexts other
than in connection with quarterly results. For example, as a commenter
noted, corporate insiders may be aware of material nonpublic
information related to other types of upcoming events, such as a
potential merger, acquisition, or departure of a named executive
officer, and, with such information, adopt a Rule 10b5-1 plan and trade
under it before that information is made public.\98\
---------------------------------------------------------------------------
\98\ See letter from ICGN; see also Henderson et al., supra note
19, at 1301 (noting that 25% of the price changes observed in their
data are the results of corporate news events other than earnings).
---------------------------------------------------------------------------
Accordingly, the cooling-off period for officers and directors that
we are adopting includes both a fixed (90-day) and a variable (two
business days after the disclosure of the issuer's financial results)
component. This cooling-off period is targeted at reducing information
asymmetries in general as well as providing separation in time between
adoption of the plan and trading under the plan so as to reduce the
ability of corporate insiders to trade on material nonpublic
information.
The approach we are adopting takes into account considerations
raised by commenters. Some commenters observed that we could accomplish
our goals by linking the end of the cooling-off period to the release
of earnings results for the current quarter instead of a fixed period
of days, and suggested that we adopt a variable cooling-off period that
ends one or two business days following the issuer's next reporting of
quarterly results.\99\ Others suggested that we adopt a cooling-off
period that would be the earlier of this date or some other fixed
period, such as
[[Page 80370]]
60 days.\100\ In addition, while several commenters supported a 120-day
cooling-off period,\101\ other commenters expressed concerns that this
duration would discourage the use of Rule 10b5-1 plans.\102\ We agree
that, in some cases, a full 120-day cooling-off period would be longer
than needed to prevent the opportunistic trading with which we are
concerned. Therefore, we have shortened the cooling off period for
officers and directors from 120 days to the later of 90 days or the
second business day following disclosure of the issuer's financial
results for the fiscal quarter in which the plan was adopted.\103\ This
will result in a shortened cooling-off period, relative to what was
proposed, when such results are disclosed sooner than 120 days
following adoption of the plan.
---------------------------------------------------------------------------
\99\ See supra note 63.
\100\ See supra note 59.
\101\ See, e.g., letters from AFL-CIO, CII, CO PERA, ICGN,
Public Citizen, O'Reilly, and NASAA.
\102\ See, e.g., letters from Chamber of Commerce 2, Davis Polk,
DLA, Fenwick, SIFMA 3, Simpson, and Sullivan.
\103\ If financial results are disclosed more than 120 days
after adoption of the plan, 120 days would be the maximum duration
of the required cooling-off period. In those circumstances, we agree
with commenters who asserted that a 120-day cooling-off period would
be an appropriate duration to better ensure that a corporate insider
would not benefit from material nonpublic information related to
earnings. See, e.g., letters from AFL-CIO, and CII. The final rule
would not foreclose issuers that may choose to impose a longer
cooling-off period.
---------------------------------------------------------------------------
In addition, to enhance clarity, the final rule provides that an
issuer will be considered to have disclosed its financial results at
the time it files a Form 10-Q or Form 10-K, or, in the case of foreign
private issuers, files a Form 20-F or furnishes a Form 6-K that
discloses the financial results. We disagree with commenters who
suggested that there cannot be material nonpublic information contained
in a Form 10-Q or similar filing when the issuer has already announced
its earnings results.\104\ For example, some academic researchers have
found that information in periodic filings affects stock prices for
issuers that also made an earlier earnings announcement for the same
quarter.\105\
---------------------------------------------------------------------------
\104\ See letters from DLA and Quest.
\105\ See Erik R. Holzman et al., Is All Disaggregation Bad for
Investors? Evidence from Earnings Announcements, 26 Rev. Acctg.
Studies 520, 540-41 (2021); Yifan Li et al., Opportunity Knocks But
Once: Delayed Disclosure of Financial Items in Earnings
Announcements and Neglect of Earnings News, 25 Rev. Acctg. Studies
159 (2020); Bin Miao et al., Limited Attention, Statement of Cash
Flow Disclosure, and the Valuation of Accruals, 21 Rev. Acctg.
Studies 473 (2016). Some earlier work finds that there are
incremental market responses to Form 10-K filings but not to Form
10-Q filings. Edward Xuejun Li & K. Ramesh, Market Reaction
Surrounding the Filing of Periodic SEC Reports, 84 Acctg. Rev. 1171
(2009).
---------------------------------------------------------------------------
Further, the cooling-off period for officers and directors includes
a two-business day period following the disclosure of the issuer's
financial results, which provides a short interval for investors and
other market participants to analyze those results.\106\ Although some
commenters suggested that the next business day after results are
released would be adequate to ensure that market participants have
access to the same information as the corporate insider, we have
adopted a cooling-off period that extends to the second business day
after results are released, as other commenters suggested.\107\ We
disagree with those commenters who suggested that a next-day approach
would provide all market participants with the same access as the
corporate insider, as it may be challenging to obtain and analyze the
full details of an issuer's quarterly results within one day. In some
cases, allowing trading such a short period after release would
effectively authorize the director or officer to trade in the first
minutes after that information's availability to the market.
---------------------------------------------------------------------------
\106\ See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 854 &
n.18 (2d Cir. 1968) (noting that the ``permissible timing of insider
transactions after disclosures of various sorts is one of the many
areas of expertise for appropriate exercise of the SEC's rule-making
power'').
\107\ See supra note 63.
---------------------------------------------------------------------------
While some commenters suggested that the cooling-off period need
only take into account the publication of an issuer's quarterly
results, we find that including a minimum duration of 90 days for the
cooling-off period is necessary to deter the full scope of
opportunistic trading that we intend to address and appropriately
balances the comments, academic studies, and the purpose of an
affirmative defense. This minimum period is a reduction from the
proposed 120-day cooling-off period, in response to comments received
stating that the length of the proposed cooling-off period could
discourage corporate insiders from using Rule 10b5-1 plans, although we
acknowledge that some of these commenters requested a shorter period
than we are adopting.\108\ Given that directors and officers may be
aware of material nonpublic information related to upcoming events
other than quarterly results, a cooling-off period based solely on the
timing of the publication of quarterly results would be too narrow to
accomplish the objective of assuring that trading under these plans is
not on the basis of material nonpublic information.\109\ For example,
as noted above, directors and officers may be aware of material
nonpublic information about a potential merger, acquisition, or
departure of a named executive officer.\110\
---------------------------------------------------------------------------
\108\ See, e.g., letters from Fenwick, Simpson, and Sullivan.
\109\ See letter from ICGN.
\110\ See Jagolinzer, supra note 18, at 234 (finding that 10b5-1
plan adoption is associated with adverse news events occurring an
average of 72.2 days after adoption).
---------------------------------------------------------------------------
Further, a cooling-off period that is linked only to the release of
the next quarterly results (plus two business days) would in some cases
cause the time between plan adoption and initial trading to be very
short, such as two to three days, raising the risk that directors and
officers could easily adopt and trade under a Rule 10b5-1 plan while
aware of material nonpublic information that is unrelated to the
earnings information that has been released. For all of these reasons,
we are requiring a minimum cooling-off period of 90 days for officers
and directors regardless of the date of the release of the subsequent
quarter's results.\111\
---------------------------------------------------------------------------
\111\ We also note that, consistent with this view, many
commenters stated that a cooling-off period for a fixed period of
days (i.e., one which in some cases would necessarily extend beyond
release of the next quarter's results) is a common industry
practice.
---------------------------------------------------------------------------
We acknowledge that the cooling-off period that we are adopting for
directors and officers is longer than many of the cooling-off periods
recommended by several commenters and that academic studies do not
provide a precise estimate of the length of time a cooling-off period
should be to prevent insiders from realizing abnormal returns on their
trades.\112\ However, we have tailored the cooling-off period to
provide a greater separation in time between plan adoption and
commencement of trading
[[Page 80371]]
under the plan to better ensure that the affirmative defense is
available only in situations in which material nonpublic information,
including information other than earnings information, did not factor
into the trading decision. Finally, although a commenter recommended
increasing the length of the cooling-off period,\113\ we decline to do
so to minimize the risk of excessively long cooling-off periods, which,
as commenters stated, may discourage the use of Rule 10b5-1 plans.
---------------------------------------------------------------------------
\112\ One study found that abnormal returns persist on average
among all observed Rule 10b5-1 plans for up to 60 days after plan
adoption, but that abnormal returns for single-trade plans, which
represent about half of the observed Rule 10b5-1 plans, persist for
120 days or more. See Gaming the System, supra note 20, at 2-3. The
authors conclude that a cooling-off period of four to six months
would be ``supported by our data,'' id. at 3, although the study did
not consider whether this would still be the case if there were also
limits on single-trade plans. A second study consistently found
abnormal returns for the 60-day period after a Rule 10b5-1 plan is
adopted, and found such returns under two of the three statistical
methods employed for the 90-day period after plan adoption. See
McGinty & Maremont supra note 32. Another study reported evidence
that insiders trade on information that on average has value for
between three and six months, and the authors suggest that a
cooling-off period of that length would curtail these trades. See
Mavruk & Seyhun, supra note 19 at 136, 163, 179. And another study
found that insiders continue to earn abnormal returns after the
fifth planned trade over a 350-day period, suggesting that Rule
10b5-1 plans do not on average involve very short-run information.
See Jagolinzer, supra note 19, at 234-35. It also found that Rule
10b5-1 plans are statistically associated with negative news items
occurring an average of 72.2 days after a plan is established.
\113\ See supra note 65.
---------------------------------------------------------------------------
Moreover, while we recognize that some issuers impose their own
cooling-off periods, those cooling-off periods are voluntary and vary
in duration. Including a cooling-off period as a condition of the
affirmative defense will provide greater consistency for Rule 10b5-1
plans and thereby help address the investor protection concerns that
motivated the adoption of Rule 10b5-1.
In choosing an appropriate cooling-off period for officers and
directors, we are mindful of some commenters' concerns that a cooling-
off period might reduce the appeal of Rule 10b5-1 plans, which could
have undesirable effects on investor confidence.\114\ We expect,
however, that the period we are adopting will not have a significant
impact on directors' and officers' desire to satisfy the requirements
of the affirmative defense. Directors and officers have strong
incentives to rely on a Rule 10b5-1 plan, due to the potential effects
of the affirmative defense on the likelihood and outcome of any
litigation. In addition, many issuers maintain trading windows that may
restrict the trading activity of corporate insiders during an issuer's
``closed window'' period except through the use of a Rule 10b5-1 plan,
and such periods may cover significant portions of the year. Similarly,
Section 306 of the Sarbanes-Oxley Act,\115\ and our implementing
regulations,\116\ prohibit most trades during issuer pension blackout
periods other than through the use of a plan that satisfies the
affirmative defense conditions of Rule 10b5-1(c).\117\ Accordingly, for
these reasons, we have selected a cooling-off period for officers and
directors that we conclude strikes the proper balance in deterring
insider trading without unduly discouraging the adoption of Rule 10b5-1
plans.
---------------------------------------------------------------------------
\114\ See, e.g., letters from Chamber of Commerce 2, NAM and
SIFMA.
