Disclosure of Rule 10b5-1 Plans and Insider Trading Compliance

A couple of weeks ago, I covered the SEC’s amendments to Rule 10b5-1. You probably won’t be surprised to learn that the adopting release for those amendments includes new disclosures and reporting requirements for Rule 10b5-1 plans.

You might be more surprised to learn that the release also changes the Section 16 reporting procedures for gifts, requires disclosure of insider trading policies, and adopts a new tabular disclosure for grants that could be considered spring-loaded or bullet-dodging.

This blog entry summarizes these new disclosures and reporting requirements.

Quarterly Disclosure of Trading Plans

Prior Rule: No required disclosure

Proposed Rule: Quarterly disclosure of 10b5-1 plans in forms 10-Q and 10-K

Final Rule: Adopted with modifications

Effective date: Effective for filings covering fiscal periods that begin on or after April 1, 2023 (October 1, 2023 for smaller reporting companies)

When proposing the amendments to Rule 10b5-1, the SEC also proposed requiring quarterly disclosure of trading plans adopted or terminated by Section 16 officers and directors. The final rule adopts this proposal, with some modifications of the information to be disclosed.

On a quarterly basis (in forms 10-Q and K), companies will be required to disclose whether any Section 16 officers and directors have adopted, modified, or terminated trading plans and describe the material terms of the plans, such as:

• The names and titles of the officers and directors.
• Dates of adoption, modification, or termination of the plans.
• The duration of the plans.
• The aggregate number of securities to be purchased or sold pursuant to the plans.
• Whether the trading plan is a Rule 10b5-1 plan or non-Rule 10b5-1 plan.

The final rule specifically exempts pricing provisions (e.g., the price at which securities will be traded) under 10b5-1 plans from disclosure, even though they might otherwise be considered a material term. Some commenters had expressed the concern that this might lead to front-running by other traders.

The SEC defines a non-Rule 10b5-1 trading arrangement as a written plan to trade securities entered into when the director or officer asserts that they are not aware of material nonpublic information that specifies (or provides a formula for determining) the amount of securities to be transacted along with the trade price and date, and does not permit the director or officer to exercise any subsequent influence over trades under the plan. Any other person who influences trades under the plan must not be aware of material nonpublic information when doing so.

This disclosure is required in the first Form 10-Q or 10-K filing that covers the first full fiscal period beginning on or after April 1, 2023 (October 1, 2023, for smaller reporting companies).

Disclosure of Insider Trading Policies

Prior Rule: No required disclosure

Proposed Rule: Disclosure of insider trading policies in Form 10-K and proxy statements

Final Rule: Adopted with modifications

Effective date: Effective for filings covering fiscal periods that begin on or after April 1, 2023 (October 1, 2023, for smaller reporting companies)

The proposing release would have required companies to describe their insider trading policies and procedures on an annual basis in Form 10-K and their proxy statement.

The final rules require companies to disclose whether they have adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of their securities by directors, officers, and employees, or the company itself. If companies have not adopted such policies, they must explain why not.

Instead of requiring companies to describe their policies in their Form 10-K and proxy statements, the final rules require a copy of the insider trading policy to be filed as an exhibit to Form 10-K.

This disclosure is required in the first Form 10-K and proxy statement that covers the first full fiscal period beginning on or after April 1, 2023 (October 1, 2023, for smaller reporting companies).

Rule 10b5-1 Checkbox on Forms 4 and 5

Prior Rule: No required indication of when trades occur under Rule 10b5-1 plans

Proposed Rule: Inclusion of 10b5-1 checkbox on Forms 4 and 5

Final Rule: Adopted with minor change to checkbox language

Effective Date: Filings submitted on or after April 1, 2023

The SEC is adopting its proposal to add a mandatory checkbox to Forms 4 and 5 to indicate when trades are executed pursuant to a plan intended to satisfy the affirmative defense under Rule 10b5-1. As originally proposed, the checkbox would have simply indicated that the plan satisfies the requirements of Rule 10b5-1; the final rules change this language to “intended to satisfy” so that insiders do not have to definitively assert that the plan meets the conditions of Rule 10b5-1, something they may be unable to attest to, despite their best intentions.  

In addition to completing the checkbox for trades occurring pursuant to a Rule 10b5-1 plan, the date the plan was adopted should be disclosed in a footnote.

