SEC Shortens Cooling-Off Period in New 10b5-1 Rule

Continuing its rapid pace of rulemaking throughout 2022, the SEC finalized its new rules on 10b5-1 plans this week, with an unusual unanimous 5-0 vote. The meeting was announced last week, and here is the press release, final rule and fact sheet. 

HR Policy’s Center On Executive Compensation was successful in getting the Commission to agree to reducing the cooling-off period from an excessive 120 days to 90 days (for directors and officers) and 30 days for other plan participants. The Center’s comment letters were cited in the comments 11 times in total. 

The SEC also agreed to several other concessions:

• Making the disclosure requirements for options granted close to release of material non-public information less onerous, including removing the disclosure trigger for options granted close in time to a stock buyback;
  
  
• An exception to the ban on overlapping plans for sell-to-cover tax obligations; and
  
  
• No requirement to disclose pricing structure of 10b5-1 plans

Rule overview: We are still reviewing the 252-page document and will provide an executive summary and compliance guide to Center members soon. In the meantime, here are the nuts and bolts of the rule.

• Summary: The final rules modify the affirmative defense under Rule 10b5-1 to require the inclusion of certain provisions, as well as impose new disclosure requirements on companies and individuals regarding the use of 10b5-1 plans and insider trading policies.
  
  
• Change to Affirmative Defense: These are changes that must be made to plans in order for the trades executed under those plans to be eligible for an “affirmative defense” to insider trading liability. They include:
  
  
  1. A cooling-off period for directors and officers of the later of 90 days or two business days post quarterly results;
     
     
  2. A cooling-off period for other plan participants of 30 days;
     
     
  3. No cooling-off period for issuers;
     
     
  4. Certification that directors and officers are not aware of material nonpublic information (MNPI) at the time of adoption, and that they adopt the plan “in good faith”; and
     
     
  5. No overlapping plans and no more than one single-trade plan in 12 months.
     
     
• New Disclosure Requirements: The rules require:
  
  
  1. Quarterly disclosure regarding the use of 10b5-1 plans,
     
     
  2. Annual disclosure of insider trading policies,
     
     
  3. Tabular disclosure of options that are granted in the period of four days before and one day after the release of MNPI, and
     
     
  4. Form 4 and 5 filers must indicate by checkbox that a transaction was intended to satisfy Rule 10b5-1.

Timing: The rules become effective 60 days following publication in the Federal Register, which is expected by February 1 according to remarks by SEC Chair Gensler. This means that stock transactions made after that date must be pursuant to a plan that complies with the new rules, if the intention is to assert the 10b5-1 affirmative defense. In addition, Section 16 officers will be required to comply with changes to Forms 4 and 5 starting April 1, 2023. The new disclosure requirements for issuers will not take effect until after the fiscal year starting April 1, 2023 (so not reported until 2025 for most calendar-year filers).