\115\ 15 U.S.C. 7244.
\116\ See 17 CFR 245.100 et seq.
\117\ See 17 CFR 245.101(c)(2). Our rules also provide trades
made pursuant to a Rule 10b5-1 plan more flexibility with respect to
when an insider must report the trade on Form 4. See 17 CFR 240.16a-
3(g)(2); 17 CFR 240.16a-3(g)(4).
---------------------------------------------------------------------------
We are not imposing the same cooling-off period required for
directors and officers to other persons, as some commenters
suggested,\118\ Instead, we are requiring a cooling-off period of 30
days for persons other than directors, officers or the issuer. We
generally agree that persons other than directors and officers often
have access to material nonpublic information. At the same time, we
recognize that each of the proposed requirements of the affirmative
defense may impose costs on such persons, whose needs for
diversification and liquidity may differ from those of officers and
directors, as some commenters noted.\119\ In particular, we recognize
that some persons will experience meaningful delays in their ability to
liquidate a stock position, which may cause some financial strain
particularly for employees who may lack the resources and access to
alternative liquidity sources available to directors and officers.
Therefore, we disagree with commenters who urged us to impose the same
cooling-off period required for directors and officers to all other
traders.
---------------------------------------------------------------------------
\118\ See letters from Better Markets, NASAA, and Senator Warren
et al.
\119\ See letters from Chamber of Commerce 2 and NAM.
---------------------------------------------------------------------------
The 30-day cooling-off period we are adopting for persons other
than directors, officers, or the issuer reflects a balancing of the
considerations we have outlined above. We believe that when any insider
enters into a Rule 10b5-1 plan, a period of time should elapse before
trading under the plan can commence to help ensure that a trade is not
on the basis of material nonpublic information. At the same time, we
recognize the heightened burdens a cooling-off period may impose on
insiders who are not directors or officers, and who may have more
limited financial resources. In light of these considerations, we have
adopted a shorter cooling-off period for persons other than officers
and directors that is still long enough to reduce the potential for
some opportunistic trades.\120\
---------------------------------------------------------------------------
\120\ We recognize that we have previously observed that the
affirmative defense would be available to an employee who acquires
company stock through an employee stock purchase plan or a Section
401(k) plan. See 2000 Adopting Release, supra note8, at 51728. We do
not believe that a 30-day cooling-off period will significantly
affect non-officer employees' use of such plans, as we think that
employees employ these plans primarily to make relatively regular
purchases over long periods of time, such that a waiting period of
two biweekly pay periods before planned trades can begin will not
appreciably affect the employees' preferences.
---------------------------------------------------------------------------
We are not implementing commenters' suggestions to adopt a
financial hardship exception from the cooling-off period due to the
practical difficulties of administering this type of exception.\121\
Assessing financial hardship would require careful scrutiny and
balancing of each insider's assets, liabilities, and obligations, and
this fact-intensive inquiry would undermine the predictability that the
affirmative defense is intended to provide.
---------------------------------------------------------------------------
\121\ See supra note 69.
---------------------------------------------------------------------------
In addition, we agree with commenters that only certain types of
modifications of an existing Rule 10b5-1 plan should trigger a new
cooling-off period. We therefore are adopting a new paragraph to Rule
10b5-1(c)(1) that specifically provides that a modification or change
to the amount, price, or timing of the purchase or sale of the
securities (or a modification or change to a written formula or
algorithm, or computer program that affects the amount, price, or
timing of the purchase or sale of the securities) underlying a
contract, instruction, or written plan as described in Rule 10b5-
1(c)(1)(i)(A) is a termination of such contract, instruction, or
written plan, and the adoption of a new contract, instruction, or
written plan, and such new adoption will trigger a new cooling-off
period. The final amendment codifies prior Commission guidance on
existing Rule 10b5-1(c)(1)(i)(C) about the effect of
modifications.\122\ Under the final amendment, modifications that do
not change the sales or purchase prices or price ranges, the amount of
securities to be sold or purchased, or the timing of transactions under
a Rule 10b5-1 plan (such as an adjustment for stock splits or a change
in account information) will not trigger a new cooling-off period. We
disagree with the commenter that urged us to not trigger a new cooling-
off period upon a modification, because a corporate insider could
easily change the key terms of an existing plan at a time when they are
aware of material nonpublic information, such as by increasing the
sales price to take advantage of favorable news, allowing the insider
to profit from such information.\123\
---------------------------------------------------------------------------
\122\ See 2000 Adopting Release, supra note 8, at 51718 n 111.
\123\ See letter from NAM.
---------------------------------------------------------------------------
Finally, we are not adopting a cooling-off period for the issuer at
this time. In light of the comments we received on this aspect of the
proposed rules, we believe that further consideration of potential
application of a cooling-off period to the issuer is
[[Page 80372]]
warranted.\124\ Although we are aware that many issuers currently use
cooling-off periods in connection with their securities transactions
and that such cooling-off periods may significantly mitigate the risk
of investor harm, we are also mindful that the use and length of such
cooling off periods is not uniform and that the misuse of material
nonpublic information by issuers when trading in their own securities
can result in significant investor harm because transactions by issuers
often involve substantial quantities of securities. We are continuing
to consider whether regulatory action is needed to mitigate any risk of
investor harm from the misuse of Rule 10b5-1 plans by the issuer, such
as in the share repurchase context. We note that, in general, a
corporation is considered an insider with regard to its duty to either
disclose or abstain when purchasing its own shares on the basis of
material, nonpublic information.\125\
---------------------------------------------------------------------------
\124\ See supra note 71 and accompanying text.
\125\ See, e.g., McCormick v. Fund Am. Cos., 26 F.3d 896 (9th
Cir. 1994) (``Numerous authorities have held or otherwise stated
that the corporate issuer in possession of material nonpublic
information must, like other insiders in the same situation,
disclose that information to its shareholders or refrain from
trading with them.'') (citations omitted); Shaw v. Digital Equip.
Corp., 82 F.3d 1194, 1203-04 (1st Cir. 1996) (``Courts . . . have
treated a corporation trading in its own securities as an `insider'
for purposes of the `disclose or abstain' rule.'') (citations
omitted); Rogen v. Ilikon Corp., 361 F.2d 260, 266-68 (1st Cir.
1966); Levinson v. Basic Inc., 786 F.2d 741, 746 (6th Cir. 1986),
vacated on other grounds, 485 U.S. 224, 108 S. Ct. 978 (1988)
(``[c]ourts have held that a duty to disclose [merger] negotiations
arises in situations, such as where the corporation is trading in
its own stock''); Kohler v. Kohler Co., 319 F.2d 634, 638 (7th Cir.
1963) (the ``underlying principles'' regarding trading on inside
information ``apply not only to majority stockholders of
corporations and corporate insiders, but equally to corporations
themselves''). Other rules promulgated pursuant to Section 10(b)
demonstrate that issuers trading in their own stock have a duty to
disclose or abstain. For example, Exchange Act Rule 10b-18 provides
an issuer with a ```safe harbor' from liability'' under Rule 10b-5
under certain circumstances when the issuer is repurchasing its own
stock. [17 CFR 240.10b-18]. But, as the Commission has explained,
Rule 10b-18 ``confers no immunity from possible Rule 10b-5 liability
where the issuer engages in repurchases while in possession of
favorable, material non-public information concerning its
securities.'' Purchases of Certain Equity Securities by the Issuer
and Others, Release No. 33-6434, 1982 WL 33916 at *2, *16 n.5 (Nov.
17, 1982).
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2. Director and Officer Certifications
a. Proposed Amendments
The Commission proposed 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 new written
Rule 10b5-1 plan, such director or officer would be required, as a
condition to the affirmative defense, to promptly furnish to the issuer
a separate written certification, certifying that at the time of the
adoption of the plan:
<bullet> They are not aware of material nonpublic information about
the issuer or its securities; and
<bullet> They are adopting the 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.
In doing so, the Commission indicated that the use of the term
``officer'' as defined in 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 Commission intended the proposed certification requirement to
reinforce directors' and officers' cognizance of their obligation not
to trade or adopt a trading plan while aware of material nonpublic
information, their responsibility to determine whether they are aware
of material non-public information when adopting Rule 10b5-1 plans, and
the fact 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. The Commission noted in the
Proposing Release that the proposed certification involves important
considerations, especially because directors and officers are often
aware of material nonpublic information.
In addition, the Commission clarified that, 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.'' \126\ The Commission stated, however, that the issue of
whether a director or officer has material nonpublic information is an
inherently fact-specific analysis. Thus, a director's or officer's
completion of the proposed certification would reflect their personal
determination that they do not have material nonpublic information at
the time of adoption of a Rule 10b5-1 plan.
---------------------------------------------------------------------------
\126\ As the Commission has stated previously, we rely on
existing definitions of the terms ``material'' and ``nonpublic''
established in 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) (quoting and applying TSC
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) to the
Section 10(b) and Rule 10b-5 context); Rule 405 [17 CFR 230.405] of
the Securities Act of 1933 (the ``Securities Act'') [15 U.S.C. 77a
et seq.]; Exchange Act Rule 12b-2 [17 CFR 240.12b-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); SEC v. Texas Gulf
Sulphur Co., 401 F.2d 833, 854 (2d Cir. 1968), cert. denied, 394
U.S. 976 (1969); Regulation FD [17 CFR 243.101(e)]. 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).
---------------------------------------------------------------------------
The proposed amendment also included 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. The proposed
amendments would not require a director, officer, or the issuer to file
the certification with the Commission, and the proposed certification
would not be an independent basis of liability for directors or
officers under Section 10(b) and Rule 10b-5. Rather, the Commission
intended the proposed certification to underscore the certifiers'
awareness of their legal obligations under the Federal securities law
related to trading in the issuer's securities.\127\
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\127\ 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).
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b. Comments on the Proposed Amendments
Commenters were divided on the certification requirement. Several
commenters generally supported the proposed certification requirement
for directors and officers.\128\ Some of these commenters agreed that
the proposed certification could reinforce directors' or officers'
awareness of their legal obligations under the Federal securities
law.\129\ Another commenter noted that the certification should
increase investor confidence.\130\
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\128\ See, e.g., letters from CII, CO PERA, ICGN, NYSE, and
O'Reilly.
\129\ See letters from CII and O'Reilly.
\130\ See letter from ICGN.
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[[Page 80373]]
A number of commenters, however, did not support the proposed
certification requirement.\131\ Many of these commenters contended that
the certification was unnecessary because broker-dealers who execute
Rule 10b5-1 plans usually require the director or officer to make
similar representations.\132\ Several commenters stated that any final
rules should clearly provide that the certification does not establish
an independent basis of liability for directors or officers under
Section 10(b) and Rule 10b-5.\133\ Another commenter expressed concern
that the language included in the proposed certification indicating
that the director or officer is ``not aware of material nonpublic
information about the issuer or its securities'' at the time of
adoption of a Rule 10b5-1 plan is inconsistent with Rule 10b-5 and
insider trading jurisprudence.\134\ This commenter asserted that, for
trading activity to be unlawful under Exchange Act Section 10(b)(5),
the person trading must not have been aware of material nonpublic
information at the time that they made the purchase or sale. This
commenter claimed that the affirmative defense should be available if
either: (1) the person trading was not aware of any material nonpublic
information about the issuer or the security when they entered into the
Rule 10b5-1 trading arrangement; or (2) any such material nonpublic
information is either public or no longer material at the time of the
trade.
