Last week, Corp Fin posted (and then deleted and reposted—but that’s another story) three new CDIs regarding the affirmative defense under Rule 10b5-1. As you may recall, in December last year, the SEC adopted new amendments to the rules regarding Rule 10b5-1 plans. These amendments added new conditions to the affirmative defense of Rule 10b5-1(c) designed to address concerns about abuse of the rule by opportunistic trading on the basis of material non-public information. Among other changes, Rule 10b5-1(c)(1) was amended to apply a cooling-off period to persons other than the issuer, impose a good-faith certification requirement on directors and officers, limit the ability of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans, limit the use of single-trade plans by persons other than the issuer to one single-trade plan in any 12-month period, and add a condition that all persons entering into Rule 10b5-1 plans must act in good faith with respect to those plans. In addition, the amendments included requirements for new disclosures regarding (1) companies’ insider trading policies and procedures, and the use of 10b5-1 plans and certain other similar trading arrangements by directors and officers; (2) director and officer equity compensation awards made close in time to company to disclosure of MNPI; and (3) bona fide gifts of securities on Forms 4 by Section 16 filers and transactions under 10b5-1 plans on Forms 4 and 5. (See this PubCo post.)
The new CDIs relate to the timing of compliance and the use and termination of multiple plans:
120.26 This CDI provides more specifics on the timing of compliance with Item 408(a) (quarterly disclosure of adoption or termination by officers or directors of 10b5-1 plans or “non-Rule 10b5-1 trading arrangements”), 408(b) and 16J of Form 20-F for FPIs (annual disclosure of whether the company has insider trading policies and procedures and filing of policies as exhibits) and 402(x) (annual disclosure of policies and practices on timing of option and similar grants and table showing D&O grants within four days before MNPI release).
Under the adopting release, for companies that are not smaller reporting companies, compliance with the new disclosure and tagging requirements in periodic reports is required “in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.” Therefore, according to the CDI, the following compliance dates apply:
- “December 31 fiscal year-end company—Quarterly disclosures must first be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in the Form 10-Q for the period ended September 30, 2023 and the Form 10-K for the fiscal year ended December 31, 2023.
- June 30 fiscal year-end company—Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2023.
- December 31 fiscal year-end company—Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
- June 30 fiscal year-end company—Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2024.”
SRCs are allowed to delay this reporting until the first filing that covers the first full fiscal period that begins on or after October 1, 2023. Therefore, according to the CDI, the following compliance dates apply:
- “December 31 fiscal year-end company—Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023.
- June 30 fiscal year-end company—Quarterly disclosures must first be provided in the Form 10-Q for the period ended December 31, 2023.
- December 31 fiscal year-end company—Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
- June 30 fiscal year-end company—Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2025.”
120.27 This CDI discusses when companies are required to provide the new disclosures (408(b) and 402(x)) in proxy statements. Corp Fin advises that, for transition purposes only, companies that are not SRCs must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after April 1, 2023. SRCs must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after October 1, 2023.
120.28 The final rules generally prohibited the use of the 10b5-1 affirmative defense in connection with multiple overlapping plans (other than for issuers) with some exceptions. One of the exceptions provided that two separate Rule 10b5-1 plans can be maintained at the same time so long as trading under the later-commencing plan cannot begin “until after all trades under the earlier-commencing plan are completed or expire without execution.” In addition, the first trade under the later-commencing plan cannot occur during what would have been the applicable cooling-off period had the later-commencing plan been adopted on the date of termination of the earlier-commencing plan.
What happens if a person takes action to terminate the earlier-commencing plan (i.e., does not allow it to terminate by its own terms)? In that event, according to the CDI, before trading can begin, the later-commencing plan will be subject to an “effective cooling-off period” beginning on the termination date of the earlier-commencing plan and lasting for the time period specified in Rule 10b5-1(c)(1)(ii)(B) (i.e., for officers and directors, the later of (1) 90 days after the adoption (which includes “modification” as defined) of the Rule 10b5-1 plan or (2) two business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the fiscal quarter in which the plan was adopted, up to a maximum of 120 days). Had the earlier-commencing plan ended by its terms without action by the individual, the cooling-off period for the later-commencing plan would not be reset, and trading could begin as soon as the plan’s original cooling-off period is complete. Depending on when the later-commencing plan was adopted, this could be as soon as immediately after the earlier-commencing plan ends.
Persons who are not officers or directors have only a 30-day cooling-off period. Footnote 180 of the adopting release provides an illustration of termination of the earlier-commencing plan in that context:
“[A]n insider who is not an officer or director has in place an existing Rule 10b5-1 plan with a scheduled date for the latest authorized trade of May 31, 2023. On May 1, 2023, that insider adopts a later commencing plan, intended to qualify for the affirmative defense under Rule 10b5-1, with a scheduled date for the first authorized trade of June 1, 2023. If the insider terminates the earlier-commencing plan on May 15, the later-commencing plan will not receive the benefit of the affirmative defense, because June 1 is within 30 days of May 15, the date of termination of the earlier-commencing plan, and thus June 1 is during the ‘effective cooling-off period.’ However, if the later-commencing plan were scheduled to begin trading on July 1, 2023, it could still receive the benefit of the affirmative defense because July 1, 2023 is more than 30 days after May 15 and thus is outside the ‘effective cooling-off period.’”
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