Earlier this week, the US Securities and Exchange Commission (SEC) proposed amendments to Exchange Act Rule 10b5-1 that would impose new restrictions and disclosure requirements for (1) trading plans that afford executives and other insiders the “good faith” affirmative defense against allegations of insider trading and (2) enhanced company stock repurchases. These actions were not unexpected. In June 2021, SEC Chair Gary Gensler said it was time to “freshen up” Rule 10b5-1 and directed SEC staff to recommend restrictions on the use of Rule 10b5-1 trading plans, including a cooling off period before trading could commence under a plan. Similarly, Chair Gensler explained the rationale for increased disclosure rules with respect to stock purchase plans, “Share buybacks have become a significant component of how public issuers return capital to shareholders…we can lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosures that today’s proposal would provide.”
PROPOSED CHANGES TO RULE 10B5-1
Both Chair Gensler and former SEC Chair Jay Clayton have raised concerns and cited data indicating that the lack of adequate disclosures and mandatory waiting periods have allowed executives to profit on inside information. The proposed amendments to Rule 10b5-1 to add restrictions and enhance disclosure include the following:1
- A 120-day cooling off period before any trading by corporate officers and directors can commence under a Rule 10b5-1 plan after its adoption; the same 120 days restriction would also apply to the adoption of a modified trading arrangement. Issuer Rule 10b5-1 plans would be subject to a 30-day cooling off period.
- Disallowing the affirmative defense of Rule 10b5-1 when utilizing multiple overlapping Rule 10b5-1 trading plans for open market trades in the same class of securities.
- Rule 10b5-1 trading plans implemented for a single trade are limited to one plan per 12-month period.
- Officers and directors must certify to the issuer that they are not aware of material nonpublic information when adopting new or modified Rule 10b5-1 plans.
In terms of “enhanced disclosures,” the proposed rules include the following requirements:
- Issuers must disclose in their quarterly reports the adoption and termination of all Rule 10b-5-1 trading plans by officers, directors and the issuer and the duration and aggregate number of shares that may be bought or sold under such plans.
- Issuers must disclose in their annual reports their insider trading policies and procedures if they have adopted such policies and procedures. If they have not adopted insider trading policies and procedures, they must disclose why not.
- Section 16 officers and directors must disclose whether a reported transaction was made pursuant to a Rule 10b5-1 trading plan by checking a box on Forms 4 and 5.
- Issuers must disclose in their annual reports their option grant policies and practices and provide tabular disclosure showing grants made within 14 days of the release of material nonpublic information and the market price of the underlying securities on the trading day before and after the release of such information.
All five commissioners approved the issuance of the proposed rules, which ratchets up the likelihood that the proposed amendments will be adopted in similar form after the comment period. The public will have an opportunity to submit comments within 45 days after the proposed rules are published in the Federal Register.
PROPOSED CHANGES WITH RESPECT TO ISSUE REPURCHASE PROGRAMS
The new proposed rules with respect to issuer repurchase programs will provide for enhanced disclosure regarding issuer repurchases.2 Current SEC rules require issuers to disclose repurchase information in their quarterly and annual reports, but the information is limited to disclosing the amount of shares purchased, the price paid and the maximum number of shares that may yet be purchased under approved repurchase plans.3 The proposed rules increase the amount of information disclosed on share repurchases, as well as the frequency of such disclosure. The SEC believes this enhanced disclosure will permit investors to better understand the impact of issuer share repurchases on the issuer’s stock price, the issuer’s motivation for share repurchases and any relationship between share repurchases and executive compensation and stock sales.
Under the proposed rules:
- Issuers would be required to file a new Form SR with the SEC one business day after execution of a repurchase order, disclosing the stock repurchases.
- The required information to be disclosed in quarterly and annual reports would be more comprehensive to include:
- The objective or rationale for its share repurchases and process or criteria used to determine the amount of repurchases.
- Any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction on such transactions.
- Whether the issuers made their 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.
- Whether purchases were made in reliance on the Rule 10b-18 non-exclusive safe harbor.
The proposed rules also require that the issuer tag in XBRL the new Form SR and new quarterly and annual disclosures to make the disclosures more readily available and easily accessible to investors, market participants and others for aggregation, comparison, filtering and other analysis.
The public will have an opportunity to submit comments within 45 days after the proposed stock repurchase disclosure rules are published in the Federal Register.
The McDermott Corporate and White-Collar teams recommend that companies begin planning now by adjusting insider trading plans, repurchase programs, updating policies and disclosures and educating executives and board members about the expected changes. The Firm’s Corporate and White-Collar Practice Groups stand ready to assist in that regard and as counsel to those considering submitting comments on the proposed rules.
1 See SEC’s Rule 10b5-1 and Insider Trading, Release No. 33-11013; 34-93782; File No. S7-20-21. https://www.sec.gov/rules/proposed/2021/33-11013.pdf.
2 See SEC’s Share Repurchase Disclosure Modernization, Release Nos. 34-93783; IC-34440; File No. S7-21-21. https://www.sec.gov/rules/proposed/2021/34-93783.pdf.
3 See Regulation S-K Rule 703.