On December 14, 2022, the Securities and Exchange Commission (SEC) finalized new rules that:
- Amend requirements for Rule 10b5-1 trading arrangements;
- Impose new disclosure and XBRL tagging requirements on reporting companies relating to insider securities transactions; and
- Alter form requirements for Section 16 filers.
Effective Date and Compliance Phase-In
The new rules are effective 60 days following publication in the Federal Register, so likely during the first quarter of 2023.
Rule 10b5-1 Arrangements. Plans that are newly adopted, and previously existing plans that are modified, on or after the effective date are subject to the new rules. Until the effective date, plans may be adopted under the existing rules.
New Disclosure and XBRL Tagging Requirements. The new requirements apply to disclosures in Forms 10-K and 10-Q and in proxy statements. Compliance will be required in the first filing that covers the first full fiscal period that begins on or after April 1, 2023 (or October 1, 2023 for smaller reporting companies). This will be the second quarter 10-Q for calendar year companies and the 2023 10-K for calendar year smaller reporting companies.
Section 16 Filings. The new Form 4 and Form 5 requirements apply to reports filed on or after April 1, 2023.
Rule 10b5-1 Arrangements
The SEC has changed the requirements applicable to Rule 10b5-1 trading plans as follows:
Waiting or "Cooling-Off" Periods
The amendments to Rule 10b5-1 impose a mandatory waiting period for insiders other than companies between the time a trading plan is adopted or amended and the date of the first trade under the plan.
For directors and officers: A minimum waiting period of the later of (1) 90 days from adoption or amendment and (2) two business days following the filing of a Form 10-Q or 10-K covering the financial reporting period in which the plan was adopted or amended (but in no event later than 120 days thereafter).
For other traders: A mandatory waiting period of 30 days for traders other than directors and officers.
For companies: No mandatory waiting period.
Plan amendments that do not modify the pricing, amount or timing of trades, or that merely substitute the executing broker without altering trading instructions, will not prompt a new mandatory waiting period.
Overlapping and Single-Trade Plans
All traders other than companies are prohibited from using multiple overlapping trading plans, with the following exceptions:
- A series of separate trading contracts with different brokers may be treated as a single plan as long as the contracts collectively meet the conditions of Rule 10b5-1.
- Adoption of multiple trading plans is permitted so long as trading under the later-adopted plan is not authorized until (1) trading under the earlier-adopted plan has terminated and (2) the first trade under the later-adopted plan is not scheduled until after the conclusion of what would have been the mandatory waiting period under the later-adopted plan had it been adopted on the termination date of the earlier-adopted plan.
- Insiders may adopt a separate concurrent plan for the purpose of selling securities to cover tax withholding obligations in connection with the vesting of incentive compensation (other than option exercises).
Traders other than companies may not have more than one single-trade plan in a 12-month period.
Representations and Good Faith Requirement
Officers and directors adopting trading plans must certify to the company, in representations included under the plan, that they are not aware of material nonpublic information and that they are adopting the plan in good faith and not as part of a plan to evade the prohibition against illegal insider trading. All persons adopting Rule 10b5-1 trading plans, including companies, must act in good faith with respect to the plan throughout its duration.
The new rules add company disclosure requirements for insider trading plans and policies.
Quarterly trading plan disclosure. Companies are required to disclose in Forms 10-Q and 10-K any trading plans adopted or terminated by officers or directors during the prior quarter. The disclosure obligation applies to Rule 10b5-1 plans and other trading plans and requires disclosure of the plans’ material terms (other than pricing), including:
- name and title of the officer or director,
- date of adoption or termination,
- duration of the plan,
- the aggregate amount of securities covered under the plan, and
- whether the plan is a Rule 10b5-1 arrangement or not.
- Disclosure of the use of trading arrangements by the company is not required.
Annual insider trading policy disclosure. Companies will be required to disclose, in annual reports on Form 10-K and proxy statements, whether they have adopted insider trading policies and procedures, or explain why they have not. Companies also will be required to file a copy of their insider trading policies and procedures as an exhibit to the filing.
Section 16 Filing Changes
- Section 16 filers will be required to report the donation (but not the receipt) of company securities by gift on Form 4 within two business days after the transaction.
- Forms 4 and 5 will now include a mandatory checkbox indicating whether a transaction was intended to satisfy the affirmative defense conditions under Rule 10b5-1.
Option and SAR Grant Disclosure
The final rule requires companies to provide annual proxy statement disclosure that describes:
- the company’s option granting policies;
- its practices regarding the timing of option grants and the release of material nonpublic information;
- how the company’s board determines when to grant options; and
- how material nonpublic information is taken into account.
The annual proxy statement also must include tabular disclosure tagged in Inline XBRL of each award of stock options, stock appreciation rights and similar awards by the company to its named executive officers made within the four business days prior to the filing of a periodic report or Form 8-K or within one business day after the filing. For each named executive officer, the table must disclose each individual award, including (1) the date of grant, (2) the number of shares underlying the award, (3) the exercise price, (4) the grant date fair value of the award, and (5) the percentage change in the market price of the underlying shares between the closing market price on the trading day before
and the trading day after disclosure of the material nonpublic information.
- Companies should consider updating their insider trading policies in response to the new requirements.
- Section 16 filers should consider the timing of their near-term gifting of securities in light of the compliance and administrative burdens of the new Form 4 filing requirements effective April 1, 2023.
Links to Resources
The following materials are available on the Securities and Exchange Commission website:
Final rules: Insider Trading Arrangements and Related Disclosures, Release No. 34-96492 (December 14, 2022)
Fact sheet: Rule 10b5-1: Insider Trading Arrangements and Related Disclosure (December 14, 2022)
Press release: SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans and Related Disclosures (2022-222, December 14, 2022)