20 十二月 2021 Mas Harntha Capital Markets - Debt - Capital Markets - Equity - Corporate Governance

10b5-1 trading plans and share repurchases in the spotlight

The SEC is considering imposing new Rule 10b5-1 conditions and disclosure requirements, as well as next-day disclosure of issuer share repurchases

Under a new proposal issued by the U.S. Securities Exchange Commission (the “SEC”), public companies and corporate insiders could be required to satisfy additional conditions, such as cooling-off periods and certifications, in order to rely on Rule 10b5-1 of the U.S. Securities and Exchange Act of 1934 (the “Exchange Act”) as a defense to insider trading charges. The proposal would also require, for the first time, specific disclosures regarding Rule 10b5-1 trading arrangements, as well as companies’ insider trading plans. 

The same day, the SEC also proposed requiring issuers to make next-day disclosures of any repurchases they make of their equity securities. The share repurchase proposal would also require issuers to disclose the objective or rationale for the share repurchases and the process or criteria used to determine the amount of repurchases.

Amendments to Rule 10b5-1

Insider trading is primarily regulated by Section 10(b) of the Exchange Act, which prohibits the use, in connection with the purchase or sale of any security, of “any manipulative or deceptive device or contrivance.” This includes the purchase or sale of a security on the basis of material nonpublic information (“MNPI”) about that security or its issuer, in breach of a duty owed to the issuer,  its shareholders, or any person who is the source of the MNPI. Exchange Act Rule 10b5-1 states that a purchase or sale of an issuer’s security is made on the basis of MNPI if the person making the purchase or sale was aware of MNPI at the time of the purchase or sale. 

Rule 10b5-1(c) provides an affirmative defense to insider trading because the trade was made pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person’s account, or a written plan adopted when the trader was not aware of MNPI. 

Proposed additional Rule 10b5-1 conditions

The proposed Rule 10b5-1 amendments would add new conditions to the availability of Rule 10b5-1(c)(1) as an affirmative defense to insider trading liability, including: 

  • Cooling-off periods – Currently, under Rule 10b5-1(c)(1), a trader can adopt a Rule 10b5-1 trading arrangement and execute a trade under the arrangement on the same day. The Rule 10b5-1 proposal would require either a 120-day (for corporate officers and directors) or a 30-day (for issuers) cooling-off period before any trading can commence under a new or modified trading arrangement. In the case of officers and directors, a 120-day cooling-off period would span an entire quarter, meaning that no trading could occur under a Rule 10b5-1(c)(1) plan adopted during a particular quarter until after that quarter’s financial results are announced. The cooling-off period requirement would also apply to issuers structuring share purchase plans as a Rule 10b5-1 trading arrangement. 
  • Certifications – Officers and directors would be required to certify that they are not aware of MNPI about the issuer or the security when adopting a new or modified trading arrangement. The certification would not have to be filed with the SEC, but would have to be retained for 10 years. The certification is not intended to serve as an independent basis of liability. 
  • Multiple overlapping plans – The Rule 10b5-1 affirmative defense currently is not available for a trade if a person enters into or alters a “corresponding or hedging transaction or position” with respect to the planned transactions. Because the use of multiple trading arrangements can be used to simulate this kind of impermissible hedging and to circumvent the proposed cooling-off period, the proposal would not allow the Rule 10b5-1 defense to apply to multiple overlapping Rule 10b5-1 trading arrangements for open market trades in the same class of securities. However, this limitation would not apply to transactions where a person acquires (or sells) securities directly from the issuer, such as through participation in employee stock ownership plans or dividend reinvestment plans, which are not executed by the director or officer on the open market.
  • Single-trade plans – 10b5-1 trading arrangements to execute a single trade would be limited to one plan per 12-month period. 
  • Good faith requirement – Currently, the Rule 10b5-1(c) defense requires a trading arrangement to only be “adopted” in good faith. The Rule 10b5-1 proposal would also require that the trading arrangement be “operated” in good faith. 

