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SEC’s Proposed Amendments to Insider Trading Rules
March 28, 2022
Whether your company is public or private, if it issues securities, then Section 10(b) of the Securities Exchange Act applies to you. Section 10(b) and the rules adopted thereunder are the primary anti-fraud provisions of the federal securities laws. Collectively, they prohibit fraud or manipulation in connection with purchases and sales of securities.
In December, following the recommendations of its Investor Advisory Committee, the SEC proposed a number of amendments to Rule 10b5-1, one of the most prominent rules adopted under Section 10(b). The amendments were published in the Federal Register on February 15, 2022, and the SEC is soliciting comments through April 1, 2022.
The insider trading rules, and the case law surrounding them, prohibit purchases or sales of securities on the basis of material nonpublic information about a company in breach of a duty owed directly, indirectly or derivatively to that company, its shareholders, or the person who is the source of the material nonpublic information. A purchase or sale is deemed to be made on the basis of material nonpublic information if the trader is aware — that is, if they know, consciously avoid knowing or are reckless in not knowing — that the information is both material and nonpublic. Rule 10b5-1 establishes an affirmative defense to liability for insider trading when a trade is made pursuant to a binding contract or written plan, namely a 10b5-1 insider trading plan (a trading plan), that is put into place while the trader is unaware of material nonpublic information.
In recent years, there have been a number of concerns raised by courts, Congress, and commentators in the academic and private sectors regarding market practices that have developed around trading plans and the potential for their misuse, such as use of multiple overlapping plans to selectively cancel trades or plans that commence trading shortly after adoption or modification. The SEC’s recent rule amendments are aimed at addressing these and other criticisms and were proposed in connection with a separate series of amendments to address similar concerns regarding misuse of material nonpublic information in connection with stock buy-backs.
Before reading on, you may want to pull out your current insider trading policies and procedures, so you can compare notes. The proposed rule amendments are numerous and would, among other things:
- Require a mandatory 120-day cooling off period before trading can commence under trading plans adopted (or modified) by officers or directors. Based on informal market survey data, current cooling off periods range from as little as 14 days to as many as 90 days.
- Require a mandatory 30-day cooling off period before trading can commence under trading plans adopted (or modified) by companies.
- Require officers and directors to personally certify that they are not aware of material nonpublic information when adopting a trading plan.
- Require quarterly disclosure regarding the adoption and termination of trading plans. Currently, there are no disclosure requirements with respect to the adoption, modification or termination of trading plans by directors, officers or even companies themselves.
- Exclude multiple overlapping trading plans for open market trades in the same class of securities from the affirmative defense available under Rule 10b5-1.
- Limit the availability of the affirmative defense under Rule 10b5-1 to one single-trade trading plan in any 12-month period.
- Require disclosure in a company’s annual report regarding whether it has adopted insider trading policies and procedures (and if not, why), and disclosure of the policies and procedures. The proposed disclosures would also be subject to the officer certifications with respect to disclosure controls and procedures required by Section 302 of the Sarbanes-Oxley Act.
- Require disclosure regarding equity compensation awards granted in close proximity to a company’s filing of periodic reports, or disclosure of certain material nonpublic information.
- Require disclosure of gifts by insiders on Form 4 within two business days of the gift being made. Currently, such disclosures are required on Form 5 within 45 days after a company’s fiscal year end.
If the amendments are adopted as proposed and your company is publicly traded, at the very least your reporting obligations will increase, making now a good time to review your policies and practices with a view toward any adjustments that the amendments may require and readying them for public disclosure. Most companies already prohibit overlapping plans and require a cooling off period, but revisions may be necessary with respect to the timing of compensation awards and gifting policies.
You may also want to spend some time considering whether you have the necessary controls and processes in place to meet the revised deadlines and enhanced disclosure requirements. If your company is not publicly traded, or not yet publicly traded, but you issue securities to your officers and directors, I still encourage you to review your insider trading policies and practices in light of current best practices and the proposed changes to the affirmative defense available under Rule 10b5-1.
Vanessa Schoenthaler is a partner in the Corporate practice at Saul Ewing Arnstein & Lehr. She advises mid-market public companies, start-ups, venture capital and private equity firms, and other institutional investors on corporate, securities and regulatory matters.
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