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\131\ See, e.g., letters from ACCO, Cravath, Davis Polk, DLA,
Kirkland, MD Bar, NAM, Quinn, SGC, Shearman, Sullivan, and Wilson
Sonsini.
\132\ See, e.g., letters from ACCO, Cravath, DLA, Kirkland,
Shearman, and Sullivan.
\133\ See, e.g., letters from Cravath, DLA, Kirkland, Shearman,
and Sullivan.
\134\ See letter from MD Bar.
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Several commenters suggested alternatives to requiring a separate
certification. A few commenters suggested that the proposed amendment
should provide that the certification should instead be included in the
documentation for the Rule 10b5-1 plan.\135\ Another commenter
recommended that the Commission rely on the representations that
traders make to the broker executing the Rule 10b5-1 plan.\136\
---------------------------------------------------------------------------
\135\ See, e.g., letters from Cravath and SIFMA 3.
\136\ See letter from ACCO.
---------------------------------------------------------------------------
c. Final Amendment
We are adopting Rule 10b5-1(c)(1)(ii)(C) largely as proposed, but
with certain modifications. Under the final rule, if a director or
``officer'' (as defined in Rule 16a-1(f)) of the issuer of the
securities adopts a Rule 10b5-1 plan, as a condition to the
availability of the affirmative defense, such director or officer will
be required to include a representation in the plan certifying that at
the time of the adoption of a new or modified Rule 10b5-1 plan: (1)
they are not aware of material nonpublic information about the issuer
or its securities; and (2) 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 Rule 10b-5.\137\
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\137\ The rule will not require these personal certifications
where a director or officer terminates an existing Rule 10b5-1 plan
and does not adopt a new/modified trading arrangement for which the
affirmative defense is sought. However, new Item 408 of Regulation
S-K will require registrants to disclose whether any director or
officer has terminated a Rule 10b5-1 plan or non-Rule 10b5-1 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.
---------------------------------------------------------------------------
Since its adoption, Rule 10b5-1(c)(1) has required, as a condition
of the affirmative defense, that a person ``demonstrate[]'' that they
adopted their trading plan before becoming aware of material nonpublic
information. The rule has also provided that the affirmative defense
only applies when the trading arrangement was entered into in good
faith. As discussed above, we are concerned that, notwithstanding these
requirements, corporate insiders may be using Rule 10b5-1 plans in ways
that are not consistent with the affirmative defense and that harm
investors and undermine the integrity of the securities markets.\138\
---------------------------------------------------------------------------
\138\ See supra Section II.A.
---------------------------------------------------------------------------
The certification condition is intended to reinforce directors' and
officers' cognizance of their obligation not to trade or enter into a
trading plan while aware of material nonpublic information about the
issuer or its securities, 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. As noted in the
Proposing Release, 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.'' \139\ 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 the
proposed certification would reflect their personal determination that
they do not have material nonpublic information at the time of adoption
of a Rule 10b5-1 plan.
---------------------------------------------------------------------------
\139\ See supra note 126.
---------------------------------------------------------------------------
As suggested by some commenters,\140\ however, we have modified the
final amendment to require that the certification be included in the
Rule 10b5-1 plan as representations, rather than prepared as a separate
document to be presented to the issuer. Consistent with the intent
behind the proposal, this approach will reinforce directors' and
officers' cognizance of their obligations discussed above, but will
eliminate any additional burden that separate documentation may create.
---------------------------------------------------------------------------
\140\ See, e.g., letters from Cravath and SIFMA 3.
---------------------------------------------------------------------------
We are not persuaded, however, that any representations that
corporate insiders may already make to broker-dealers obviate the need
for a certification. While we note that broker-dealers may require
similar representations from directors and officers before executing a
Rule 10b5-1 plan, given that there is no requirement that they do so,
such practices may not be universal, and the requirement may differ
among the various broker-dealers that do require such representations.
This rule therefore will better ensure that corporate insiders provide
these representations. Further, because issuers must provide disclosure
regarding the material terms (other than price) of their directors' and
officers' Rule 10b5-1 plans under new Item 408(a) of Regulation S-K as
described below, any representation made as part of such plans will
also likely be requested by and made available to the issuer to
facilitate its compliance with the disclosure requirement. To the
extent that directors and officers provide issuers with these
representations, they would likely have a greater effect on investor
confidence that the officer or director in fact was not aware of
material nonpublic information when making the representation due to
the issuer's close relationship to its officers and directors.
In addition, we are not adopting the proposed instruction that a
director or
[[Page 80374]]
officer seeking to rely on the affirmative defense should retain a copy
of the certification for a period of ten years. The burden of
establishing that the requirements of the affirmative defense have been
met will fall on the corporate insider who wishes to rely on it. As a
result, we find that the proposed instruction is unnecessary as
directors and officers already have reason to keep accurate records,
including the representations, to establish that they have satisfied
the conditions of the affirmative defense.
Finally, we disagree with the commenter who argued that requiring
directors or officers to certify that they lack material nonpublic
information at the time of adopting a Rule 10b5-1 plan would be
inconsistent with insider trading jurisprudence.\141\ Specifically, the
commenter argued that the certification should instead allow a trader
to certify that any material nonpublic information the trader holds at
the time the plan is entered into will be either public or no longer
material at the time of the trade.\142\ We concur with this commenter
that, in general, liability under Rule 10b-5 and Section 10(b) requires
a showing that a covered individual was aware of material nonpublic
information at the time that a trade was executed. Rule 10b5-1,
however, is intended to provide an affirmative defense against
liability under circumstances where it is relatively unlikely that a
trader will be able to trade on material nonpublic information. As
noted earlier, this defense is designed to cover situations where a
person can demonstrate that a trade was not based on material nonpublic
information. Requiring a representation that a director or officer was
not aware of material nonpublic information when adopting a Rule 10b5-1
plan as a condition of the affirmative defense better ensures that the
defense is available only in those circumstances. Moreover, by its
nature, an affirmative defense does not affect the substance of the
underlying prohibition. Individuals who cannot satisfy this condition
because they are aware of material nonpublic information at the time
that they enter into a Rule 10b5-1 plan may still be able to trade
without liability if they lack material nonpublic information at the
time that their trade is actually executed. In such circumstances,
however, they would not be able to benefit from the affirmative defense
provided by Rule 10b5-1(c)(1). We also disagree with the commenter's
suggestion that the representation condition we are adopting is a
substantive change in what knowledge an individual may possess when
adopting a plan that satisfies the conditions of Rule 10b5-
1(c)(1).\143\ The representation condition rather adds a requirement
about how that knowledge is documented for purposes of the affirmative
defense.
---------------------------------------------------------------------------
\141\ See letter from MD Bar.
\142\ The Commission is not adopting this alternative because of
the difficulties a trader would face in assessing at the time of
certification whether the information will become nonpublic or no
longer material at the time of their future trading. For example, a
trader may not be able to make a determination about whether and
when other persons will disclose nonpublic information on behalf of
an issuer by a certain time in the future. See 2000 Adopting
Release, supra note 8 above (noting that public companies frequently
``designat[e] a limited number of persons who are authorized to make
disclosures'' that can be considered as made ``on behalf of an
issuer'' to comply with the securities laws); see also 17 CFR
243.100, 101(c). The certification condition that the Commission is
adopting permits traders to make the relatively more straightforward
determination whether they are aware of material nonpublic
information at a given point in time.
\143\ The 2000 adopting release made clear that a person could
adopt a plan ``while the person was not aware of any inside
information.'' 2000 Adopting Release at 51737 (emphasis added);
accord Selective Disclosure and Insider Trading, Release No. 33-7787
(Dec. 20, 1999) [64 FR 72590 (Dec. 28, 1999)] at 72601 (``If the
insider provides the instructions without awareness of any material
nonpublic information, the Rule would permit him or her to complete
the previously instructed sales plan even if he or she later became
aware of inside information.'') (emphasis added).
---------------------------------------------------------------------------
Finally, the Commission also proposed a technical change to
incorporate the Preliminary Note to Rule 10b5-1 into Rule 10b5-
1(b).\144\ The Preliminary Note to Rule 10b5-1 states that the rule
defines when a purchase or sale constitutes trading ``on the basis of''
material nonpublic information in insider trading cases brought under
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, that the
law of insider trading is otherwise defined by judicial opinions
construing Rule 10b-5, and that Rule 10b5-1 does not modify the scope
of insider trading law in any other respect.\145\ We are adopting this
change as proposed.
---------------------------------------------------------------------------
\144\ See Proposing Release at 8689.
\145\ See 2000 Adopting Release supra note 8 at 51727. The
Commission adopted an ``awareness'' standard in 2000 that provides
that a purchase or sale of a security of an issuer is on the basis
of material nonpublic information about that security or issuer ``if
the person making the purchase or sale was aware of the material
nonpublic information when the person made the purchase or sale.''
17 CFR 240.10b5-1(b) (2000). The Commission explained at that time
that one view was that a trader may be liable for trading while in
``knowing possession of information,'' while a contrary view was
that a trader is not liable unless it is shown that the trader
``used'' the information for trading. Selective Disclosure and
Insider Trading, 65 FR 51716-01, 51726-27 (Aug. 24, 2000). The
Commission ultimately adopted the ``awareness'' standard that
balanced considerations of both views while being ``closer'' to the
``knowing possession'' standard than to the ``use'' standard. Id.
One commenter suggested that the Commission lacked authority ``in
the year 2000'' to adopt Rule 10b5-1(b)'s awareness standard. See
letter from Pacific Legal Foundation. However, none of the
modifications the Commission is adopting in this Release would alter
the ``awareness'' standard that the Commission adopted in 2000. See
supra at p.8 n. 9. In any event, by prohibiting any manipulative or
deceptive device or contrivance ``in contravention of such rules and
regulations as the Commission may prescribe as necessary or
appropriate in the public interest or the protection of investors''
(Exchange Act Section 10(b)), Congress thereby authorized the
Commission to ``prescribe legislative rules'' like Rule 10b5-1, and
courts must accord Rule 10b5-1 ``controlling weight.'' O'Hagan, 521
U.S. at 673 (quoting Chevron, 467 U.S. at 844). Since its adoption
in 2000, courts have appropriately deferred to the Commission's
``awareness'' standard, holding that the Commission's determination
is ``entitled to deference.'' Royer, 549 F.3d at 899 (applying
Chevron); see also United States v. Rajaratnam, 719 F.3d 139, 157-61
(2d Cir. 2013), cert. denied, 134 S. Ct. 2820 (2014). Furthermore,
Congress has expressly authorized the Commission to seek and
district courts to impose civil monetary penalties where a person
has violated the securities laws by purchasing or selling a security
``while in possession of'' material nonpublic information. Exchange
Act Section 21A(a)(1) [15 U.S.C. 78u-1(a)(1)]; see also Exchange Act
Section 20(d) (liability for trading ``while in possession of''
material nonpublic information) [15 U.S.C. 78t(d)].
