Proposed New Rules Affecting 10b5-1 Trading Plans and Share Buyback Programs | Akin Gump Strauss Hauer & Feld LLP
On December 15, 2021, the SEC proposed amendments regarding Rule 10b5-1 trading plans and share buyback programs. The SEC’s proposed rules aim to reduce the information asymmetry between public companies and investors by closing perceived loopholes in the current insider trading regime and increasing disclosure of stock buybacks. If adopted, these rules could have a material impact on how insiders handle transactions in public company securities and public companies conduct share buyback programs.
Proposed new rules affecting 10b5-1 plans
In 2000, the SEC adopted Rule 10b5-1 to clarify what was prohibited with respect to trading on the basis of material nonpublic information (MNPI) and to provide insiders, who generally hold MNPI, with an affirmative defense when they negotiate with the public. company titles. Rule 10b5-1(c) established an affirmative defense that insiders may arrange future transactions pursuant to a contract or binding plan adopted in good faith where the insider does not have MNPI, and the plan can be executed even if the insider later acquires MNPI. This affirmative defense shifts the insider trading analysis (i.e. whether the insider has MNPI) from when securities are bought or sold to when the agreement or plan in Rule 10b5- 1 is set up. However, the rule has been criticized by some for leaving gaps that can be manipulated.
For example, the current rule does not prohibit overlapping plans or require no MNPI at the time of termination of plans or Rule 10b5-1 transactions. Terminations are not the “purchase or sale of a security” subject to the rule. Nevertheless, future trade terminations may have as much economic benefit to the insider as a purchase or a sale. For example, an executive could have two permanent Rule 10b5-1 plans, one for periodic purchases and one for periodic sales, and cancel only one of the plans once he becomes aware of MNPI, such as revenue results not disclosed. As discussed in more detail below, the proposed rules prohibit overlapping plans and would require disclosure of terminations, discouraging the use of terminations to game the system.
The SEC’s proposed amendments to Rule 10b5-1 would add new conditions to the affirmative defense of Rule 10b5-1 to address what the SEC and others perceive to be loopholes. Under the new rules, the following additional conditions would have to be met to invoke the affirmative defence:
- Mandatory cooling-off periods for directors, officers and issuers following newly adopted or amended Rule 10b5-1 plans.
- Certifications from individual directors and officers that they were unaware of MNPI when adopting a plan under Rule 10b5-1.
- No overlapping planes.
- Only one unique exchange plan over a period of 12 months.
- Bona fide trading by insiders.
A cooling off period is a specified period of time during which insiders may not trade under a Rule 10b5-1 plan after it is adopted or amended. As proposed, a “modification” would include the cancellation of one or more exchanges. Under the proposed amendments, directors’ and officers’ plans under Rule 10b5-1 would require a cooling-off period of 120 days and issuers’ plans under Rule 10b5-1 would require a cooling-off period of 30 days. Cooling off periods are intended to ensure that even if an insider has information unknown to investors at the time a plan is adopted or modified, that information will be stale by the time transactions are made under the plan.
The proposed rule also prohibits overlapping plans and more than one single trade plan in a 12-month period. In its proposed release, the SEC notes that concerns have been raised that company insiders are using multiple overlapping schemes to selectively cancel individual trades based on MNPI, commencing trades after the adoption of a new plan or unfairly exploit information asymmetries. The proposed change is intended to prevent such practices.
Finally, under the proposed amendments, Rule 10b5-1 business agreements must be performed in good faith, not just entered into in good faith, and Section 16 directors and officers would be required to personally certify when adopting a plan they do not currently hold MNPI and are acting in good faith.
In addition to the additional requirements of Rule 10b5-1, the Proposed Rules also contemplate additional disclosure, including:
- Additional disclosure on Forms 4 or 5.
- Quarterly disclosure of Rule 10b5-1 plans.
- Disclosure of Insider Trading Policy.
- Disclosure of Stock Options and Similar Awards.
- Faster disclosure of securities as gifts on Form 4.
Under the proposed rules, Section 16 officers would be required to indicate on Form 4 or 5 whether disclosed trades comply with a Rule 10b5-1 or other trading plan. Issuers would also be required to disclose in their periodic reports on a quarterly basis the adoption or termination of Rule 10b5-1 or other trading plans, including the material terms of the plan, the date of adoption or termination, the name and title of any director or officer. concerned, the duration of the plan and the total amount of shares subject to the plan. In addition, issuers would be required to disclose in their annual report whether they have adopted an insider trading policy and, if so, to disclose such policies and procedures. If issuers have not adopted an insider trading policy, they will be required to disclose the reasons why.
In addition, companies would be required to disclose a table of options granted within 14 days before or after a periodic report filing, issuer stock buyback or MNPI publication on Form 8-K and the price of the underlying securities on the trading day. before and after disclosure. This proposal seeks to address the practice of granting stock options and other similar awards with option-like features to insiders in coordination with the MNPI release, which the SEC perceives as a misuse potential of MNPI.
Finally, the proposed rules would require Section 16 insiders to report donations of securities on Form 4 by the end of the second business day following the trade execution date. Currently, insiders can delay reporting bona fide gifts on Form 5. This new disclosure requirement is intended to address the concerns of insiders who donate securities while holding MNPI or backdate a gift of stock in order to maximize the donor’s tax benefit. In its statement, the SEC notes that the majority of insiders already report gift transactions on Form 4.
Proposed new rules affecting share buybacks
The proposed amendments regarding disclosure of public company redemptions of its equity securities are intended to significantly accelerate and improve the timing of required disclosure.
Under current Section SK 703, issuers are required to disclose information about share repurchases in their quarterly reports, including (i) a breakdown by month of the number of shares repurchased by the issuer or a affiliate, (ii) the average price paid per share, (iii) the maximum number of shares that may be repurchased under the program or plan in the future, and (iv) the principal terms of any publicly announced repurchase plans.
Under the proposed rules, the timing of this disclosure would be significantly accelerated, as issuers would be required to disclose share buybacks within one business day on a new SR form. The SR form would require disclosure of (i) date of redemption, (ii) class of securities redeemed, (iii) total amount redeemed, (iv) average price paid per share, (v) total amount of shares repurchased on the open market and (vi) the aggregate amount of shares repurchased under Safe Harbor Rule 10b-18 or under a Rule 10b5-1 plan. The proposed next day reporting requirement on Form SR is a significant change to the current disclosure regime for share redemptions, which some issuers may find to create a substantial burden.
In addition to the new SR Form, issuers would be required to add information to their quarterly reports regarding the purpose or rationale for share repurchases and the criteria used to determine repurchase amounts, including any policies, procedures or restrictions followed by officers and directors. in carrying out the share buyback plan.