Proposed additional Rule 10b5-1 disclosures

Currently, there are no mandatory disclosure requirements concerning the use of Rule 10b5-1 trading arrangements. Issuers are also not required to disclose their insider trading policies or procedures. The Rule 10b5-1 proposal would require disclosure of Rule 10b5-1 trading arrangements, as well as insider trading policies and procedures, as follows:

  • Insider trading policies – New Item 408(b) of Regulation S-K and new Item 16J of Form 20-F would require issuers to disclose in their annual reports their insider trading policies and procedures, or disclose why they have not adopted any. The proposed Rule 10b5-1 amendments do not specify all details that a registrant should address in its insider trading policies or prescribe any specific language that the policies must include. 
  • Equity grants – New Item 402(x) of Regulation S-K would require issuers to (i) include narrative disclosure in their annual reports of their policies and practices related to the grant of equity awards in coordination with the release of MNPI, and (ii) provide tabular disclosure showing grants of options made within 14 days of the release of MNPI and the market price of the underlying securities on the trading day before and after the release of the MNPI. The Rule 10b5-1 proposal does not exempt smaller reporting companies or emerging growth companies from these requirements, although they would be permitted to limit their disclosures about specific option awards to the principal executive officer (the “PEO”), the two most highly compensated executive officers other than the PEO at fiscal year-end, and up to two additional individuals who would have been the most highly compensated had they been serving as executive officers at fiscal year-end. 
  • 10b5-1 plans – Under proposed Item 408(a) of Regulation S-K, issuers would be required to disclose in their quarterly reports the adoption and termination of Rule 10b5‑1 trading arrangements and other trading arrangements by directors, officers, and issuers, and the terms of such trading arrangements. 
  • Inline XBRL – The Item 408 and Item 402(x) disclosures would have to be tagged using Inline eXtensible Business Reporting Language (“Inline XBRL”). 
  • Section 16 reporting – Section 16 officers and directors would have to disclose, by checking a box on Forms 4 and 5, whether a reported transaction was made pursuant to a 10b5-1(c) trading arrangement. Corporate insiders subject to the reporting requirements of Exchange Act Section 16 would also be required to promptly disclose bona fide gifts of securities on Form 4.

Foreign private issuers would only be subject to the first disclosure requirement (relating to insider trading plans). Notably, the SEC opted not to propose subjecting foreign private issuers to Section 16 reporting, as the SEC’s Investor Advisory Committee had recommended earlier this year. 

Amendments to share repurchase disclosure requirements

Under current rules, issuers are not required to, and typically do not, disclose the specific dates on which they will execute trades pursuant to an announced repurchase plan or program. An issuer generally will not disclose its actual share repurchase activity until it files its periodic reports, usually long after the trades have been executed.

Next-day disclosure on Form SR

Proposed new Exchange Act Rule 13a-21 and Form SR would require issuers – including foreign private issuers – to report any purchase made by or on behalf of the issuer or any affiliated purchaser of shares of any class of the issuer’s equity securities that is registered pursuant to Section 12 of the Exchange Act. An issuer would be required to furnish (rather than file) Form SR to the SEC before the end of the next business day after the repurchase is executed. 

As proposed, Form SR would require: 

  • Identification of the class of securities purchased;
  • The total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs;
  • The average price paid per share (or unit);
  • The aggregate total number of shares (or units) purchased on the open market;
  • The aggregate total number of shares (or units) purchased in reliance on the safe harbor in Rule 10b-18 under the Exchange Act; and
  • The aggregate total number of shares (or units) purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

While noting that some jurisdictions already require daily disclosure of share repurchase transactions, the proposing release asks for public comment as to whether foreign private issuers should be exempt from Form SR. 

Additional disclosure under Item 703

Currently, an issuer must disclose its share repurchases under Item 703 of Regulation S-K on a quarterly basis on Form 10-Q and annually on Form 10-K, annually on Form 20-F, or semi-annually on Form N-CSR. The share repurchase proposal would revise Item 703, with corresponding changes to Form 20-F and Form N-CSR, to require additional disclosure about an issuer’s share repurchases, including: 

  • The objective or rationale for its share repurchases and the process or criteria used to determine the amount of repurchases;
  • Any policies and procedures relating to repurchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction on such transactions;
  • Whether it 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
  • Whether repurchases were made in reliance on the Rule 10b-18 non-exclusive safe harbor.

Structured data requirement

Finally, the SEC is also considering requiring issuers to tag, using Inline XBRL,  information disclosed pursuant to Item 703 of Regulation S-K, Item 16E of Form 20-F, Item 9 of Form N-CSR, and Form SR. 

This would include detail tagging of quantitative amounts disclosed within the tabular disclosures in each of the forms, as well as block text tagging and detail tagging of narrative and quantitative information disclosed in the footnotes to the tables required by Item 703 of Regulation S-K, Item 16E of Form 20-F, and Item 9 of Form N-CSR.

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Comments on both proposals are due 45 days after they are published in the Federal Register. We will continue to monitor developments in these areas and encourage you to contact us if you have any questions.