On August 25, 2023, the staff of the Division of Corporation Finance (the “Staff") of the Securities and Exchange Commission (the “SEC") issued five new Compliance and Disclosure Interpretations (“C&DIs") regarding the SEC's recent Exchange Act Rule 10b5-1 amendments. The new C&DIs address how to calculate the required cooling-off period; how 401(k) plans interact with the Rule 10b5-1 affirmative defense in certain circumstances; when the Rule 10b5-1 check box on Form 4 applies; and when disclosure of plan adoption and termination is required.
This new guidance is in addition to the three C&DIs issued by the Staff in May 2023, discussed in our blog post here, which explained the operation of the cooling-off period when entering into back-to-back trading plans and the effective dates for the new disclosures.
Question 120.29 – Counting Business Days for the Cooling-off Period
Under Rule 10b5-1(c)(1)(ii)(B)(1), the required cooling-off period for directors and officers subject to Exchange Act Section 16 reporting is the later of 90 days after the adoption of the contract, instruction, or plan or “[t]wo business days following the disclosure of the issuer's financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted." The Staff clarified that for purposes of calculating the two business day provision of the cooling-off period, the first business day is the business day following the “filing date" of the Form 10-Q or Form 10-K, as calculated by Rule 13(a)(2) of Regulation S-T, which applies a 5:30 p.m. Eastern Time cut-off deadline. For example, if the relevant form is filed on a Monday before 5:30 p.m. Eastern Time, trading may commence under the contract, instruction, or plan on Thursday. If such form is filed on Monday after 5:30 p.m., it will be deemed to be filed on Tuesday (i.e., it will get Tuesday as its filing date), in which case the day after the second business day would be Friday. The Staff also stated that, for purposes of this provision, it does not make a difference whether a form is filed before or after trading opens (but before the 5:30 pm Eastern Time cut-off on a given day). To date, we have not seen, and we do not expect to see, many companies changing their own quarterly trading window guidelines to conform to the SEC's cooling off period for Rule 10b5-1.
Question 120.30 – Participation in 401(k) Matching Plans
Rule 10b5-1(c)(1)(ii)(D) provides that an individual cannot have more than one active open-market trading plan under the new rules. The Staff clarified that a 401(k) plan participant's use of a Rule 10b5-1 plan to participate in the 401(k) plan will not be treated as an “open market" plan (and thus not subject to the “one plan" restriction) even if the plan administrator purchases stock in the open market to make matching grants to plan participants. The Staff noted that even though participants elect how much to contribute to their 401(k) accounts, an open-market transaction conducted at the direction of the plan administrator, not the plan participant, to match a contribution by the participant with employer stock would not be an overlapping plan for purposes of Rule 10b5-1(c)(1)(ii)(D). As such, it would not disqualify a plan participant from relying on Rule 10b5-1 for a concurrent open market trading plan.
Questions 120.31 and 135.04 – Plans Subject to Rule 10b5-1 Check Box on Form 4
The Staff stated that the Rule 10b5-1(c) check box on Form 4 does not apply to trading plans that were adopted prior to February 27, 2023, the effective date of the recent amendments to Rule 10b5-1. It applies only to securities transactions made pursuant to a trading plan that is intended to satisfy the affirmative defense conditions of the amended Rule 10b5-1(c) – i.e., entered into on or after February 27, 2023.
Questions 133A.01 and 133A.02 – Plan Adoption and Termination Disclosures
Item 408(a) of Regulation S-K requires disclosure of whether “any director or officer" adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter. Two of the C&DIs issued by the Staff clarify the scope of this requirement:
Question 133A.01 explains that this disclosure is not triggered when a plan ends due to its expiration or completion.
Question 133A.02 states that this disclosure applies to any trading arrangement “covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate." This means that adoption or termination of trading plans entered into by an individual or legal entity who shares a pecuniary interest in the securities with the officer or director (e.g., the officer's spouse) will require disclosure, but only if the officer or director “made the decision to adopt or terminate" the plan. Thus, companies will need to be certain that their disclosure controls cover those scenarios, and should carefully consider the officer's or director's facts and circumstances to determine who is the decisionmaker when deciding whether certain adoptions and terminations require disclosure in the company's Form 10-Q or Form 10-K.
We would like to thank Maggie Valachovic in our Washington, D.C. office for her work on this post.