As seen in NACD Directorship Quarter One 2023
The US Securities and Exchange Commission (SEC) has dramatically changed the legal landscape governing Rule 10b5-1 trading plans. Late last year, the SEC adopted new rules covering the terms, operation, and disclosure of such trading plans. These new requirements are effective Feb. 27, 2023, and apply to trading plans entered into on or after the effective date and to existing trading plans modified on or after the effective date. Here’s what boards and compensation committees need to know.
Rule 10b5 prohibits insiders (e.g., officers and directors) from buying or selling company securities on the basis of material nonpublic information, or MNPI. Rule 10b5-1 was adopted in 2000 to allow insiders to buy and sell company securities through prearranged trading plans. Rule 10b5-1 trading plans allow insiders to diversify their equity holdings while mitigating the risk of violating securities laws; a compliant plan provides an affirmative defense to insider trading allegations even when an insider buys or sells company securities when they are aware of MNPI.
Changes Aimed at Transparency
In part due to claimed abuses in the operation of some trading plans, the SEC has adopted new rules to rein in these abuses and increase the transparency of trading plans.
The table below describes these new rules along with existing rules governing Rule 10b5-1 trading plans.
In addition, there are new public disclosure requirements for Rule 10b5-1 trading plans. Companies will be required to make the following quarterly disclosures on Form 10-Q and Form 1-K filings, as applicable, generally for filings made on or after April 1, 2023:
- Disclose whether, during the company’s last fiscal quarter, any director or officer has adopted or terminated a compliant or noncompliant Rule10b5-1(c) trading plan.
- Provide a description of the material terms of the trading plan, except for terms related to the price at which the individual executing the arrangement is authorized to trade.
Separately, Section 16 officers will be required to disclose in Forms 4 and 5 filings whether a reported transaction was made under a compliant Rule 10b5-1(c) trading plan. This requirement is applicable to filings made on or after April 1, 2023.