---------------------------------------------------------------------------
The existing law of insider trading provides an established legal
framework that makes directors and officers liable if they fraudulently
purchase or sell securities on the basis of material nonpublic
information in breach of a duty of trust or confidence. Rule 10b5-1
provides that a purchase or sale of a security of an issuer is on the
basis of material nonpublic information for purposes of Section 10(b)
and Rule 10b-5 if the person making the purchase or sale was aware of
the material nonpublic information when the person made the purchase or
sale. Rule 10b5-1 expressly ``does not modify the scope of insider
trading law in any other respect.'' We think it is sufficiently clear
that the certification would not create an independent basis of
liability for insider trading and do not believe it is necessary to
amend the rule in this regard, as suggested by several commenters.\146\
---------------------------------------------------------------------------
\146\ See, e.g., letters from Cravath, DLA, Kirkland, Shearman,
and Sullivan.
---------------------------------------------------------------------------
3. Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements
and Single-Trade Arrangements
a. Proposed Amendments
Currently, a person is not entitled to the Rule 10b5-1(c)(1)
affirmative defense for a trade if they enter into or alter a
``corresponding or hedging transaction or position'' with respect to
the planned transactions.\147\ In proposing this requirement, the
Commission explained that it was
[[Page 80375]]
designed to prevent persons from devising schemes to exploit material
nonpublic 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.\148\
---------------------------------------------------------------------------
\147\ See Rule 10b5-1(c)(1).
\148\ See Selective Disclosure and Insider Trading, Release No.
33-7787 (Dec. 20, 1999) [64 FR 72590 (Dec. 28, 1999)].
---------------------------------------------------------------------------
In the Proposing Release, the Commission recognized that multiple
overlapping plans can be used for these hedging purposes and in other
ways that might allow material nonpublic information to ``factor into
the trading decision'' of an insider who had complied with the other
provisions of Rule 10b5-1. In particular, currently, a person can adopt
and employ multiple overlapping Rule 10b5-1 trading arrangements and
exploit material nonpublic information by setting up trades timed to
occur around dates on which they expect that the issuer will likely
release material nonpublic information (such as earnings releases) and
then selectively cancel trades or terminate plans on the basis of
material nonpublic information before the information is publicly
disclosed. In this same vein, the Commission noted its concern that a
person could circumvent the proposed cooling-off period by setting up
multiple overlapping Rule 10b5-1 trading arrangements, and deciding
later which trades to execute and which to cancel after they become
aware of material nonpublic information, but before its release.
To address these concerns, the Commission proposed to amend Rule
10b5-1(c)(1) to provide as a condition of the affirmative defense that
the person who has entered the plan has no outstanding (and does not
subsequently enter into another) Rule 10b5-1 plan for open market
purchases or sales of the same class of securities. The Commission also
requested comment on whether it was appropriate to exclude multiple
trading arrangements for open market purchases or sales of the same
class of securities, and specifically asked commenters to weigh in on
whether allowing a concurrent trading arrangement for each class of
securities would ``create incentives for corporate insiders to own
different classes of stock.'' \149\
---------------------------------------------------------------------------
\149\ Proposing Release, supra note 23, at 8692 (request for
comment number 13).
---------------------------------------------------------------------------
This proposed limitation was 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 the
affirmative defense for such trades.
The proposed amendment would not apply to transactions where a
person acquires (or sells) securities through participation in employee
stock ownership plans (``ESOPs'') or dividend reinvestment plans
(``DRIPs''), which are not executed by the person on the open market.
Participation in these programs is sometimes effected through Rule
10b5-1 plans, and because these transactions are directly with the
issuer, the Commission concluded they were less likely to give rise to
insider trading concerns.\150\ Thus, the Commission proposed this
exception to preserve the benefits of flexibility for plan participants
with respect to such plans.
---------------------------------------------------------------------------
\150\ However, the Supreme Court has explained that lower courts
``should consider the extent to which an ERISa-based obligation
either to refrain on the basis of inside information from making a
planned trade or to disclose inside information to the public could
conflict with the complex insider trading and corporate disclosure
requirements imposed by the federal securities laws or with the
objectives of those laws.'' Fifth Third Bancorp v. Dudenhoeffer, 573
U.S. 409, 429 (2014). Officers and directors also need to follow
Regulation Blackout Trading Restrictions, see 17 CFR 245.100 through
245.104.
---------------------------------------------------------------------------
In addition to restricting the use of multiple overlapping trading
arrangements, the Commission proposed 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, by providing 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 purchased or sold securities pursuant to another single-
trade plan within the preceding 12-month period. In proposing this
amendment, the Commission noted that some recent research indicated
that single-trade plans are consistently loss-avoiding and their
adoption often precedes stock price declines.\151\ At the same time,
the Commission recognized the use of single-trade plans to address one-
time liquidity needs. The proposed limitation on single-trade plans was
intended to balance accommodating the use of single-trade plans for
one-time liquidity needs against the potential for abuse of such plans.
---------------------------------------------------------------------------
\151\ See Gaming the System, supra note 20; see also infra
Section V.B.
---------------------------------------------------------------------------
b. Comments on the Proposed Amendments
Several commenters generally supported both the proposed
restriction on multiple overlapping trading arrangements, and the
limitation on single-trade plans.\152\ One commenter expressed support
for the prohibition on multiple overlapping trading arrangements, but
did not address single-trade plans.\153\ A few commenters supported the
proposed prohibition on multiple overlapping trading arrangements but
asked the Commission to limit the prohibition to directors and
officers, noting that individuals have many legitimate reasons to have
overlapping plans, such as gifts and estate-planning transactions, and
that directors and officers are the group most likely to have material
nonpublic information.\154\
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\152\ See, e.g., letters from AFL-CIO, Better Markets, CO PERA,
MD Bar, NYCC, NASAA, and Public Citizen.
\153\ See letter from Kirkland.
\154\ See, e.g., letters from SIFMA 3 and Sullivan.
---------------------------------------------------------------------------
With respect to single-trade plans specifically, commenters had
mixed responses. One commenter expressed support for the limitation on
single-trade plans,\155\ while another commenter recommended that the
Commission eliminate the availability of the Rule 10b5-1 affirmative
defense for all single-trade plans.\156\ On the other hand, some
commenters noted that single-trade plans often have legitimate
uses.\157\ For example, one commenter maintained that, if adopted, the
Commission should provide exceptions for derivative transactions,
gifts, estate-planning transactions, and employee benefit plan
transactions.\158\ Other commenters indicated that the proposed
restriction could be evaded by splitting one trade that would be
authorized under such a plan into two trades.\159\
---------------------------------------------------------------------------
\155\ See letter from NYSE.
\156\ See letter from Sen. Warren et al.
\157\ See, e.g., letters from <a href="http://Monday.com">Monday.com</a> Ltd (``<a href="http://Monday.com">Monday.com</a>''),
BioNJ, SCG, SIFMA 3, Davis Polk, Fenwick, Jones Day, Shearman, and
Wilson Sonsini
\158\ See letter from Sullivan.
\159\ See letter from Cravath and Davis Polk.
---------------------------------------------------------------------------
In addition, several commenters expressed concern that the proposed
restrictions on multiple overlapping and single-trade Rule 10b5-1 plans
would negatively impact certain employee compensation plan transactions
that are structured as Rule 10b5-1 plans, such as sales of securities
used to generate funds to cover the withholding taxes associated with
equity vesting and elections under 401(k) plans or employee stock
purchase plans that may be structured as Rule 10b5-1 plans (``sell-to-
cover transactions'').\160\ Some of these commenters asserted that
these transactions do not implicate the concerns that the proposed
amendment is intended to address because a
[[Page 80376]]
corporate insider has limited discretion as to the timing or the number
of shares sold to cover the tax liability.\161\ Other commenters
generally stated that under the proposed limitations, insiders could
not maintain both a traditional Rule 10b5-1 plan and a plan designed to
execute sell-to-cover transactions.\162\
---------------------------------------------------------------------------
\160\ See, e.g., letters from Fenwick, HP, <a href="http://Monday.com">Monday.com</a>, SCG,
Sullivan, and Wilson Sonsini.
\161\ See, e.g., letters from BioNJ, <a href="http://Monday.com">Monday.com</a>, and Simpson
Thatcher.
\162\ See, e.g., Sullivan and Wilson Sonsini.
---------------------------------------------------------------------------
With respect to the aspect of the proposed definition of ``multiple
concurrent trading arrangements'' under which an insider could
establish a separate arrangement for each ``class of securities,''
several commenters generally supported the limitation on multiple
overlapping plans as proposed.\163\ One commenter, however, argued that
the proposed definition would encourage insiders to establish parallel
trading arrangements for common stock, preferred stock, and
options.\164\ Because the values of these instruments are all highly
correlated, the commenter stated, the proposed rule would still allow
insiders to opportunistically use material nonpublic information by
establishing such parallel arrangements and then cancelling one or more
of them.
---------------------------------------------------------------------------
\163\ See letters from Better Markets, CII, and CO PERA.
\164\ See letter from NASAA.
---------------------------------------------------------------------------
Many commenters did not support the proposed restriction on
multiple overlapping Rule 10b5-1 plans.\165\ Some commenters asserted
that this limitation was unnecessary, because, given that the
affirmative defense already does not permit adoption of hedged plans in
which a person takes offsetting financial positions, there is no
additional abusive conduct to address.\166\
---------------------------------------------------------------------------
\165\ See, e.g., letters from ABA, ACCO, BioNJ, Chamber of
Commerce 2, Chevron, Coalition Letter, Cravath, Davis Polk, DLA,
Dow, FedEx, Fenwick, HP, HRPA, HudsonWest, Jones Day, K&L Gates,
Kirkland, Manulife, <a href="http://Monday.com">Monday.com</a>, NAM, NVCA, NYC Bar, Paul Weiss, PNC,
Quest, Quinn, SCG, Shearman, Simpson, and Wilson Sonsini.
\166\ See, e.g., letters from Davis Polk and Shearman.
---------------------------------------------------------------------------
As with single-trade plans, a number of commenters indicated that
there are legitimate, common uses of multiple, overlapping Rule 10b5-1
plans.\167\ Some commenters noted, for example, that issuers often use
multiple concurrent Rule 10b5-1 plans with different brokers to execute
share repurchase transactions.\168\ Other commenters indicated that
directors and officers often employ multiple Rule 10b5-1 plans because
they hold shares in different accounts with multiple financial
institutions.\169\ They noted, for example, that a corporate insider
may hold shares received upon the exercise of stock options in an
account with the financial institution that is the administrator of the
issuer's incentive equity plan, and hold shares acquired through open
market transactions or other means in a separate account with a
different financial institution.
---------------------------------------------------------------------------
\167\ See, e.g., letters from Chamber of Commerce 2, Cravath,
Davis Polk, Dow, FedEx, HP, Jones Day, Manulife, <a href="http://Monday.com">Monday.com</a>, NVCA,
NYC Bar, Quest, Shearman, Sullivan, and Wilson Sonsini.