This change is effective for Forms 4 and 5 filed on or after April 1. Pursuant to a CD&I (Q. 120.31 under “Exchange Act Rules”), the SEC has confirmed that the checkbox should be selected only for 10b5-1 plans that comply with the new rule; the box should not be selected for legacy plans that were implemented before adoption of new Rule 10b5-1.

The SEC had also proposed adding another checkbox that could be used to indicate when trades were executed pursuant to non-10b5-1 plans; this proposal was not adopted.

Reporting Gifts on Form 4

Prior Rule: Gifts are reportable on Form 5

Proposed Rule: Certain gifts must be reported on Form 4 within two business days

Final Rule: Adopted as proposed

Effective Date: Gifts occurring on or after February 27, 2023

The SEC has adopted its proposal to require that dispositions in the form of gifts (i.e., gifts of securities from the insider to another entity or person) be reported on Form 4 within two business days. As indicated in the proposing release, the SEC is concerned that insiders may be making gifts while in the possession of material nonpublic information with the knowledge that the donee will immediately sell the gifted securities. The SEC is also concerned that insiders may be backdating gifts to maximize their tax benefits.

Based on informal polls conducted by the NASPP, many companies already report insider gifts voluntarily on Form 4 but may not report them within two business days. Companies will need to implement procedures to ensure that they are informed of insider gifts on a timely basis; to this end, companies that do not currently subject gifts to pre-clearance may want to consider doing so.

Acquisitions in the form of gifts (i.e., gifts of securities to the insider) remain reportable on Form 5. Thus, if an insider makes a gift that results in indirect ownership (e.g., to a family member or trust), the disposition portion of the transaction would be reportable on Form 4 within two business days but the acquisition portion would not be reportable until the end of the company’s fiscal year on Form 5. We suspect, however, that in most cases, insiders would report both transactions on the same Form 4 to minimize confusion.

This rule is effective for gifts occurring on or after February 27, 2023. Gifts that occur prior to this date remain reportable on Form 5, even if not yet reported as of February 27.

Spring-Loading and Bullet-Dodging

Prior Rule: No required disclosure of grants issued shortly before or after the disclosure of material nonpublic information

Proposed Rule: Tabular disclosure of stock options granted to executives within 14 days of certain public filings and corporate repurchases

Final Rule: Tabular disclosure of stock options granted to executives within 4 business days before or 1 business day after certain public filings

Effective date: Effective for filings covering fiscal periods that begin on or after April 1, 2023 (October 1, 2023, for smaller reporting companies)

The term “spring-loading” refers to the practice of granting equity awards in advance of an announcement of material nonpublic information that will cause the underlying stock price to increase. Bullet-dodging refers to the practice of delaying equity grants until after the announcement of material nonpublic information that causes the price of the underlying stock to decline.

Both practices are the target of a new tabular disclosure that the SEC has adopted for Forms 10-K and proxy statements. The table will include any stock options and SARs granted to named executive officers within four business days before or one business day after a triggering event (this is a considerably narrower period than the 14 days before and after the triggering event that the SEC originally proposed).

The events which trigger disclosure are filing of a periodic report and or filing or furnishing of a Form 8-K that contains material nonpublic information (other than the grant of a material new equity award). The SEC did not adopt its proposal to include corporate repurchases among the triggering events.

The table will include the following information:

• Name of the NEO.
• Number of options granted, grant date, exercise price, and grant date fair value.
• Percentage change in the closing stock price before and after disclosure of the material nonpublic information.

The narrative accompanying the table should discuss the company’s policies and practices on the timing of awards of stock options and SARs in relation to the disclosure of material nonpublic information, including:

• How the board determines when to grant options (e.g., are awards granted on a predetermined schedule).
• How the board or compensation committee takes material nonpublic information into account when determining the timing and terms of grants.
• If the disclosure of material nonpublic information is timed to affect the value of executive compensation.

This disclosure is required in the first Form 10-K and proxy statement that covers the first full fiscal period beginning on or after April 1, 2023 (October 1, 2023 for smaller reporting companies).

NASPP Webinar on 10b5-1 Plans

Check out our webinar on the amendments, “Understanding the New Rules for 10b5-1 Plans.” In addition to examining what is required under the new rules, our expert panelists discuss how your company’s policies for 10b5-1 plans need to be adjusted and highlight specific implications for equity plan transactions.