On December 15, 2021, the Securities and Exchange Commission (“SEC" or “Commission") held a virtual open meeting where it considered four rule proposals, including two that are particularly pertinent to all public companies: (i) amendments regarding Rule 10b5-1 insider trading plans and related disclosures and (ii) new share repurchase disclosures rules.

Both proposals passed, though only the proposed amendments regarding Rule 10b5-1 insider trading plans and related disclosures passed unanimously; the proposed new share repurchase disclosures rules passed on party lines. Notably, these proposals only have a 45-day comment period, which is shorter than the more customary 60- or 90-day comment periods. Commissioner Roisman[1], in particular, raised concerns about the 45-day comment periods being too short, noting that the comment periods run “not only over several holidays," but “also concurrent with five other rule proposals that have open comment periods."

Below, please find summary descriptions of the these two rule proposals, as well as certain Commissioners' concerns related to these proposals.

Amendments Regarding Rule 10b5-1 Insider Trading Plans and Related Disclosures

Summary of Proposed Amendments

New Conditions to the Availability of the Rule 10b5-1(c)(1) Affirmative Defense

The proposed amendments would add new conditions to the availability of the Rule 10b5-1(c)(1) affirmative defense by:

imposing a 120-day cooling off period for Section 16 insiders and a 30-day cooling off period for public companies before trading can commence after a new plan adoption or a plan modification/amendment;
requiring Section 16 insiders to certify that they are not aware of material nonpublic information (“MNPI") and that the plan is being entered into in good faith prior to adopting a new plan or modifying/amending an existing plan;
at any given time, only one Rule 10b5-1 plan for open market trades in a given class of securities may be in effect (this is often referred to as overlapping plans);
limiting single-trade plans to one trading plan per twelve month period; and
requiring plans be “operated" in good faith, which is an expansion from the current “entered into" in good faith standard.

A copy of the certification by Section 16 insiders must be retained for 10 years.

New Disclosure Requirements for Companies

Annual Disclosures. The proposed amendments would require a company to disclose the following on an annual basis: (i) whether or not it has adopted insider trading policies and procedures; (ii) its insider trading policies and procedures (if adopted); (iii) its option grant policies and practices; and (iv) tabular disclosure of option, SAR or similar instrument grants that were awarded to named executive officers within a 14-day period “before or after the filing of a periodic report on Form 10-Q or Form 10-K, an issuer share repurchase, or the filing or furnishing of a current report Form 8-K that discloses MNPI (including earnings information)." Many of these disclosures will need to be tagged using iXBRL.

Quarterly Disclosures. The proposed amendments would require a company to disclose the adoption, amendment, modification[2] or termination of Rule 10b5-1 and other trading arrangements by the company and Section 16 insiders on a quarterly basis. The disclosure requirements, which will need to be tagged using iXBRL, include (i) date on which the plan was adopted, amended, modified or terminated, (ii) the plan's duration and (iii) aggregate amount of securities to be sold or purchased pursuant to the plan.

New Disclosure Requirements for Section 16 Insiders

The proposed amendments would require Section 16 insiders to indicate via a new checkbox on Forms 4 or 5 whether the reported transactions were made pursuant to a Rule 10b5-1(c) or another trading plan and provide the date of adoption of the plan in the “Explanation of Responses" portion of the form. Section 16 insiders would also be required to disclose dispositions by gifts within two business days as opposed to the current ability to report share gifts in a Form 5 within 45 days following the end of the year.

For additional information on the proposed amendments, please see the following links:

Commissioner Concerns

Although all the Commissioners voted in support of the proposed amendments, Commissioners Peirce and Roisman expressed some reservations about the proposal. Specifically, Commissioner Peirce voiced concern that: (i) the proposed certification requirement for Section 16 insiders is of minimal benefit given the existing obligations under Rule 10b5-1; (ii) conditioning plans to be “operated" in good faith may incentivize Section 16 insiders to consider Rule 10b5-1 plans in connection with corporate actions after establishing plans; (iii) the proposed disclosure requirements relating to insider trading policies and procedures may not be necessary; and (iv) the proposed disclosure requirements relating to spring-loaded options seem designed to discourage the use of such equity-based compensation. Commissioner Roisman's concerns included: (i) the comment period is only 45 days; (ii) the proposed rules may impose undue costs for Section 16 insiders; and (iii) whether the 30-day cooling-off period is appropriate for companies.

For the full statements of each of the SEC commissioners, please see the following links:

New Share Repurchase Disclosures Rules

Summary of Proposed Rules

New Form SR

The proposed rule would require a company to furnish a Form SR before the end of the first business day following the day on which the company executes an equity share repurchase that discloses: (i) the identification of the class of securities purchased; (ii) the total number of shares purchased, including all company repurchases, whether or not made pursuant to publicly announced plans or programs; (iii) the average price paid per share; (iv) the aggregate total number of shares purchased on the open market; (v) the aggregate total number of shares purchased in reliance on the Rule 10b-18 safe harbor; and (vi) the aggregate total number of shares purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). These disclosures will need to be tagged using iXBRL.

New Quarterly Disclosure Requirements for Companies

The proposed rule would amend Regulation S-K Item 703 to require a company to disclose: (i) the objective or rationale for its share repurchases and process or criteria used to determine the amount of repurchases; (ii) any policies and procedures relating to purchases and sales of the company's securities by its Section 16 insiders, including any restriction on such transactions; (iii) whether the company made its repurchases pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and if so, the date that the plan was adopted or terminated; and (iv) whether purchases were made in reliance on the Rule 10b-18 non-exclusive safe harbor. These disclosures will also need to be tagged using iXBRL.

Companies would also be required to check a box in their Item 703 disclosure if any Section 16 insider purchased or sold shares within ten business days before or after the announcement of a company's purchase plan or program.

For additional information on the proposed rules, please see the following links:

Commissioner Concerns

The Commission voted three to two in support of the proposed amendments, with Commissioners Peirce and Roisman voting against them. Specifically, Commissioner Peirce stated that the proposed amendments require “painfully granular, unnecessarily frequent disclosure obligations," and any concerns regarding information asymmetries between companies and investors should be addressed through more tailored disclosure. Commissioner Roisman similarly stated that he is concerned that the daily reporting is unduly burdensome and “could provide a roadmap for traders to figure out the company's upcoming trades and trade ahead of them." Commissioner Roisman believes information asymmetries could be better addressed by companies disclosing ahead of time, via Forms 8-K, their plans to conduct a share purchase and provide the relevant repurchase information in such disclosure.

For the full statements of each of the SEC commissioners, please see the following links:

Special thanks to David Korvin and Olivia Brown in our Washington, DC office for their assistance in the preparation of this alert.

[1] On December 20, 2021, Commissioner Roisman announced that he intended to resign from his position as Commissioner at the end of January 2022.

[2] The proposed rules clarify that “Any modification or amendment to a prior contract, instruction, or written plan is deemed to be the termination of such prior contract, instruction, or written plan, and the adoption of a new contract, instruction, or written plan."

December // <![CDATA[ _spBodyOnLoadFunctionNames.push("setupPageDescriptionCallout"); // ]]>

Posts

Error ‭[1]‬

December