\168\ See, e.g., letters from Cravath, Davis Polk, Dow, FedEx,
Quest, Shearman, and Sullivan.
\169\ See, e.g., letters from Quest, and Wilson Sonsini.
---------------------------------------------------------------------------
A number of commenters expressed concern that the wording of the
proposed amendment regarding multiple overlapping plans was overly
broad as it could encompass every open market transaction, including
transactions that are not executed under a Rule 10b5-1 plan.\170\
Several commenters urged the Commission to clarify that this provision
would not prohibit the adoption of a new Rule 10b5-1 plan while an
existing plan is in effect as long as no trades could commence under
the new plan until the existing plan has expired.\171\
---------------------------------------------------------------------------
\170\ See, e.g., letters from Dow, SCG, ABA, Cleary, Paul Weiss,
Shearman, Sullivan, and Wilson Sonsini.
\171\ See, e.g., letters from Jones Day, Kirkland, Paul Weiss,
Simpson, Shearman, and Wilson Sonsini.
---------------------------------------------------------------------------
Finally, several commenters contended that the proposed cooling-off
period for Rule 10b5-1 plans was a more effective method to address the
concerns over potential abusive uses of multiple overlapping and
single-trade Rule 10b5-1 plans.\172\
---------------------------------------------------------------------------
\172\ See, e.g., letters from Manulife, Cravath, NAM, and
Cleary.
---------------------------------------------------------------------------
c. Final Amendments
After considering the comments, we are adopting the proposed
amendment addressing multiple overlapping Rule 10b5-1 plans with
certain modifications. With respect to multiple overlapping Rule 10b5-1
contracts, instructions or plans, the final amendment will add a
condition to the Rule 10b5-1(c)(1) affirmative defense that persons,
other than issuers, may not have another outstanding (and may not
subsequently enter into any additional) contract, instruction or plan
that would qualify for the affirmative defense under the amended Rule
10b5-1 for purchases or sales of any class of securities of the issuer
on the open market during the same period. We disagree with commenters
who urged us to limit these provisions only to directors and
officers.\173\ While it is true, as commenters note and as we observed
in the Proposing Release, that officers and directors are most likely
to have access to material nonpublic information,\174\ other traders
may at times also have such access. Trading by these other persons can
impact investors and investor confidence in much the same ways as
trading by officers and directors. For example, we think it could
undermine investor confidence to learn that insiders who are not
Section 16 officers were able to opportunistically manipulate their
trading after receiving material nonpublic information, so that the
insider could profit at the expense of uninformed investors. As we
explain below, we think that any financial impact on insiders other
than officers and directors resulting from these limitations will be
more limited than in the case of the cooling-off period.
---------------------------------------------------------------------------
\173\ See letters from Sullivan and SIFMA 3.
\174\ See Proposing Release at 23; letters from CII, Cravath,
and SIFMA.
---------------------------------------------------------------------------
Accordingly, we disagree with those commenters who suggested that
trades by individuals other than officers and directors would not
affect the integrity of securities markets.\175\ While other traders
may not necessarily control corporate trading or disclosure decisions,
they still may stand to profit substantially from trading on any
material nonpublic information to which they have access. Further,
because Form 4 may reveal potentially opportunistic trades to the
public, we think the fact that most persons, other than Section 16
officers, do not file Form 4 is a reason for more safeguards with
respect to their trading, not fewer.
---------------------------------------------------------------------------
\175\ See letters from Cravath and Davis Polk.
---------------------------------------------------------------------------
In reaching our determination, we are mindful that some traders,
such as rank-and-file employees, may have liquidity and diversification
needs that are greater than those of more highly compensated officers,
as commenters noted.\176\ In recognition of these needs, we are
adopting a modification to the proposed limitations, described in more
detail below, under which traders may employ multiple plans to satisfy
certain tax obligations incident to equity compensation. For insiders
who are already trading under an existing plan when such liquidity
needs arise, meeting those needs will typically require the insider to
modify the existing plan, as our limitation on multiple plans will
prevent the insider from adopting an additional plan to cover the newly
planned transactions. This modification will in turn likely require the
insider to pause trading under the preexisting plan for the duration of
the insider's cooling-off
[[Page 80377]]
period. Because the cooling-off period for insiders other than officers
and directors is 30 days, however, we believe that any resulting impact
on the insider should be limited. While we agree that it is possible
this cost, or other barriers, may reduce the appeal of requiring non-
officers to make use of a Rule 10b5-1 plan, as one commenter
noted,\177\ we think on balance that it is better to ensure that any
Rule 10b5-1 plans that are adopted in fact impose meaningful limits on
opportunistic trading. More widespread adoption of Rule 10b5-1 plans is
unlikely to be helpful to investors or markets if such plans do not
constrain many opportunistic trades.
---------------------------------------------------------------------------
\176\ See letters from Chamber of Commerce 2 and NAM.
\177\ See letter from Davis Polk.
---------------------------------------------------------------------------
We are modifying the original proposal by removing the reference to
``same class of securities,'' so that the multiple overlapping plans
restriction will apply to contracts, instructions or plans for any
class of securities of the issuer. We agree with the commenter who
argued that, given the strong likelihood that the values of different
classes of securities of a given issuer are highly correlated, allowing
the use of multiple plans for trading in the securities of one issuer
would allow for significant possibility of opportunistic behavior.\178\
As a result, persons (other than the issuer) may only have one such
contract, instruction or plan, rather than one contract, instruction or
plan for each class of securities.
---------------------------------------------------------------------------
\178\ See letter from NASAA.
---------------------------------------------------------------------------
This condition is intended to address the concerns discussed above
about an insider's use of multiple overlapping plans in ways that could
allow material nonpublic information to factor into the trading
decision. Because these concerns are not limited to hedged plans where
a trader takes offsetting financial positions, we disagree with those
commenters who asserted that the existing hedging restriction of the
Rule 10b5-1 affirmative defense renders this limitation unnecessary.
With a sufficient number of different plans, an insider could achieve a
desired trading outcome. For example, an insider could adopt several
plans to sell their company stock at varying prices in excess of the
current share price, and then cancel the plans authorizing trades at
the lowest of these prices upon learning nonpublic information that the
insider expects to substantially increase the share price. For similar
reasons, we disagree with commenters that the cooling-off period
sufficiently addresses our concerns given that an insider could
maintain multiple overlapping plans that satisfy the cooling-off period
and then cancel plans based on later-obtained material nonpublic
information.
In light of comments received, we are making three further
modifications to this condition. The first addresses an insider's use
of multiple brokers to execute trades pursuant to a single Rule 10b5-1
plan that covers securities held in different accounts. Specifically, a
series of separate contracts with different broker-dealers or other
agents acting on behalf of the person (other than the issuer) to
execute trades thereunder may be treated as a single ``plan,'' provided
that the contracts with each broker-dealer or other agent, when taken
together as a whole, meet all of the applicable conditions of and
remain collectively subject to the provisions of Rule 10b5-1(c)(1). A
modification of any such contract will be a modification of each other
contract or instruction such single plan. We agree with commenters that
in circumstances where a corporate insider holds securities in separate
accounts with different financial institutions, the execution of trades
by multiple brokers under a Rule 10b5-1 plan is less likely to raise
the concerns underlying this condition of the rule. We recognize that a
trader will typically enter into a formally distinct contract or
agreement with each agent authorized to conduct trades. Thus, for
purposes of the multiple overlapping plans restriction, a series of
formally distinct such contracts may be treated as a single ``plan''
where taken together the contracts otherwise satisfy the conditions of
the rule. As we have described, the overlapping-plans condition is
intended to prevent selective alteration or cancellation of Rule 10b5-1
plans to achieve a particular trading outcome when an insider is aware
of material nonpublic information, and for that reason, we are
providing that modification (as defined in the Rule) of a contract with
any given agent will also be treated as a modification of the other
contracts making up the plan.
In addition, the final amendment provides that a broker-dealer or
other agent executing trades on behalf of the insider pursuant to the
Rule 10b5-1 plan may be substituted by a different broker-dealer or
other agent as long as the purchase or sales instructions applicable to
the substituted broker and the substitute are identical, including with
respect to the prices of securities to be purchased or sold, dates of
the purchases or sales to be executed, and amount of securities to be
purchased or sold. Under this provision, an insider will not lose the
benefit of the affirmative defense where the insider closes a
securities account with a financial institution and transfers the
securities to a different financial institution. If an insider provides
instructions to the new broker-dealer in accordance with this
provision, there is more limited possibility for selective cancellation
because substituting a broker authorized to trade under a Rule 10b5-1
plan would not change the remaining trades in ways that likely would
allow the insider to profit on material nonpublic information. We note,
however, that a plan modification, such as the substitution or removal
of a broker that is executing trades pursuant to a Rule 10b5-1
arrangement on behalf of the insider that changes the purchase or sale
amount, price or date on which purchases or sales are to be executed is
a termination of such plan and the adoption of a new plan. This will
further limit opportunities for opportunistic manipulation of broker-
dealers executing trades on behalf of the insider.
The second change permits persons (other than the issuer) to
maintain two separate Rule 10b5-1 plans at the same time so long as
trading under the later-commencing plan is not authorized to begin
until after all trades under the earlier-commencing plan are completed
or expire without execution.\179\ This provision would not be available
for the later-commencing plan, however, if the first trade under the
later-commencing plan is scheduled to begin during the ``effective
cooling-off period''--namely, the cooling-off period that would be
applicable under paragraph (c)(1)(ii)(B) to the later-commencing plan
if the date of adoption of the later-commencing plan were deemed to be
the date of termination of the earlier-commencing plan.\180\ Absent
this qualification, an
[[Page 80378]]
insider might cancel the earlier-commencing plan before its scheduled
completion but still trade under the later-commencing plan in fewer
than the minimum 90 days (or 30 days) that would otherwise be required
for a new plan that is established after a plan termination. Both plans
must meet all other conditions of the affirmative defense, including
the cooling-off period. Under these circumstances, we agree with
commenters that there would be a much lower risk of a corporate insider
who is aware of material nonpublic information profiting by
opportunistically canceling a trading plan as the Rule 10b5-1 plans
would not authorize trading during the same period of time.
---------------------------------------------------------------------------
\179\ See Rule 10b5-1(c)(1)(ii)(D) which provides that a
contract, instruction, or plan that would meet the other
requirements of Rule 10b5-1(c)(1)(i) may still qualify for the
affirmative defense where the director or officer has one other
contract, instruction, or plan that would qualify for the
affirmative defense for purchases or sales of the same class of
securities on the open market and trading under one contract,
instruction, or plan (``later-commencing plan'') is not authorized
to begin until after all trades under the other contract,
instruction, or plan (``earlier-commencing plan'') are completed.
\180\ For example, an insider who is not an officer or director
has in place an existing Rule 10b5-1 plan with a scheduled date for
the latest authorized trade of May 31, 2023. On May 1, 2023, that
insider adopts a later-commencing plan, intended to qualify for the
affirmative defense under Rule 10b5-1, with a scheduled date for the
first authorized trade of June 1, 2023. If the insider terminates
the earlier-commencing plan on May 15, the later-commencing plan
will not receive the benefit of the affirmative defense, because
June 1 is within 30 days of May 15, the date of termination of the
earlier-commencing plan, and thus June 1 is during the ``effective
cooling-off period.'' However, if the later-commencing plan were
scheduled to begin trading on July 1, 2023, it could still receive
the benefit of the affirmative defense because July 1, 2023 is more
than 30 days after May 15 and thus is outside the ``effective
cooling-off period.''
