Defining Issues | December 2022

 

Insight

SEC adopts amendments to insider trading plans rule

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

The final rules enhance 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, officers, and other employees 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

  • December 14, 2022 – Final rules adopted
  • Effective date is 60 days after publication in the Federal Register.

 

Requirement

Applicability

Compliance required

Amendments to Forms 4 and 5 for beneficial ownership reports

Officers, directors or beneficial owners of more than 10% of a registrant’s shares

Apr 1, 2023

New disclosure and tagging requirements

Registrants other than smaller reporting companies

The first filing that covers the first full fiscal period that begins on or after Apr 1, 2023

New disclosure and tagging requirements

Smaller reporting companies

The first filing that covers the first full fiscal period that begins on or after Oct 1, 2023


Key impacts

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

The rule amendments were developed to provide additional investor protections related to corporate insider trading policies and activities, and to require additional disclosures of registrants regarding certain equity transactions with their directors and officers.

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

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

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

  • A ‘cooling-off’ period before trading can commence for corporate directors and officers of the later of:
    • 90 days after the adoption or modification of a trading arrangement; or
    • 2 business days after the disclosure of the issuer’s quarterly financial results (but no longer than 120 days after adoption or modification).
  • A ‘cooling-off’ period for individuals other than directors and officers of 30 days after the adoption or modification of a trading arrangement before trading can commence.
  • Requiring a corporate officer or director to certify at the time of entering into or modifying a trading arrangement that:
    • they are not aware of material nonpublic information; and
    • they are adopting the plan in good faith.
  • Eliminating the affirmative defense for multiple overlapping trading arrangements.
  • Limiting single-trade plans to a maximum of one trade in a consecutive 12-month period.
  • Broadening the provision requiring trading plans to be entered into and acted upon in good faith.

Addition of insider trading arrangement disclosures

The amendments 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 final rules, a registrant is required to disclose:

  • Whether, during the last quarter, the registrant or any of its officers or directors adopted or terminated any contract, instruction or written plan to purchase or sell securities of the registrant. This is 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.

Registrants will be required to tag the additional disclosures using Inline XBRL.

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

The final rules require registrants that have issued stock options to named executive officers or directors in the 4 business days before through one day after the release* of material nonpublic information to disclose specific information regarding those awards. This includes the percentage change in the market price of the underlying securities in the trading day immediately before and after disclosure of the material nonpublic information.

*This includes the filing of a periodic report on Form 10-Q or Form 10-K as well as the filing of a Form 8-K that discloses material nonpublic information (Including earnings information).

In addition, registrants are 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 amendments 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 2 business days of the disposition.


Related content

Subscribe to our newsletter

Receive timely updates on accounting and financial reporting topics from KPMG.

Receive timely updates on accounting and financial reporting topics from KPMG.

ARO

Use our Accounting Research Online for financial reporting resources.

Use our Accounting Research Online for financial reporting resources.