SEC Provides Guidance On Sell To Cover Exception In Rule 10b5-1
On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (“Exchange Act”) to enhance disclosure requirements and investor protections against insider trading. The amendments include updates to Rule 10b5-1(c)(1), which provides an affirmative defense to insider trading liability under Section 10(b) and Rule 10b-5. For a review of the Rules see HERE and HERE.
Updated Rule 10b5-1 adds conditions to the affirmative defense to insider trading. The Rule now has cooling-off periods before trading can commence under a Rule 10b5-1 plan and adds a condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to the plan. The Rule also requires directors and officers to include representations in their plans certifying at the time of the adoption of a new or modified Rule 10b5-1 plan that: (i) they are not aware of any material nonpublic information about the issuer or its securities; and
The New 10-K Requirements For Annual Report Season
As 2023 has come to a close it is time to prepare for the upcoming annual report season and this year there are multiple new requirements to be cognizant of. With annual reports being followed by proxies and first quarter 10-Q’s in rapid succession, it is important to get ahead of all the new disclosures. This blog will summarize each of the new disclosures and include some practice tips.
First, though is what is suddenly not a new requirement and in particular the share repurchase disclosures. Adopted on May 3, 2023 (see HERE) the new disclosure requirements would have taken effect for inclusion in the upcoming 10-K season. Following a successful court challenge, on November 22, 2023, the SEC issued an order postponing the effective date of the new rules pending further SEC action (see HERE). However, the SEC may not get the opportunity to resurrect the rules. The U.S. Chamber of Commerce is doubling down and
SEC Publishes New C&DI On Rule 10b5-1
On August 25, 2023, the SEC published five new Compliance and Disclosure Interpretations (C&DI) on the recently effective Rule 10b5-1 amendments. The new rules were adopted on December 14, 2022 (see HERE) to enhance disclosure requirements and investor protections against insider trading. The amendments include updates to Rule 10b5-1(c)(1), which provides an affirmative defense to insider trading liability under Section 10(b) and Rule 10b-5. This is the second time the SEC has published guidance on the rules having issued three C&DI in May – see HERE.
The rule amendments updated the conditions to satisfy the 10b5-1 affirmative defense, including adding cooling-off periods before trading can commence under a Rule 10b5-1 plan and a condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to the plan. The amendments also require directors and officers to include representations in their plans certifying at the time of the adoption of
SEC Issues Guidance On New Pay Versus Performance Disclosure Rules
On February 10, 2023, the SEC published 15 new Compliance and Disclosure Interpretations (C&DI) related to the pay versus performance (“Pay vs. Performance”) disclosure rules which were, in turn, adopted in August, 2022 (see HERE) after seven years in the process.
The rules require companies to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years in any proxy or information statement filed under Section 14 of the Exchange Act. With respect to the measures of performance, a company will be required to report its total shareholder return (TSR), the TSR of companies in the company’s peer group, its net income, and a financial performance measure chosen by the company itself. Using the information presented in the table, companies will be required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the company’s TSR and the
SEC Proposes New Share Repurchase Disclosure Rules
On December 15, 2021, the SEC proposed amendments to Securities Exchange Act Rule 10b-18, which provides issuers and affiliates with a non-exclusive safe harbor from liability for market manipulation under Sections 9(a)(2) and 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, as amended (“Exchange Act”) when issuers bid for or repurchase their common stock. The proposed new rules are part of a broader SEC initiative aimed at market manipulation and insider trading, including proposed new amendments related to Rule 10b5-1 Insider Trading Plans (see HERE). The proposed amendments are intended to improve the quality, relevance, and timeliness of information related to issuer share repurchases.
The proposed rules would require an issuer to provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. Form SR would require disclosure identifying the class of securities purchased, the total amount purchased, the average price paid, as well
SEC Proposes Amendments To Rule 10b5-1 Insider Trading Plans
As expected from the Spring 2021 Regulatory Agenda, on December 15, 2021, the SEC proposed amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (“Exchange Act”) to enhance disclosure requirements and investor protections against insider trading. Although there is a statutory framework, the laws surrounding insider trading are largely based on judicial precedence and are difficult to navigate. I last wrote about insider trading in 2014 (see HERE) but there have been many curves in the road since that time.
Since the adoption of Rule 10b5-1, courts, commentators, and members of Congress have expressed concern that the affirmative defense under Rule 10b5-1(c)(1)(i) has allowed traders to take advantage of the liability protections provided by the rule to opportunistically trade securities on the basis of material nonpublic information. Furthermore, some academic studies of Rule 10b5-1 trading arrangements have shown that corporate insiders trading pursuant to Rule 10b5-1 consistently outperform trading of executives and directors not conducted under a
Rule 701 – Exemption for Offers and Sales to Employees of Non-Reporting Entities
While the issuance of small numbers of shares as prizes or awards to employees may be made without Securities Act Registration, if such awards are tied to the achievement of specific goals (eg. sales goals) by individual employees, an offer or sale requiring registration may be involved. When tied to the achievement of specific goals, the share awards may constitute compensation for services performed or to be performed by the employees that would amount to a disposition of the shares for value and a “sale” of the shares to employees requiring either registration or an exemption from registration under the Securities Act of 1933.
Although many exemptions may be available for the issuance of securities to employees, Rule 701 provides an excellent exemption for non-reporting entities. In particular, Rule 701 is only available to issuers that are not subject to the reporting requirements of the Securities Exchange Act 1934. The beauty of Rule 701 is that ninety days after the
10b5-1 Trading Plans and Material Non-Public Information
As a safe harbor from insider trading liability, Rule 10b5-1 provides that a purchase or sale of securities will not be deemed to be on the basis of material nonpublic information if it is pursuant to a contract, instruction or plan that (i) was entered into before the person became aware of the information; (ii) specifies the amounts, prices, and dates for transactions under the plan (or includes a formula for determining them); and (iii) does not later allow the person to influence how, when or whether transactions will occur.
Good Faith Practices When Establishing Trading Plans
In addition, the plan must be entered into in good faith and not as part of a scheme to evade the insider trading laws. Particular care should be taken to avoid adopting or amending trading plans when in possession of material nonpublic information. On June 4, 2009, The SEC filed an insider trading complaint against Angelo Mozilo, the former CEO of Countrywide Financial