---------------------------------------------------------------------------
Third, we are adopting a modification for plans authorizing certain
``sell-to-cover'' transactions in which an insider instructs their
agent to sell securities in order to satisfy tax withholding
obligations at the time an award vests. Under this modification, an
insider will not lose the benefit of the affirmative defense with
respect to an otherwise eligible Rule 10b5-1 plan if the insider has in
place another plan that would qualify for the affirmative defense, so
long as the additional plan or plans only authorize qualified sell-to-
cover transactions. Such plans that authorize only such qualified sell-
to-cover transactions are eligible for the affirmative defense
notwithstanding the fact that the insider may have another plan
eligible for the affirmative defense in place. A plan authorizing sell-
to-cover transactions is qualified for this provision where the plan
authorizes an agent to sell only such securities as are necessary to
satisfy tax withholding obligations incident to the vesting of a
compensatory award, such as restricted stock or stock appreciation
rights, and the insider does not otherwise exercise control over the
timing of such sales.\181\
---------------------------------------------------------------------------
\181\ In our view, a plan that authorizes an agent to sell only
such securities as are necessary to satisfy tax withholding
obligations incident to the vesting of a compensatory award meets
the requirement that the plan does ``not permit the person to
exercise any subsequent influence over how, when, or whether to
effect . . . sales,'' Rule 10b5-1(c)(1)(B)(3) [17 CFR 240.10b5-
1(c)(1)(B)(3)].
---------------------------------------------------------------------------
We are providing this modification because we agree with commenters
who contended that under these limited circumstances, there is little
danger of opportunistic trading. Because vesting schedules are
generally set in advance by the issuer, the amount of securities to be
sold would be determined by the value of the award and the taxes due on
that value. We are further stipulating that eligible plans cannot
provide the insider with control over the timing of any sales. For
these reasons, we think it is highly unlikely that insiders would be
able to make opportunistic use of such additional plans.
We are not extending this modification to include sales incident to
the exercise of option awards because it could create a risk of
opportunistic trading. Option exercises occur at the discretion of the
insider, and such decisions could occur when the insider later obtains
material nonpublic information. To the extent that commenters have
suggested that an insider with a sell-to-cover plan tied to an option
exercise could not use the revised Rule 10b5-1 affirmative defense, we
disagree.\182\ The revised affirmative defense would not prevent a
corporate insider from entering into a Rule 10b5-1 plan that includes
instructions directing a broker to sell securities sufficient to meet
the tax withholding obligations incident to an option or similar award
exercise. For example, the insider might provide that a designated
agent is authorized to sell sufficient securities to cover any tax
withholding obligations incident to an option exercise. Such
instructions can be included in a single Rule 10b5-1 plan along with
instructions to sell based on other financial variables. Accordingly,
an officer or director may take advantage of the affirmative defense
both for sell-to-cover transactions and other planned trades, provided
that the conditions of the affirmative defense are met, including the
cooling-off period.
---------------------------------------------------------------------------
\182\ See supra note 161.
---------------------------------------------------------------------------
In addition, we are not adopting the proposed limitation on
multiple plans and single-trade plans for the issuer at this time. As
with the cooling-off period, we believe that further consideration of
potential application to the issuer is warranted.
Finally, we are adopting the proposed limitation on single-trade
plans with modifications. Consistent with the approach to multiple
overlapping plans, the limitation will apply to the Rule 10b5-1 plans
of all persons, other than the issuer. As a result, the final rule
provides that if the contract, instruction, or plan is designed to
effect the open-market purchase or sale of the total amount of
securities as a single transaction, the contract, instruction or plan
will not receive the benefit of the affirmative defense unless: (1) the
person who entered into the contract, instruction, or plan has not,
during the prior 12-month period, adopted another contract,
instruction, or plan that was designed to effect the open-market
purchase or sale of the total amount of securities subject to that plan
in a single transaction; and (2) such other contract, instruction, or
plan in fact was eligible to receive the affirmative defense. A person
(other than the issuer) will be able to rely on the Rule 10b5-
1(c)(1)(ii) affirmative defense for only one single-trade plan during
any 12-month period. The defense will only be available for a single-
trade plan if the person had not, during the preceding 12-month period,
adopted another single-trade plan, where the other plan qualified for
the affirmative defense under Rule 10b5-1.\183\ We disagree with the
commenter who argued that, due to the possibility that an insider might
divide their planned single trade into multiple trades, any limit on
single-trade plans would be ineffective.\184\ For example, certain
insiders who divide a planned trade over several days are likely to
realize reduced profits from trading after a Form 4 is filed, which at
least in part, will reduce an insider's incentives to engage in trading
while aware of material nonpublic information.
---------------------------------------------------------------------------
\183\ We have added this qualification because we do not intend
for a plan that is ineligible for the affirmative defense to
preclude the affirmative defense for another plan, even if both
trades are single-trade plans.
\184\ See letter from Davis Polk.
---------------------------------------------------------------------------
For this purpose, a plan is ``designed to effect'' the purchase or
sale of securities as a single transaction when the contract,
instruction, or plan has the practical effect of requiring such a
result. In contrast, a plan is not designed to effect a single
transaction where the plan leaves the person's agent discretion over
whether to execute the contract, instruction, or plan as a single
transaction. Similarly, a plan is also not designed to effect the
purchase or sale of securities as a single transaction when (1) the
contract, instruction, or plan does not leave discretion to the agent,
but instead provides that the agent's future acts will depend on events
or data not known at the time the plan is entered into, such as a plan
providing for the agent to conduct a certain volume of sales or
purchases at each of several given future stock prices; and (2) it is
reasonably foreseeable at the time the plan is entered into that the
contract, plan, or instruction might result in multiple transactions.
We are adopting the limitation on single-trade plans because we are
concerned that trades under such plans may provide particularly
profitable opportunities for insiders who are trading while aware of
material
[[Page 80379]]
nonpublic information. As we described in the Proposing Release, a
recent study found that trades under a single-trade plan avoid losses
that appear statistically unlikely to be avoided by uninformed
traders.\185\ This pattern persisted even when the first such trade
occurred more than 120 days after adoption of the plan, suggesting that
a cooling-off period alone may not be sufficient to prevent
opportunistic single-trade plans.\186\ For these reasons, we disagree
with the commenters who suggested that the cooling-off period would be
sufficient to address the problem addressed by the single-trade
limitation.\187\
---------------------------------------------------------------------------
\185\ See Gaming the System, supra note 20 at 2, 14 (observing
that ``trades of single-trade plans are consistently loss-avoiding
regardless of cooling-off period''). But see infra note 400.
\186\ See id.
\187\ See letters from Manulife, Cravath, NAM, and Cleary.
---------------------------------------------------------------------------
Several commenters expressed concern about potential ambiguity or
uncertainty around the concept of a single-trade plan and asked us to
clarify the scope of this provision, such as its potential application
to block trades of venture capital funds.\188\ We agree with those
commenters who indicated that an insider should not be at risk of
losing the benefit of the affirmative defense due to decisions outside
the insider's control when the insider did not design the Rule 10b5-1
plan to effect the authorized purchases or sales in a single
transaction, such as in the case where the insider's agent exercises
their own discretion to complete all authorized trading in a single
transaction. For that reason, we have added the ``designed to effect''
provision discussed above. We are concerned, however, that further
delineating what constitutes a single transaction for purposes of this
rule could create incentives to design Rule 10b5-1 plans that avoid
application of the single-trade plan limitation.
---------------------------------------------------------------------------
\188\ See letters from Sullivan, SIFMA 3 and NVCA.
---------------------------------------------------------------------------
For reasons similar to those we have explained with respect to
multiple overlapping trades, in response to comments, we are modifying
the proposed single-trade limitation with respect to qualified sell-to-
cover transactions. This modification applies to the same plans
eligible for the sell-to-cover provision of the overlapping trade
limitation. Again, we think that such plans present little, if any
risk, of opportunistic trading.
Also for reasons similar to those we have explained with respect to
multiple overlapping trades, we are applying the single-trade
limitation to all persons other than the issuer. The single-trade
limitation helps to ensure that the affirmative defense provides
meaningful constraints on the extent to which material nonpublic
information affects an insider's decision to trade. While we recognize
that the limitation also may impose some moderate limitations on
insiders' ability to obtain liquidity and diversification, as noted, we
think that there are alternative means for such insiders to achieve
these goals.
Because single-trade plans may have legitimate uses to address one-
time liquidity needs, we also disagree with the commenter who suggested
that the affirmative defense should not be available for any single-
trade plan.\189\ Overall, the limitation we are adopting is intended to
balance legitimate uses of single-trade plans against the potential for
abuse.
---------------------------------------------------------------------------
\189\ See letter from NASAA.
---------------------------------------------------------------------------
4. The Amended Good Faith Condition
a. Proposed Amendments
The Rule 10b5-1(c)(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 Commission
proposed to amend this condition to require that the contract,
instruction, or plan also be ``operated'' in good faith.
In proposing this amendment, the Commission noted its concern that
some corporate insiders may try to improperly influence the timing of
corporate disclosures to benefit their trades under a Rule 10b5-1
trading arrangement, such as by delaying or accelerating the release of
material nonpublic information.\190\ The Commission also noted its
concern that a Rule 10b5-1 plan may be canceled or modified in an
attempt to evade the prohibitions of the rule without affecting the
availability of the affirmative defense. Moreover, the Commission
stated that requiring that a trader both enter into and operate a Rule
10b5-1 plan in good faith would help deter fraudulent and manipulative
conduct and enhance investor protection throughout the duration of the
trading arrangement. Thus the Commission intended the proposed
amendment to make clear that the affirmative defense would not be
available to a trader who, for example, modifies their plan in an
effort to evade the prohibitions of the rule or uses their influence to
affect the timing of corporate disclosure to occur before or after a
planned trade to make it more profitable or to avoid or reduce a loss.
---------------------------------------------------------------------------
\190\ See Proposing Release, supra note 23, at 8693.
---------------------------------------------------------------------------
b. Comments on the Proposed Amendments
Several commenters generally supported the proposed amendment.\191\
Some of these commenters indicated that the proposed amendment would
deter opportunistic trading in connection with Rule 10b5-1 plans and
increase investor confidence.\192\ One of these commenters also
expressed the view that, among other things, this requirement would
ensure that there is liability where persons attempt to manipulate the
timing of corporate announcements to benefit trades made pursuant to a
Rule 10b5-1 plan.\193\ Another commenter asserted that adding the
``operate in good faith'' requirement would be helpful in improving the
insider trading compliance programs of issuers.\194\
---------------------------------------------------------------------------
\191\ See, e.g., letters from CII, AFL-CIO, Better Markets, CO
PERA, NYCC, NASAA, NYSE, and O'Reilly.
