Defining Issues | December 2021

 

Insight

SEC proposes amendments to insider trading plans rule

Proposed rules strengthen investor protections and enhance disclosures of insider trading policies and arrangements.

The proposed rules would strengthen disclosure requirements and investor protections that provide an affirmative defense to insider trading for directors, officers and others with access to material nonpublic information. 

Applicability

  • Public companies and directors and officers of public companies who purchase, sell or are granted shares or share-based awards of the issuer, including trading arrangements covered under Rule 10b5-1.

Relevant dates

  • Comments are due within 45 days after publication in the Federal Register

Key impacts

The SEC has issued a Fact Sheet summarizing the key provision of the proposed rules.

The proposed rules were developed to provide additional investor protections related to corporate insider trading policies and activities, and to require additional disclosures of issuers regarding certain equity transactions with its directors and officers.

Amendments to affirmative defense to insider trading liability - Rule 10b5-1(c)(1)

The proposed amendments are intended to protect investors by limiting the ability for issuers and their directors and officers to profit from transacting on material nonpublic information.

They add conditions to be satisfied for a trading arrangement to be eligible for the affirmative defense in Rule 10b5-1(c)(1), including:

  • A 120-day ‘cooling-off’ period after a corporate officer or director enters into or modifies a trading arrangement before trading can commence.
  • A 30-day ‘cooling-off’ period after an issuer enters into or modifies a trading arrangement before trading can commence.
  • Requiring a corporate officer or director to certify that they are not aware of material nonpublic information prior to entering into a trading arrangement.
  • Eliminating the affirmative defense for multiple overlapping trading arrangements.
  • Limiting single-trade plans to a maximum of one plan in a consecutive 12-month period.
  • Broadening the provision requiring trading plans to be entered into and operated in good faith.

Addition of insider trading arrangement disclosures

The proposed rules would add disclosure requirements in periodic filings (e.g. Forms 10-Q, 10-K and 20-F) related to certain trading arrangements. These disclosures would be subject to certification of the principal executive officer and principal financial officer under Section 302 of the Sarbanes-Oxley Act. 

Under the proposed rules, a registrant would be required to disclose:

  • Whether, during the last quarter, the registrant or any its officers or directors adopted or terminated any contract, instruction or written plan to purchase or sell securities of the registrant, regardless of whether the arrangement was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and identify material terms of the arrangement including:
    • date of adoption;
    • duration of the arrangement; and
    • the aggregate number of securities to be sold or purchased under the arrangement.
  • Whether the registrant has adopted insider trading policies and procedures governing purchase, sale or other disposition of the registrant’s securities to promote compliance with applicable insider trading laws and regulations and, if not, explain why such policies and procedures have not been adopted.

Disclosure of stock option grants issued in close proximity to the release of material nonpublic information

Registrants that have issued stock options to named executive officers or directors within 14 days of the release of material nonpublic information will be required to disclose the details of each award. This includes the market price of the underlying securities in the trading day immediately before and after disclosure of the material nonpublic information. 

In addition, registrants would be required to disclose policies and procedures related to the timing of option grants in the presence of material nonpublic information, and a discussion of how the board of directors or compensation committee takes into account material nonpublic information when structuring and issuing such awards.

Reporting of gifts on Form 4

The proposed amendments would also require officers, directors or beneficial owners of more than 10% of a registrant’s shares making a gift of a registrant’s equity securities to report the disposition by gift on Form 4 within two business days of the disposition.


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