SEC Adopts New Approach to Rule 10b5-1’s Affirmative Defense to Insider Trading and Related Matters

On Dec. 14, 2022, the Securities and Exchange Commission (SEC) adopted amendments to Rule 10b5-1 (Rule 10b5-1) under the Securities Exchange Act of 1934, as amended (Exchange Act), which provides an affirmative defense to “insider trading,” or trading on the basis of material nonpublic information (MNPI), pursuant to plans intended to meet the conditions of Rule 10b5-1 (10b5-1 plans). The amendments include mandatory cooling-off periods, director and officer certifications, restrictions on multiple overlapping 10b5-1 plans and single-transaction plans and an expanded good faith requirement. At the same time, the SEC also adopted new disclosure requirements regarding insider trading policies, the adoption and termination of 10b5-1 plans, and option (or option-like) awards made close in time to a reporting company’s (referred to in this article as “registrants” or “issuers”) release of MNPI. Finally, Section 16 of the Exchange Act was also amended to require reporting persons (Section 16 reporting persons) to identify transactions effected under a 10b5-1 plan on Forms 4 and 5 and to require disclosure of bona fide gifts of equity securities on Form 4.

The new rules become effective Feb. 27, but are subject to varied compliance dates. Registrants must comply with the new rules in their periodic reports on Form 10-Q, Form 10-K, Form 20-F, and in any proxy statements, as applicable, in the first filing that covers the first full fiscal period that begins on or after April 1, which for Dec. 31 fiscal year registrants would require compliance beginning with second quarter Forms 10-Q in 2023. Registrants that are smaller reporting companies have until the first filing covering the first full fiscal period beginning on or after Oct. 1. Section 16 reporting persons must comply with the applicable amendments relating to reporting of bona fide gifts beginning Feb. 27 and the identification of a transaction effected under a 10b5-1 plan beginning April 1. Finally, the amendments to Rule 10b5-1 will not affect the affirmative defense under existing 10b5-1 plans entered into prior to Feb. 27, unless these plans are modified after Feb. 27.

Cooling-Off Period