\192\ See, e.g., letters from AFL-CIO, Better Markets, CII, and
NASAA.
\193\ See letter from Better Markets.
\194\ See letter from O'Reilly.
---------------------------------------------------------------------------
A number of commenters, however, opposed adding the condition that
a Rule 10b5-1 plan be ``operated'' in good faith.\195\ Many of these
commenters indicated that the concept of ``operated in good faith'' was
not sufficiently clear and would lead to uncertainty surrounding the
availability of the affirmative defense.\196\ Similarly, another
commenter asked the Commission to clarify the extent to which a failure
to operate a Rule 10b5-1 plan in good faith would invalidate the
affirmative defense for transactions that were executed under the
plan.\197\ Some commenters contended that, given that the scope of
conduct or activity covered by the phrase was potentially extensive,
this condition could inhibit the use of Rule 10b5-1 plans.\198\
Finally, another commenter suggested requiring that a Rule 10b5-1 plan
be ``modified in good faith'' as an alternative.\199\ This commenter
contended that ``modified'' is a clearer term and would cover
circumstances where a trader amends or terminates a Rule 10b5-1 plan
based on material nonpublic information.
---------------------------------------------------------------------------
\195\ See, e.g., letters from Dow, Quest, HRPA, Cleary, Cravath,
Davis Polk, DLA, Fenwick, Shearman, Wilson Sonsini, PNC, SIFMA 2,
and SIFMA 3.
\196\ See, e.g., letters from Quest, Cleary, Cravath, Davis
Polk, DLA, Fenwick, Shearman, Wilson Sonsini, and PNC, SIFMA 2,
SIFMA 3 and Chamber of Commerce 2.
\197\ See letter from PNC.
\198\ See, e.g., letters from Dow, Quest, HRPA, Cleary, Cravath,
Davis Polk, DLA, Fenwick, Shearman, Wilson Sonsini, PNC, SIFMA 2,
and SIFMA 3.
\199\ See letter from Fenwick.
---------------------------------------------------------------------------
[[Page 80380]]
c. Final Amendment
Having considered the comments received, we are adopting the
amendment to Rule 10b5-1(c)(1)(ii) with a modification in response to
comments concerning the term ``operated in good faith.'' The final
rules add the condition that the person who entered into the Rule 10b5-
1 contract, instruction, or plan ``has acted in good faith with respect
to'' the contract, instruction, or plan. As discussed above, since the
time that Rule 10b5-1 was adopted, we have become concerned that
corporate insiders may take actions after adopting a Rule 10b5-1 plan
to benefit from material nonpublic information the insider acquires
after establishment of the plan. We therefore agree with commenters
that this requirement will help ensure that traders do not engage in
opportunistic trading in connection with Rule 10b5-1 plans, and will
help deter corporate insiders from improperly influencing the timing of
corporate disclosures to benefit their trades under such a plan.\200\
---------------------------------------------------------------------------
\200\ See, e.g., letters from AFL-CIO, Better Markets, CII, and
NASAA.
---------------------------------------------------------------------------
Many commenters appeared to understand that the proposed ``operated
in good faith'' language was intended to govern the behavior of the
trader.\201\ Some commenters, however, expressed concern that the term
``operated'' could be ambiguous or cause confusion because it could be
read to apply, or might apply only, to the insider's agents, such as
brokers who executed the trades authorized by the insider.\202\ To make
clear that the good faith obligation applies to the activities of the
insider (including the insider's efforts to direct the activities of
others), we have modified this language to state that the trader must
``act[ ] in good faith with respect to the contract, instruction, or
plan.''
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\201\ See letters from Davis Polk, DLA Piper, Dow, Home Depot,
and Shearman & Sterling.
\202\ See letters from Cravath, Fenwick, and PNC.
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In adopting this amendment, we disagree with commenters that the
expanded good faith requirement is not sufficiently clear. The concept
of ``good faith'' should be familiar to corporate insiders as it has
been a component of Rule 10b5-1 since its adoption two decades
ago.\203\ This amendment extends this familiar concept from the time of
adoption through the duration of the Rule 10b5-1 plan to better ensure
that material nonpublic information does not factor into the decision
to trade under such plans, as it would when, for example, a corporate
insider materially modifies a planned trade at their own direction and
to their own benefit,\204\ based on material nonpublic information
acquired after the plan was entered into. Indeed, a corporate insider
would not be operating a Rule 10b5-1 plan in good faith if the
corporate insider, while aware of material nonpublic information,
directly or indirectly induces the issuer to publicly disclose that
information in a manner that makes their trades under a Rule 10b5-1
plan more profitable (or less unprofitable). In such a scenario,
notwithstanding that the Rule 10b5-1 plan may have been adopted or
entered into in good faith, the corporate insider would not be entitled
to the affirmative defense. Moreover, we disagree with commenters who
argue that this requirement will deter adoption of Rule 10b5-1 plans by
individuals who do not intend to misuse material nonpublic information.
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\203\ See 2000 Adopting Release, supra note 8.
\204\ A modification of a Rule 10b5-1 plan in an effort to allow
the individual to trade on the basis of material nonpublic
information would not constitute acting in good faith. In light of
our adoption of a limitation on multiple plans, however, we
anticipate that an individual will generally not be able to engage
in any trade under a Rule 10b5-1 plan following a cancellation of
such a plan, and therefore the applicability of the affirmative
defense will not be at issue in that situation.
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Commenters also asked us to clarify whether the obligation to act
in good faith would not be met in other factual settings, such as in
the event an issuer halts any trading by insiders under Rule 10b5-1
plans due to a possible merger, or where it similarly blocks sales
transactions after learning of material nonpublic information that it
expects will lead to a decline in the market price of its
securities.\205\ As we have stated, this amendment relates to
activities within the control of the insider. Accordingly, we agree
with the commenter that cancellations directed by the issuer where such
cancellations are outside the control or influence of the insider may
not, by themselves, implicate the good faith condition.
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\205\ See, e.g., letters from Davis Polk, Shearman (requesting
that we clarify that cancellations for legitimate reasons are not
bad faith); and Wilson Sonsini (requesting we clarify that
cancellations are not per se bad faith).
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Finally, we disagree with the commenter who recommended that we
instead require good faith ``modification'' of a plan as this narrower
condition would not address all of our concerns. For example, as we
have noted, efforts to manipulate the timing of releases of corporate
information to benefit an officer's or a director's planned trades may
not involve a modification of a plan but would be inconsistent with
established notions of good faith. While the condition that we are
adopting would cover such efforts, the commenter's alternative might
not do so.
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 issuers or corporate insiders.\206\ The lack of
comprehensive public information about the use of these arrangements--
whether pursuant to a Rule 10b5-1 plan or otherwise--creates an
environment in which it is more difficult for investors to assess
whether those parties may be misusing their access to material
nonpublic information. This lack of transparency may allow improper
trading to go undetected and thereby undermine the deterrent impact of
our insider trading laws. In addition, the lack of public information
about the use of these arrangements by 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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\206\ 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 Securities Act Rule 144
(17 CFR 230.144). 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)]. The Commission did not adopt this proposal.
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In addition, issuers are currently not required to disclose their
insider trading policies or procedures. In the Proposing Release, the
Commission stated 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 the codes of ethics that registrants are required to
disclose pursuant to Item 406 of Regulation S-K may address insider
trading issues, they may lack the detail necessary for investors to
assess actual practices
[[Page 80381]]
surrounding potential insider trading. General statements such as that
an issuer ``has a policy regarding insider trading'' or ``prohibits
insider trading'' do not meaningfully assist investors in their
assessments of whether an issuer's efforts to prevent insider trading
are likely to be effective. While not every individual component of an
insider trading policy is necessarily material on its own, together, a
comprehensive description of an insider trading policy can help
investors to assess the thoroughness and seriousness with which the
issuer addresses the prohibition of trading on the basis of material
nonpublic information by its officers, directors and employees. More
detailed disclosure about these policies and procedures could therefore
improve investor confidence, and in turn, potentially contribute to
market liquidity and capital formation.
To address these information gaps, the Commission proposed 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.
The Commission also proposed new Item 16J to Form 20-F to require
similar annual disclosure of a foreign private issuer's insider trading
policies and procedures. In addition, the Commission proposed
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.
1. Quarterly Reporting of Rule 10b5-1 and Non-Rule 10b5-1 Trading
Arrangements
a. Proposed Amendments
Proposed new Item 408(a) of Regulation S-K would require
registrants to disclose:
<bullet> Whether, during the registrant's most recently completed
fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report), the registrant 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; \207\
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\207\ As discussed above, the Commission also proposed to state
explicitly in the rule that any modification or amendment of an
existing Rule 10b5-1 trading arrangement would be the equivalent of
terminating the existing arrangement and adopting a new arrangement.
See supra note 46.
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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'' (as defined in Rule 16a-1(f)) has adopted or
terminated any contract, instruction or written plan for the purchase
or sale of 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.
Under the proposed rule, the disclosures would be required in Forms
10-Q and 10-K, as applicable. Registrants would be required to provide
this information 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,\208\ adopted or
terminated a Rule 10b5-1 plan. 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.
---------------------------------------------------------------------------
\208\ 15 U.S.C. 78p.
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The Commission stated that the proposed rule would provide material
information that would better allow investors, the Commission, and
other market participants to observe how directors, officers and
issuers use Rule 10b5-1 plans. 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 such as, for example,
if the termination occurs close in time to 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 plans 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. The Commission also proposed to require
similar disclosure 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 director
seeks to transact in the issuer's securities.
b. Comments on the Proposed Amendments
Many commenters generally supported the proposed reporting
requirements.\209\ For example, one of these commenters stated that the
proposed disclosures would provide important information regarding
insider stock trades and useful information to investors to inform
their own investment decisions.\210\ Another commenter asserted that
the proposed disclosures would provide long-term shareholders with
information about insider trades that complete the partial picture
provided by Form 144 and Section 16 reports.\211\ A few commenters
supported the proposed requirements, but asked that issuers also report
plans with respect not only to officers and directors, but also more
generally any employee of the issuer.\212\
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\209\ See, e.g., letters from AFL-CIO, Better Markets, CII, CO
PERA, DLA, ICGN, NASAA, O'Reilly, and Simpson.
\210\ See letter from AFL-CIO.
\211\ See letter from CII.
\212\ See, e.g., letters from BrilLiquid and NASAA.
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Several commenters, however, did not support the proposed reporting
requirements.\213\ Some of these commenters contended that the proposed
disclosures are unnecessary because they would be duplicative of the
disclosures that would be required under the proposed amendments to
Forms 4 and 5.\214\ One of these commenters also asserted that it would
be a significant burden on issuers to
[[Page 80382]]
provide the proposed disclosures concerning all of the trading actions
of their directors and officers.\215\
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\213\ See, e.g., letters from ACCO, IBC, MD Bar, NVCA, NAM, SCG,
Sullivan and Wilson Sonsini.
\214\ See, e.g., letters from Sullivan and Wilson Sonsini.
\215\ See letter from Sullivan.
