Updates on SEC Rulemaking Affecting Company Insiders

A number of new SEC rules have recently gone into effect or are about to become effective. Here is a summary of the latest developments as well as an update on some longer-term projects.

10b5-1 Checkbox on Forms 4 and 5

Starting April 1, insiders will be required to indicate on Forms 4 and 5 when transactions are made pursuant to a trading plan that is intended to comply with Rule 10b5-1. The SEC has added a checkbox to the forms for this purpose. You can start using the checkbox now but aren’t required to do so until April 1.

Trap for the Unwary: EDGAR XML Update

EDGAR Release 23.1, deployed on March 20, updated Forms 4 and 5 to include the new Rule 10b5-1 checkbox.  The technical specifications for the XML files have been available on the SEC’s EDGAR website since February 22 (in the “Information for Filers” area).

As of March 20, all Form 4 and 5 filings must utilize the new XML schema. Filings submitted using the old schema will be rejected. If you use a third-party filer to create Form 4 and 5 filings, now is a good time to confirm that your provider has conformed its system to the new XML schema. Third-party filers may have expected to have until April 1 to transition to the new schema and may not have updated their filing systems yet.

If you need a filing solution in a pinch, its free to use the EDGAR OnlineForms website. Just remember that you have to create the filing and submit it in one session (you can’t save your work), so have your draft of the filing ready to go and approved.

Checkbox Location

I am surprised that the SEC added the checkbox at the top of the form, rather than in tables I and II. As a result, there’s just one checkbox for the entire form, which doesn’t allow insiders to indicate specifically which transactions on the form were intended to comply with Rule 10b5-1. When insiders have transactions to report that did not occur pursuant to Rule 10b5-1 plans on the same day that they are reporting transactions that did occur under Rule 10b5-1 plans, they may want to report them on separate forms.

The EDGAR OnlineForms website refers to instruction 10 for more information on the checkbox, so it’s possible there is more information on the SEC’s expectation in the instructions to Forms 4 and 5. I haven’t been able to find an updated copy of the instructions yet but will update this blog entry when I do.

Given that most 10b5-1 plan transactions are likely reportable on Form 4, which must be filed within two business days, I expect that, in most cases, insiders won’t have both 10b5-1 and non-10b5-1 transactions to report at the same time, so perhaps this won’t be a significant inconvenience.

Checkbox Is Only for Plans That Comply With New Rule

In his blog on Section16.net, Alan Dye clarifies that the Rule 10b5-1 checkbox should only be selected if the reported transactions are pursuant to a trading plan that is intended to comply with the new Rule 10b5-1(c), as amended in December 2022. The checkbox should not be selected for transactions pursuant to grandfathered 10b5-1 plans. A footnote can be included to identify transactions that occur pursuant to a 10b5-1 plan that is intended to comply with the prior version of the rule.

Don’t Forget the Plan Adoption Date

One last bit of advice—in addition to selecting the 10b5-1 checkbox, the date the 10b5-1 plan was adopted should be noted in the Explanation of Responses area of the form.

Gifts

The requirement for insiders to report their gifts of company securities on Form 4 within two business days went into effect on February 27. 

This requirement applies only to gifts made by the insider. Gifts of securities to the insider are still reportable on Form 5. Likewise, gifts made before February 27 remain reportable on Form 5.

Form 144

Electronic filing of Form 144 will become mandatory on April 13. Here are a couple of tasks to get done before then:

• Make sure officers, directors, and other affiliates that receive company assistance with their Form 144 filings are aware that this new requirement is going into effect.
• Affiliates who aren’t Section 16 insiders and haven’t been submitting their Forms 144 via EDGAR will need to submit Form ID to apply for EDGAR access codes. If any of these affiliates will expect your assistance with this process, proactively reach out to them to get this taken care of, so as to avoid a fire drill when they next want to sell company stock.
• If affiliates’ brokers have been handling their Form 144 filings, verify that they will continue to do so. Practitioners have expressed concern that brokers may no longer be willing to handle these files. This thread in the NASPP’s Discussion Forum indicates that at least some third-party administrators and brokers that specialize in equity plan transactions are going to continue to handle Form 144 for their clients.

EDGAR Release 23.1 adds Form 144 to the forms that can be submitted until 10:00 PM Eastern. If Form 144 is submitted before 10:00 PM Eastern, the filing date will be the date that it is submitted.

This release also updates the EDGAR OnlineForms website to include an interface that can be used to manually create and file Form 144.

Rule 10b5-1

New Rule 10b5-1 went into effect as of February 27. Any 10b5-1 trading plans adopted from here on out must comply with the requirement of the new rule, including:

• All trading plans must include a cooling-off period (the length of which depends on whether the individual adopting the plan is an officer or director).
• Overlapping 10b5-1 plans are prohibited (except for certain equity plan transactions).
• Use of single-trade plans is limited to just one over a 12-month period (except for certain equity plan transactions).
• 10b5-1 plans must be adopted and operated in good faith.
• Section 16 officers and directors must make certain certifications when adopting Rule 10b5-1 plans.

The Form 10-Q, 10-K, and proxy statement disclosures will go into effect for fiscal periods beginning on or after April 1.

For more information on the new rule, see the NASPP blog entry "SEC Adopts Amendments to Rule 10b5-1."

Clawbacks

Last November, the SEC adopted rules directing US securities exchanges (e.g., the NYSE and Nasdaq) to adopt standards requiring listed companies to implement policies under which incentive-based compensation paid to executive officers will be clawed back if based on financial measures that have been materially restated.

In late February, both the NYSE and Nasdaq posted their rule filings to comply with the SEC’s directive. According to TheCorporateCounsel.net, both proposals align closely with the SEC’s final rules.

So we are one more step along what has turned out to be a fairly long road to implementation of this requirement (which was enacted over a decade ago under the Dodd-Frank Act). Still to come: the exchanges must finalize the proposed listing requirements. The final listing standards must be effective no later than November 28, 2023 (one year after the SEC’s final rules were published in the Federal Register). Once the listing standards are effective, companies will have 60 days to comply.

Other SEC Projects

EDGAR Next: The goal of this project is to update how filers access EDGAR, with the intention of making it more secure. The SEC has proposed significant changes that would disrupt the current processes involved in Section 16 filings. The EDGAR website indicates that the project is ongoing but that the SEC is reconsidering certain aspects of the proposal in light of comments received. The Commission has not committed to a rulemaking time frame for the project.

Rule 701 and Form S-8: The SEC’s proposals to modernize Rule 701 and Form S-8 have landed on the SEC’s long-term agenda; at this time, there doesn’t appear to be a target time frame for final rules. This is disappointing for several reasons, not the least of which is that I spent literally days drafting a comment letter on them that now appears to have been not the best use of my time. But it’s even more disappointing because many aspects of the proposal were very helpful and seemed to have broad support.

Ditto the SEC’s proposal to implement a temporary pilot program that would allow companies to rely on Rule 701 and Form S-8 to issue equity to gig workers. There is currently no rulemaking time frame for this project.