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A number of commenters expressed concern regarding the requirement
for registrants to provide a description of the ``material terms'' of
the Rule 10b5-1 trading arrangement.\216\ Several commenters indicated
that the proposal could be interpreted as requiring registrants to
disclose specific details of a trading arrangement, such as pricing
information.\217\ Many commenters stated that the disclosure of pricing
information and other details of a Rule 10b5-1 plan could facilitate
the front-running of transactions under the plan by other traders.\218\
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\216\ See, e.g., letters from ABA, Davis Polk, Cleary, DLA,
FedEx, Fenwick, Kirkland, NVCA, NAM, Quest, SCG, SIFMA 2, Sullivan
and Wilson Sonsini.
\217\ See, e.g., letters from ABA, Cleary, Davis Polk, DLA,
Fenwick, Quest, SCG, SIFMA 2, and Wilson Sonsini.
\218\ See, e.g., letters from Davis Polk, DLA, Fenwick, NVCA,
SCG, SIFMA 2, and Wilson Sonsini.
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Due to these concerns, commenters were divided in their
recommendations of what information about trading arrangements should
be disclosed. Some commenters stated that the final rule should not
require disclosure of the number of shares covered by a trading
arrangement or the duration of the arrangement.\219\ Other commenters
recommended that the Commission limit disclosures to the name of the
person adopting the plan, the date of adoption or termination of the
plan, and the plan's duration.\220\ In contrast, other commenters
opposed requiring disclosure of the termination of a plan, contending
that this information could signal to the market that there has been a
material development concerning the issuer, such as an impending merger
agreement.\221\
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\219\ See, e.g., letters from Quest and Simpson.
\220\ See, e.g., letters from Fenwick and Shearman.
\221\ See letters from Sullivan and SIFMA 3.
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In addition, a number of commenters recommended that the Commission
should not require disclosure regarding non-Rule 10b5-1 trading
arrangements.\222\ Several commenters asserted that this term was
confusing and overly broad.\223\ One commenter indicated that this term
would raise a number of interpretive issues as it potentially
encompasses a wide range of transactions, such as transactions related
to open market purchases, derivative securities and employee benefit
plans.\224\ Other commenters claimed that this disclosure would not
provide valuable information to investors, the Commission, or other
market participants.\225\ For example, some of these commenters stated
that the details of trades executed under a non-Rule 10b5-1 trading
arrangement are already required to be disclosed in Section 16
filings.\226\
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\222\ See, e.g., letters from Cleary, Cravath, Davis Polk,
Shearman, Sullivan, and Simpson.
\223\ See, e.g., letters from Cleary, Cravath, SIFMA 3, and
Sullivan.
\224\ See letter from Sullivan.
\225\ See, e.g., letters from Cleary, Cravath, Shearman, and
Simpson.
\226\ See, e.g., letters from Cravath and Shearman.
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A few commenters recommended that the disclosure requirements
regarding registrant trading arrangements should be removed from
proposed Item 408(a) and included with the pending proposed rulemaking
\227\ to update the disclosure requirements for purchases of equity
securities by an issuer and affiliated purchasers under Item 703 of
Regulation S-K.\228\
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\227\ See Share Repurchase Disclosure Modernization, Release No.
34-93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 15, 2022)].
\228\ See, e.g., letters from Cravath and Simpson.
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Another commenter suggested the Commission exempt smaller reporting
companies (``SRCs'') \229\ from the proposed disclosure
requirement.\230\ This commenter claimed SRCs and their insiders are
less likely to engage in the kinds of trading in the securities of
their companies that would cause concern, but that the reporting burden
could disproportionately impact these issuers.
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\229\ ``Smaller reporting company'' is defined in Securities Act
Rule 405 and 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 had: (1) a public float of less
than $250 million; or (2) annual revenues of less than $100 million
and either: (a) no public float; or (b) a public float of less than
$700 million.
\230\ See letter from MD Bar.
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Finally, one commenter suggested that it would be more appropriate
to include proposed Item 408(a) disclosure in Part II, Item 9(B) of
Form 10-K, and Item 408(b) disclosure in Part III, Item 10 of Form 10-
K.\231\ This commenter claimed that requiring Item 408(a) disclosure in
Item 9(B) rather than Item 10 of Form 10-K would align with the
Commission's proposal to require Item 408(a) disclosure in Item 5 of
Form 10-Q because both Items cover similar types of information.
Further, this commenter posited that this approach would ensure that
Item 408(a) disclosure, which relates to the last fiscal quarter,
appears in each periodic report.
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\231\ See letter from ABA.
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c. Final Rule
We are adopting new Item 408(a) with several modifications in
response to comments. Specifically, we are not adopting the proposed
requirement regarding contracts, instructions, or plans of registrants;
we are providing that the description of material terms need not
address pricing terms; and we are adding a definition of ``non-Rule
10b5-1 trading arrangement.'' As proposed, these disclosures will be
required in Forms 10-Q and 10-K.\232\
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\232\ In a slight modification, we are adopting the approach
suggested by a commenter to include new Item 408(a) in Part II, Item
9(B) of Form 10-K. See letter from ABA.
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The final rule will require registrants to (1) disclose whether,
during the registrant's last fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report), any director or
``officer'' (as defined in Rule 16a-1(f)) has adopted or terminated (i)
any contract, instruction or written plan for the purchase or sale of
securities of the registrant that is intended to satisfy the
affirmative defense conditions of Rule 10b5-1(c) (a ``Rule 10b5-1(c)
trading arrangement''), and/or (ii) any written trading arrangement for
the purchase or sale of securities of the registrant that meets the
requirements of a non-Rule 10b5-1 trading arrangement as defined in
Item 408(c) (a ``non-Rule 10b5-1 trading arrangement''); and (2)
provide a description of the material terms of the Rule 10b5-1 trading
arrangement or non-Rule 10b5-1 trading arrangement other than terms
with respect to the price at which the individual executing the
respective trading arrangement is authorized to trade, such as:
<bullet> The name and title of the director or officer;
<bullet> The date of adoption or termination of the trading
arrangement;
<bullet> The duration of the trading arrangement; and
<bullet> The aggregate number of securities to be sold or purchased
under the trading arrangement.
With respect to any given trading arrangement subject to disclosure
under Item 408(a), the registrant must indicate whether such trading
arrangement is a Rule 10b5-1 trading arrangement or is a non-Rule 10b5-
1 trading arrangement.
In addition, any modification or change to a Rule 10b5-1 plan by a
director or officer that falls within the meaning of new Rule 10b5-
1(c)(1)(iv) would also be required to be disclosed under Item 408(a) as
it constitutes the termination of an existing plan and the adoption of
a new contract, instruction, or written plan.
[[Page 80383]]
Having considered comments received, we view this information as
necessary to better allow investors, the Commission, and other market
participants to observe how directors and officers use Rule 10b5-1
plans and other non-Rule 10b5-1 trading arrangements. The information
also will add important context to other disclosures of trades by
directors and officers, such as in Forms 4 and 5, and may aid investors
in obtaining a more accurate valuation of the issuer's shares and
making more informed investment decisions.\233\ Furthermore, this
information will provide investors with valuable information about the
specific uses of such arrangements, which could bring focus to the
particular arrangements and deter potential abuses. While it is true,
as commenters observed, that Forms 4 and 5 may already include some of
this information, we expect it will be more useful and time-saving for
investors to have information regarding all of the trading arrangements
for directors and officers of a given issuer in a single location. We
are also requiring disclosure of details about the content of such
arrangements that is not mandated on Form 4 or Form 5, which, pursuant
to the amendments that we are adopting as described below, will require
only the date of adoption of the Rule 10b5-1 plan.
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\233\ See infra Section V.C.2. The mandatory Rule 10b5-1 plan
checkbox disclosures on Forms 4 and 5, in combination with this
disclosure will provide greater transparency to investors regarding
the use of Rule 10b5-1 plans for trading. All of this information
will provide investors with valuable context for interpreting other
corporate disclosure, which should help them value the companies'
shares and make informed voting and investment decisions.
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In response to the concerns expressed by some commenters that the
proposal could require the disclosure of pricing information,\234\
however, we have revised the final rules to clarify that new Item
408(a) does not require disclosure of the price at which the individual
executing the trading arrangement is authorized to trade. We agree with
these commenters that disclosing this information could allow other
persons to trade strategically in anticipation of an officer's or a
director's planned trades, increasing the costs or reducing the
profitability of that officer's or director's trading. Although we
recognize that some commenters urged us to not require disclosure of
the trading arrangement's duration or the aggregate number of
securities that could be purchased and sold under it, we view this
information as necessary context for a trading arrangement that does
not raise similar concerns because, in most cases, general information
about the volume and duration of an officer's or director's Rule 10b5-1
plan or non-Rule 10b5-1 trading arrangement will not be sufficient to
permit strategic trades by other market participants. We also disagree
with commenters that we should not require disclosure related to
terminations because, first, Rule 10b5-1 plans or non-Rule 10b5-1
trading arrangements may be terminated for many reasons, making it
unlikely that a termination would be interpreted as an indication of a
pending material event (such as a merger announcement), and second,
because the interval between a termination and the filing of the Form
10-Q or Form 10-K disclosing the termination should mitigate any such
potential strategic trading.
---------------------------------------------------------------------------
\234\ See, e.g., letters from ABA, Cleary, Davis Polk, DLA,
Fenwick, Quest, SIFMA 2, SCG, and Wilson Sonsini.
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In addition, the final rule will also require disclosure regarding
the adoption or termination of non-Rule 10b5-1 trading arrangements. In
response to the concerns expressed by some commenters that the term
``non-Rule 10b5-1 trading arrangements'' was confusing and overly
broad,\235\ we are adopting a definition of this term to clarify the
types of pre-planned trading arrangements that should be disclosed
under Item 408(a). To ensure that market participants are familiar with
how to apply this concept, the definition we adopt accords with the
requirements of the Rule 10b5-1 affirmative defense that the Commission
adopted in 2000. Under the final rule, a trading arrangement with
respect to a director or ``officer'' (as defined in Rule 16a-1(f))
would be a ``non-Rule 10b5-1 trading arrangement'' where the director
or officer asserts that, at a time when they were not aware of material
nonpublic information about the security or the issuer of the security,
they
---------------------------------------------------------------------------
\235\ See, e.g., letter from Sullivan.
---------------------------------------------------------------------------
<bullet> adopted a written arrangement for trading the securities;
and
<bullet> The trading arrangement:
[cir] Specified the amount of securities to be purchased or sold
and the price at which and the date on which the securities were to be
subsequently purchased or sold;
[cir] Included a written formula or algorithm, or computer program,
for determining the amount of securities to be purchased or sold and
the price at which the securities were to be purchased or sold; or
[cir] Did not permit the covered person to exercise any subsequent
influence over how, when, or whether to effect purchases or sales;
provided, in addition, that any other person who, pursuant to the
trading arrangement did exercise such influence must not have been
aware of material nonpublic information when doing so.
In adopting this requirement, we recognize that Rule 10b5-1
provides affirmative defenses, but that corporate insiders may assert
other defenses to liability under Section 10(b). Absent this disclosure
requirement, directors and officers may be more likely to choose to
trade in reliance on alternativ
[…truncated; see source link]Indexed from Federal Register on December 29, 2022.
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